Libertarians want the government to leave business alone.

Things often get hairy for libertarians, though, when they enter into the real world — when you’re dealing with a circumstance created in part by government privilege, laissez-faire policy responses may just perpetuate the previously granted government privilege. But a direct government “corrective” often causes libertarians to shudder.

Some of that tension pulls at libertarian writer Jesse Walker in his mostly supportive recent treatment of libertarian populism at Reason.com.

Big banks, I believe, are both the result and the cause of big government.

Big banks are the result of big government: Once a bank reaches a certain size, government acts to protect it from competition, causing the banks to grow bigger. Regulation creates a “moat” around big banks, as Jamie Dimon of JP Morgan recently explained about Dodd-Frank.

Also, there’s perception that a bank is so big that its failure would be impermissibly disruptive to the economy. This perception creates an assumption that the government will bail the bank out if it fails. This assumption manifests itself as higher credit ratings and lower borrowing costs. The megabanks use this government-granted privilege to grow bigger.

Big banks are the cause of big government: They get bailed out, which leads to more regulations and more implicit bailouts, which leads to more regulations.

So, what’s a libertarian to do? If taxpayers are the guarantors of the big banks, then laissez-fairism seems pretty misplaced. Once government is the insurer of banks, explicitly and implicitly, then it violates no libertarian principle for government to regulate the banks for the sake of safety and soundness.

But I’m very skeptical of government’s ability to regulate wisely without being captured or simply foolish. So, as Walker sums up my argument at Reason, blunt and dumb means of regulating are probably best. One possible big-government approach: bar the banks from getting so big that our politicians will feel compelled to bail them out.

But there’s a more libertarian way to approach even that.

Consider the ongoing explicit subsidies that exist for banks: FDIC insurance and access to Fed lending windows, for instance. Just cut the big banks off from these subsidies. There are lots of ways to do this, and I don’t want to get into details, but the bottom line would be this: banks can get as big as they want, but at some point, they’ll lose some of the government-granted privilege we give all banks.

This could keep banks from getting so big by means of reducing subsidies. For a libertarian, what’s not to like?