Should We Break Up the Big Banks?

Jeffrey Rogers Hummel sends along a link to his post on the next focus of the Obama interventionists, the financial sector. Hummel makes some much needed observations to put things into perspective. Here's a tatse:

Now that Congress and the Obama Administration have succeeded in making U.S. health care even worse than it was before--which result, when it becomes evident over the next few years, will simply become an excuse for still more counter-productive, government intervention--they will no doubt set their sights on "reforming" the financial system. One idea that has appealed even to some market advocates is breaking up the big banks. Doing so would allegedly undermine "too big too fail" both directly and indirectly, by reducing the political clout of large institutions.

So I was intrigued to notice that the most recent, 2010 edition of Frederic S. Mishkin's standard money and banking text, The Economics of Money, Banking & Financial Markets, observes that, despite the increased consolidation of the U.S. banking industry over the last twenty-five years, it still remains the least concentrated in the developed world.

The full commentary is here.

On Central Banks Muscling the Clearing System

For you bank clearing wonks out there, Jeffrey Rogers Hummel sends along this footnote to his recent comments re: the Fed paying interest on reserves.

Only after my recent comment on "Paradoxes of Paying Interest on Reserves," did I become aware of an important, relatedarticle by George Selgin. Entitled "Wholesale Payments: Questioning the Market-Failure Hypothesis" and appearing in the International Review of Law and Economics, 24 (2004): 333-350, it tellingly critiques the worldwide effort of central banks, culminating in the 1990s, to replace deferred net settlement clearing systems with real-time gross settlement (RTGS) systems. Pressure was applied even to private clearing systems, such as CHIPS, using spurious market-failure arguments.

The Selgin abstract:

The 1990s witnessed a major worldwide change in the management of “wholesale” payments. Insisting that traditional Deferred Net Settlement (DNS) payment systems involve serious externalities, monetary authorities legally restricted such systems and compelled or encouraged their replacement by Real-Time Gross Settlement (RTGS) systems. The present paper argues that market failure arguments used to justify these reforms reflect a fundamental misunderstanding of the manner in which traditional DNS systems generate and assign intraday credit risk. A proper understanding of the nature and role of intraday credits in deferred net settlement supplies no market-failure rationale for government interference with traditional payments systems, suggesting that recent reforms are at most justified on second-best grounds only.

Contra-Cowen

Bob Murphy generally does a good job of rebutting the regular nonsense blogged by Tyler Cowen. However, today, I have to step into the fray, since Cowen touches on topic near and dear to my heart, the business cycle.

In a post titled, Assorted Links, Cowen lists Greg Mankiw's recent column. About the column, he writes,"My favorite Greg Mankiw column so far."

I have a decidedly different take, since in his column Mankiw discusses the current downturn and the Great Depression, yet fails to even mention the possibility of a business cycle theory that could explain the two declines.

Cowen also links to a column by Jeffrey Rogers Hummel. About this column, Cowen writes, "Jeff Hummel blames Bernanke and Paulson for what has happened. I don't agree but we are committed to passing along many different points of view."

Say what?

Hummel writes a detailed blow by blow of Fed money manipulations over recent months. He details what I have been pointing out in real time all summer, that the Fed only started expanding the money supply in late September.

Hummel also does an excellent job of explaining what the recent explosion in the monetary base and Fed credit is all about. (

Although, there are several points of Hummel's that I disagree with, for example, he fails to note that M1 is climbing because of the fear factor, and that the explosion in the monetary base may not, in itself, cause a money supply explosion since the huge Treasury deposit is just sitting there and not entering the system, it is one of the best columns I have read that describes the current monetary situation. Cowen disagrees. He prefers the Mankiw puff piece.

Read the two columns for yourself, and decide who is writing a detailed explanation of the current situation and who is writing puff. Cowen's choice between these two columns is the kind of off center stuff that he regularly posts, which makes it easy to understand how Murphy is able to plant brutal knockout blow after knockout blow on Cowen.

Mankiw's column is here. Hummel's is here.