Law on Rice

I was in financial institutions again this morning which means I feel compelled to blog again.

My professor consistently tells us that we have failed to plan our regulatory architecture.

Surely he’s right, but isn’t planning kind of antithetical to capitalism? He tells me not to worry because we’re not as capitalist as we claim to be. But I don’t know, I thought the true essence of capitalism was that you need plan very little.

Despite all the Fed’s efforts, the broadest measure of the money supply indicated a drop of 2.2% for the last three months. What’s going on? Are banks still not lending?

This from a BusinessWeek article:

Paul Ashworth, senior U.S. economist for the economic consulting firm Capital Economics, says it’s “disconcerting” that in August the broadest measure of money fell at an annual rate of 2.2%. That rate comes from comparing the amount of money in the three-month period of June through August to the previous three months. This broadest money measure, known as M3, is no longer officially published by the Fed but is tracked by private forecasters. It includes cash, checking and savings accounts, certificates of deposit, savings and loan deposits, and money-market funds.

My financial institutions class is starting soon. We spend at least half the class talking about the money supply, so I’ll have to see what I can find out.

Here’s my chart of M1 and M2:

I have the perfect yin and yang this semester: I’m studying financial institution law in the mornings, bankruptcy in the afternoons.

Right now, I’m going over my notes for the night. The notes leave me with the lingering sensation that I have a lot to learn about banking.

We’re starting with an exploration of the development of the centralized money system in America. The celebrity Fed chiefs we’re getting used to (think Greenspan, think Bernanke) would be completely unrecognizable to our founders and to almost everyone who lived in the 19th Century.

And it’s a far cry from the world we were in today in class. We were mired in the wildcat banking era of 1836 to, say, 1863.

And I’m torn.

On the one hand, I’m a strong capitalist and I’m deeply suspicious of regulation. On the other, I instinctively feel that banking is a little different from other free enterprise. Maybe because it seems at once germane and exotic. Maybe it’s because I believe what I’ve told: no other business has the power to print money like banks can (oh sure, issuing stock bear some resemblance, but not much). If that’s true, then proponents of strong regulation have a powerful argument: the free enterprise system doesn’t usually inspire the kind of confidence we need. We’ll never trust banks to run around the park with their leash off. They might run away.

The wildcat banking era was a bare knuckled capitalist approach to banking complete with a jurisdictional race to the bottom as states tried figure out who could regulate the least. And it failed spectacularly according to my readings. But does that mean it will always fail? Does that mean we have all been foreclosed from arguing against the Fed? Am I wasting time even thinking about it?

I have a lot to learn.

I’m having lunch at my favorite teriyaki place after my first class of financial institutions and the law.

My professor also sits on the board of State Farm and has years of experience in banking. Some of the students also have banking background.

In talking about the financial crises, I asked if part of the problem was that there’s just too much cheap money sloshing around the system. He said lots of people want to blame Greenspan, but the Chinese were also pumping a lot of money into the economy.

It’s going to be a great class!