There are always reasons to justify government intervention. Is this what happened when politicians got involved with banks? The desire to step in using regulatory powers and taxpayer money to prevent disaster is entirely understandable, but there are longer-term consequences to be considered.

The Federal Reserve’s decision to offer security for depositors and the Swiss government and central bank’s support for the purchase of the ailing Credit Suisse appeared reasonable on the surface. If the US and Swiss governments hadn’t intervened, the crisis could have deepened, potentially infecting other sectors and causing serious turmoil in the world markets.

Even in the best-case scenario interpretation of the consequences of these interventions, where governments’ actions prevented a widespread banking crisis and successfully stabilized the situation, we should still be wary of the interventions.

There are several reasons for such skepticism, such as the problems directly related to the interventions. The problem with the government intervening in the short term is that the fact that it intervenes impacts the behavior of those the government's actions influence.

When governments regularly bail out companies, their managers have an incentive to take on too much risk. After all, if their high-reward, high-risk gamble pays off, they make huge profits. And if it fails, the government is there to help them. This behavior, which in the economic literature is referred to as ‘moral hazard,’ is a result of the distorted incentives that naturally arise when governments socialize losses while profits remain in private hands.

But not only do the companies have an incentive to engage in too-risky behavior; customers—citizens and companies—no longer have the incentive to critically assess the quality of the bank where they place their deposits. Only when customers critically screen the banks where they place their deposits do these banks feel real pressure to carefully calculate the risk they take, insure against potential catastrophes, and generally act prudently.

Instead, the customers will also commit a ‘moral hazard’ and neglect their duty to check the quality of the bank they contract with. Once the government assures them that their deposits are secure, the disciplining market forces are powerless. It no longer pays for banks to be ‘good’ banks—so there is a tendency for ‘bad’ banks to prosper.

In combination with the tendency of governments to favor strong incumbent firms, erect barriers to entry, and hamper the market process’s selection of ‘good’ firms, these kinds of interventions will prove fatal to the financial system in the long run.

More crises will occur, and these will tend to be more catastrophic than what would have happened had the government allowed things to run their course. As happens so often, the state favors short-term benefits at the expense of vastly higher long-run costs.

What’s more, the government ultimately uses taxpayer money to support groups of people that, most likely, belong to the upper echelons of society. While some people support redistribution of wealth to the poor, it seems grotesque when governments redistribute to the wealthy—while sowing the seeds for future, more damaging crises that will make the poor suffer even more.

The consequences of government intervention in banking extend far beyond the immediate crisis response. While such actions may seem like a necessary evil to restore stability and avoid panic, they create a pattern that can lead to further instability down the line. By stepping in and preventing market forces from taking their natural course, the government disrupts the self-correcting mechanisms of capitalism. When banks are able to rely on the state to bail them out in times of trouble, they lose the incentive to act responsibly, as the risks are essentially absorbed by the taxpayer.

This dynamic, known as moral hazard, affects not only the financial institutions but also the consumers who interact with them. When people know their deposits are insured, they are less likely to scrutinize the risks taken by the banks where they entrust their money. The same holds true for businesses that engage with banks—they can become complacent, assuming that if things go wrong, the government will step in and save them. This complacency weakens the natural checks and balances that are necessary for maintaining a healthy economy.

Furthermore, the government’s preferential treatment of established firms distorts the competitive landscape, making it difficult for newer, more innovative firms to enter the market. When large, inefficient banks are protected from the consequences of their mistakes, they can continue to operate despite their inability to provide quality services or manage risk effectively. This creates an environment where market competition is stifled, and the economy as a whole suffers from a lack of innovation and dynamism.

In the long term, the cost of such interventions can be staggering. Not only does the taxpayer bear the financial burden of bailing out the wealthy, but the resulting market inefficiencies prevent the emergence of new, more responsible players in the banking sector. As a result, the cycle of risky behavior, government intervention, and economic instability continues, making future crises inevitable and potentially more severe than those that would have occurred in a more laissez-faire system. If society is to avoid such damaging cycles, a return to the principles of limited government, rule of law, and free markets is crucial—values that have been championed by classical liberals throughout history.

Stopping governments from interfering with the market process and protecting the interests of the well-to-do requires a full and earnest commitment to the classical liberal values of freedom and the market economy. It is not enough to hope that governments will make reasonable decisions and refrain from intervening when the long-term costs outweigh the short-term benefits.

A return to the ideas that the likes of Friedrich von Hayek and Ludwig von Mises defended, such as limited government, the rule of law, and free markets, is needed. If these ideas become dominant again, there is finally hope for a return to good governance.

This article was written by Max Molden. Max is a German writer and PhD student in philosophy at the University of Hamburg. He also helps run Der Freydenker, a student magazine.