The ever-prescient Financial Times columnist Martin Wolf, an economist, raises, and to some degree answers, a question that no-doubt has been on the minds of U.S. investors, readers, as well as Europeans: Why does banking generate such turmoil?

Or, as Wolf put it another way: why is banking an accident waiting to happen, with the crisis in securitized lending the latest example?

The answer - - or fault, to paraphrase Shakespeare - - lies within ourselves, Wolf argues, due to the very things nations have established to protect depositors - - namely, depositors' insurance and government guarantees, which prompts banks to take high risks.
To be sure, the public and their governments are getting some benefits from this relationship and framework, i.e. something in return: a safe haven for money and a payment system - - but that does not blot out the contradiction inherent in how many nations treat banks, in the view of Wolf, and many others.

Déjà vu all over again?

For example, the free market system argues that corporations that operate well will earn a profit, those that don't will lose money, may end up bankrupting their shareholders and go out of business. That's capitalism, and it encourages executives to make prudent decisions, because their livelihood is at stake.

But for some corporations (banks) a different framework applies. You've written good loans? Congrats, you're highly profitable. You've written bad loans, loans that won't be repaid? Fear not, government insurance will cover most of the loss, and a government bailout (or a new government agency established for the same purpose) with cover the rest. This, in Wolf's view, has been the history of banking, again and again and again.

But what would the tonic be? Wolf is not suggesting that we abolish depositor insurance, no. (In the U.S., the primary depositor insurance is the Federal Deposit Insurance Corporation, which was set up, incidentally, during the U.S.'s biggest banking crisis during The Great Depression of the 1930s.)

What Wolf is arguing is that nations should treat banking as a utility, with regulated returns, or as a profit-seeking sector that operates within the laws of the free market, including the possibility of bankruptcies.

Economic Analysis: Once again, Wolf is on-the-mark regarding problem identification. However, it's too soon to tell what shape banking reforms will take in various nations. In the United States, the U.S. Congress will most likely lead the effort, but don't anticipate Wolf's "either/or" prescription. What's more-likely is a tiered system: one category of banks that offer modest returns on deposits/CDs, with depositor insurance; and another category of banks that offer higher returns on deposits/CDs, but with substantially less depositor insurance.

Further, the scope/scale of any U.S. reform plan depends on, among other unknown variables, the percent of the banking sector affected by the current subprime mortgage and related asset default issue, which party wins the 2008 U.S. presidential election, which party controls Congress, and the overall economy's health.