Saturday, August 28, 2010

A deregulation conundrum












A plea














Anonymous said...

The Rich&Co factors haven't been possible in a very long time, yet set a new standard in fancy. Maybe skim is a slightly rough word to use when those 30 years ago slow was the word in markets. A little 'liquid reciprocity' quickly became sacred to a deal; speeds things up, brings conviction, and in most circles better with good spirits and not too much froth. What we know too little about requires some empathy because there's a bit of that in many of these old deals merely in order to get them done. In this day and age, we're dealing with packages not each other. And all that is tough intricate rule-making that will takes many years I think.

狂猪 said...

The use of regulation in pursuit of a particular social outcome is inherently fragile within a complex environment.

Regulations can work very well for simple problems and work very efficiently too. However, for complex issues, the success of the regulation depends on the intelligence of the regulator. Furthermore, while the regulations tend to be static (rules on pieces of paper), the environment is dynamic (the world is always changing). For example, the regulation for mortgage finance has been largely the same for the last 30 years. However, the environment (various preconditions) for the subprime mess only came together in ~2004 to bring about the current crisis. The smart regulations can turn into dumb regulation when the rules of the game are changed.

Stepping back, I do believe governments should use their resources to promote certain social outcome. However, framing the problem in terms of finding "better regulation" for complex issues is ultimately counter productive.

Perhaps we should frame the problem in terms of finding "better incentive".

epicaricacy said...

Excellent Post. One point. There's a problem with giving shareholders that much say over operations. Well not as much a problem, as it doesn't necessarily represent a solution. In 2007, which management team would face shareholder wrath, those booking the record profits which were ruinous on a risk-reward basis ex post, or the management team showing 10% lower than peer ROAs because management feels uneasy "dancing as long as the music is playing"?

Wisely Managed said...

Very interesting post; I think I'll have to read that book.

However, in stating the obvious, you seem to have missed the even-more-obvious:

"The most obvious things that need regulation are things with a government guarantee (implicit or explicit)."

The obvious solution is to remove the government guarantee.

Agency problems are at the core of every government, every corporation, and our entire financial system. Exposing people to the risks of their own decisions is the only real solution, and it happens to be the simple one. Government guarantees on deposits, home loans, student loans, small business loans, and farm loans were bad enough, but now we have even more precedence for guarantees on poorly run banks and corporations and unrealistic, vote-buying promises to labor groups. To your point, government guarantees on things naturally lead to those things being highly (mis)regulated (think healthcare). Of course, the regulation will fail, so more regulation will result. It will also fail. Altruistic regulators (if you are naïve enough to actually believe that regulators and government employees are in it for “the good of people”) are just as fallible as profiteers and rent seekers and rarely suffer any consequences for their poor decisions. Anointing bureaucrats with power and expecting them to figure out how to solve agency problems (while ignoring the agency problem caused by the mere existence of their job) is what got us where we are today.

The only conundrum is why anyone expected the outcome to be different.

John Hempton said...

Well maybe removing the government guarantee is "more obvious" but removing implicit government guarantees is easier said than done.

Moreover - and this is one of those I am a liberal moments - I don't want to do it for everything.

At the base level I think we can agree on a government guarantee of availability and some quality in primary school education...

Where we draw the line (my line quite a long way into the liberal camp) then becomes a matter for debate...


John Haskell said...

About this Iran to Israel pipeline ... did it run through any other countries? I kind of wonder if say the Iraqis or Jordanians or Lebanese started wondering why the pipeline (assuming it actually ever existed, which I find extremely doubtful) all of a sudden needed to be used?

Presumably the Iranians asked them to turn their pumping stations back on and they just acceded without asking any questions. Also I wonder if the outbreak of the Iran-Iraq war posed some kind of slight obstacle?

MattJ said...

I don't understand your antipathy to the Tea Party relative to the Democrats and Republicans. What should be abundantly clear at this point is that the agency profiteers you reference effectively own both the Democrat and Republican parties. There is little to no chance of any useful regulation coming from either of those parties at this time. What I would hope would happen is that those like yourself who see the problems on the horizon would realize the futility of dealing with them through the current parties and would attempt to use the emerging Tea Party to move things forward.

You call them Tea Party Republicans, but that is only true to the extent that the Democrats have made no attempt at all to win their votes. I think the next two election cycles in the US are the last chance for Republicans to hold onto them. If the Republicans win power and then are as useless as I expect them to be, the field will be wide open for a new party to emerge. I hope there will be sensible people at that time in a position to lead that movement, but if they all have the same attitude that you show, I fear there won't be.

Anonymous said...


sorry, this may be completely irrelevant but I just wanted to clarify.
You said "many of the same people want planning regulations to ban a mosque in downtown New York ".
I obviously did not trace what every single and possibly even prominint Tea Party member said but I usually saw a slightly different kind of statement, namely
people asking those who try to build the mosque to stop and think about the potential insult to others. Have I missed something obvious?

minka said...

I read an article recently, wish I could remember where, that the fundamental problem is that taxation of the rich has to soar, back to say 70%, as before Reagan. That removes the incentives to subvert regulation, which was in fact much lower when upper income taxes were (much) higher. If the rich make much less from such legerdemain, they are less likely to engage in it.

John Hempton said...

Disincentives on the rich are generally overstated. I never noticed the seroiusly motivated being less seroiusly motivated when their marginal tax rate was 45 versus say 37.


But more to the point - it that was what would work it is the dumbest idea I have read in a while.

Raising taxes to the point they kill all incentives including the incentives for legerderain - would - politely - seem counterproductive.


Anonymous said...

Having a proposed mosque move a few blocks from the epicenter of where two hijacked planes were crashed into World Trade centers filled with people, taking out a whole zip code, has nothing to do with whether one is a Tea Party person or not.

How close to Mecca, Medina, Damascus, Mount Sinai Egypt, Mashhad Iran can one propose to build a Jewish Temple. A Christian Church? A Catholic Church. A Buddhist Temple?

On a second note John Hempton, and speaking of fascist Spain, it was no coincidence that the proposed name of this mosque was Cordoba House.

Robert Dobb

Anonymous said...

Laffer's Curve is as valid as ever.

As are growth inducing, supply side economic policies.

Keep your eye out for them in Presidnet Obama's second half of his term... Especially if he truly cares to be reelected.

-R. Dobb

Sir G said...


surely, one aspect of good regulation must be that it is written with regulation-busting in mind: any regulation which contains strong incentives to circumvent it *and which leaves substantial loopholes within it is, i would argue, a bad regulation to start with;

i don't understand your reference to Ayn rand morals; what is that? surely, the persistence with which governments make bad laws has to make clear that "morality" and "law abiding" cannot possibly be one and the same thing: no offense, but only someone whose life experience is limited to dealing with a relatively benign government regimes could confuse the two;

you should get out more :)

kim.rampling said...

Had the pleasure of having the original Marc Rich & Co A.G, Zug as a client way back when they were into just about every commodity deal in the the book.

Their great rivals in Zug, Phillip Bros (of Philbro Solomon fame) where always runners up. And they span off so many of commodity traders in that small Swiss town that it become synonymous with that business.

Regulation by it's very nature produces arbitrage opportunities - just look at the asset backed securities market. No regulation can ever be perfect as there are too many diverse interests to pander to that lead's to more regulation and...

...arbitrage opportunities.

Peter Rickwood said...

Taxing transactions seems pretty obvious as arbitrage relies on low cost transactions, right? Killing off some of the arbitrage trade might mean we give up a little efficient allocation of resources. But on the other hand, we might gain something from having all the uber-smart arbitragers actually doing something directly productive....

Anonymous said...

As to this Cordoba House mosque at ground zero, would it be any different or insensitive if some group built a gun store next to Columbine High?

I don't recall any group proposing a Buddhist or Shinto temple anywhere close to The Arizona Memorial.

Anonymous said...

The problem with transaction taxes is the create even more arbitrage opportunities unless all countries agree to along. Thus the political establishment of a country like Canada which faces very little domestic political pressure on financial reform can gain its own arbitrage rewards by acting as a spoiler within the G8/G20 financial reform councils. As a corrillary I suspect if Kevin Rudd had acted more like a bad ass spoiler on bank taxes and global bank reform like Canada's Stephen Harper I suspect Rudd might still be Prime Minister today. That's largely because a lot of electorate in small countries like Australia and Canada like political leaders ala Trudeau and Whitlam who do things to annoy, frustrate, make difficult for, etc the leaders of larger countires such as the UK and the US.

Marc Rich Rocks said...

Marc Rich was unjustly persecuted by Rudy Giuliani, perhaps the most corrupt and self-serving US Attorney the over hyped SDNY ever had or will have.

Pincus was a little lazy. Didn't want to work on Friday nights or Saturdays. Perhaps some day Hashem will forgive him.

Hashem loves Marc Rich, the mensch.

Anonymous said...

Is the Ground Zero Mosque a joke?
While everyone has chased after Imam Feisal Abdul Rauf and his wife, Daisy, I have been reading up on Sharif El-Gamal, the actual developer of the mosque/community center/tourist attraction/whatever he says it is today.

Who else si not impressed.

Land near Ground Zero was pretty cheap before 9/11 and the prices have not gone up.

So what’s he up to with buying and obtaining rights to land there?

He has a project. But not a lot of money.


Maybe the Saudis or the Iranians pony up money. But he might just borrow it.


We’re seeing hat. Not cattle.

Now the New York Post reported: “Sharif El-Gamal, the leading organizer behind the mosque and community center near Ground Zero, owes $224,270.77 in back property tax on the site, city records show. El-Gamal’s company, 45 Park Place Partners, failed to pay its half-yearly bills in January and July, according to the city Finance Department. The delinquency is a possible violation of El-Gamal’s lease with Con Edison, which owns half of the proposed building site on Park Place. El-Gamal owns the other half but must pay taxes on the entire parcel.”

Amid all the hoopla, something else is going on. If someone can explain it, I’m all ears.

Maybe these guys are just the imen of arbitrage. And Cordoba House is just some random, no meaning pulled out of the air name.

Anonymous said...


which book are you referring to? The Fountainhead, Atlas Shrugged, or one of the less famous volumes?

I don't know that the repeated reference to Ayn Rand strengthens your argument.

John Hempton said...

Marc Rich is the closest real-life example I have to an Ayn Rand hero. Either of those books would do...

Just google the expression ayn rand marc rich.

The references are legion.

Laban said...


Does that include the trade restrictions on weaponry and explosives, drugs and prostitution, all of which seem to have 'arbitrageurs'?

John Hempton said...

I was careful to note that there would obviously need to be extensions to these rules...

But if you ask my personal position - prostitution should be legal. Illegal and it becomes a mechanism for making crime pay.

I am a little less liberal on drugs - but my inclination there would also be to say that prohibition has not worked any better than the alternatives.

Drugs however is generally a crime between consenting adults - and the story is harm minimization. (Yes - at heart I am a bleeding heart liberal.)

I have however a real problem whent it comes to activity not involving consenting adults. Child prostitution should remain illegal - period - no exceptions etc... introducing drugs to minors...

Again there will be arbitrageurs as you would call them... in that case I might call them something else...

I set this up as a subject for discussion as I do not know the answers - and far smarter people than me have deliberated for a long long time on these issues.


Anonymous said...

"proposed mosque move a few blocks from the epicenter of ..."

Dobb, I believe the proposed site is already a few blocks from said epicenter. That's not to say it isn't in less than perfect taste, but they are not exactly taking down the U.S. flag from ground zero, and raising the crescent moon.

Anonymous said...


The only regulation that ever works is the RSP one (rock-scissors-paper) - i.e. setting few sides against each other, and making them about equal to start with. Ideally so that either side winning even a bit means the other side loosing quite a bit (but not necessarily vice versa).
I know, it's easy to say but pretty damn hard to figure out how to do it. My problem is that no-one even looks at it from this perspective, and the regulation we get is not really a regulation as such but one of the extremes you describe.

I'm sure game theorists have other uses than doing auctions, and when it came to them gov'ts were pretty happy to use them to maximize the revenues. Why is it that no gov't I know of talks to them about how to write regulation?

Anonymous said...


Good point, but how do you even get the powers that be to heel enough to play RPS when they all have large scale automatic weapons? Bigger weapons?

Anonymous said...

Falls short of identifying the probable real issue: concentration of wealth and power.

If regulatory capture is easiest when ruling elites control regulators (and most everything else, economically), statements like "regulation matters when institutions are too big to fail" are trivial.

Now you could say these people will get some ethics and start to give up wealth and power by behaving honorably... but come on, these people LOVE MONEY and are not likely to change.

It may be that a depression that destroys massive amounts of wealth across all classes is what Nature requires to bring people to their senses.

Anonymous said...

@previous anon: Indeed, but at least trying would help.
At least in theory executive/legislative/judical arms are RSP. Of course, in practice it gets a bit more complicated, but I still believe it's better than the regulatory stuff we have now

Karen said...

I don't think it is that hard to think up good regulations and weed out the bad - IF you really want to do the right thing.

What has me in despair is my perception that "the right thing" is the LAST thing Congress or the Obama Administration wants to do.

Our most powerful political leaders seem to want the campaign-donation spigots and the revolving door to stay open for them, in preference to doing what's morally right and what will enhance our nation's strength for the future.

And what has me truly worried is my perception that ordinary Americans' sense of right and wrong has also been deadened to the point where if there is a revolt against the status quo it will only make things worse.

Anonymous said...

Great article. I agree with your analysis fully. I wish there was some easy way to get laws and/or regulators to stop the type of things you mention. In a 'democracy' of self-interested individuals, i don't think there is much hope. The only two solutions i can think of are to have a culture of people who stand-up firmly against this type of stuff at the first instance, whistle-blow and then massive action is taken. The US is not a country that has this type of culture right now. It might be possible in Austria, or the Netherlands, or Sweden. The other solution is to have a state with extremely punitive powers for actions like this. This punitive powers (say death by torture for white collar crimes) will avert alot of this nonsense before it even gets started.

Anonymous said...


the problem is not our unfamiliarity with Ayn rand (a writer who is greatly overestimated as both writer and thinker, imho), but the inexplicable manner in which you conflate observance of government-made regulation with morality of any sort, whether ayn rand or otherwise


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