voice was. trees jackets and old whiskey. a much younger life. and more than twenty years of intelligence service in profits of the soviet union. feel these choices on forty. and out let's take a look at the headlines now arundhati syria is in turmoil it has been laid bare our t.v. screens for more than a year but it's claimed something that works on twisting events that qatar's al jazeera t.v. channel is accused of staging shots to shape it and it's there off to. britain and america's leaders get together to discuss getting out of afghanistan to hit the basketball court first london has been that washington's main ally in the conflict

as a front since i went to them. and iran brushes off claims by the u.n. nuclear watchdog it's trying to raise evidence of explosives testing at a key military site israel's threats of attack still stand despite loud criticism from its own citizens. all next so with money and credits in short supply across europe crosstalk examines what needs to be learned from the economic pitfalls of two thousand and eight. please. liz. can you.

please. go and welcome across the time you go is more or less better this is the question still being asked when there are calls for regulation of the financial markets have the lessons of the two thousand a price has been learned the speculation control the markets and can free markets do better things than regulators. limit the complete. story. across our financial regulation i'm joined by arnold kling in washington he's a founder and coeditor of the economics blog econ log and in warsaw we have patrick young he is executive director of devi advisors and editor of the gathering storm and in madrid we go to glen while he is an assistant professor of economics at the university of chicago all right gentlemen cross titles in effect that means you can jump in anytime you want a first i'd like to go to glenn in madrid are you in your co-author erica posner caused a bit of a stir by coming out with a paper titled just recently

a proposal for limiting speculation on derivatives a f d a for financial innovation ok now and there's a lot of press about it why now and why do you think new financial instruments should be regulated like drugs. basically every developed country. requires that drugs before they are marketed are tested for safety and efficacy because consumers. would have to heart of a time figuring out on their own with such a complex of facts that drugs can have whether the drugs are safe and efficacious and also the health consequences of drugs not being safe and efficacious are too dangerous for society to allow it and i think we found out in the two thousand and eight crisis the financial products can be at least as if not more complicated then drugs can in their effects and their. potential consequences for the world economy

can be at least as dangerous as those of drugs for the public health so we think that there's a close analogy between these and therefore bed it makes a lot of sense for a new financial products to be subject to pre-approval regulation based on careful research the same way that drugs are ok arnold what do you think about that you think the new financial instruments should be treated like drugs i mean we're talking about consumers. well i think that regulation in finance has to be done i think you when you phrase the question more or less i think that's the wrong way to phrase it i think it's sensible or not sensible i just don't see how using the drug analogy can be sensible so we go back to the goals of regulation in finance one is consumer protection and stuff only true that financial

institutions can be more sophisticated than individual consumers and so they can exploit consumers lack of knowledge and you want to stop that. for reasons i'll explain that the idea of testing products doesn't really work for them then the second reason you want to regulate the financial industry is to avoid the kind of meltdown the systemic breakdowns that we're talking about. here i think that the testing of financial products the analogy with drugs completely breaks down because when you turn thing you test it in a sample under certain conditions and when you do there with a drug you can be pretty confident if you do the testing properly that the results from your sample will translate to the full articulate and that's fair enough. arnold it seems to me that the entire financial system at least from two thousand and five on was rigged to make sure some people got rich without any care whatsoever about society and the economy patrick if i can go to you i mean i'll

stay with more or less regulation ok because what happened in two thousand and eight is a catastrophe for the ninety nine percent not the one percent so i i would tend to maybe go on the side of glenn a little bit more why not have a little bit more testing would it really hurt to test some of these products that people are good for society because it lacks because they are just good because glenn and his co-author talk about social values which i think is interesting in terms of finance ok patrick go first i want to go to going there. there's a lovely concept in here there's a beautiful idea but the fundamental problem we have is it's comparing science with economics and i cannot mix called itself a social science the science element is probably overstated peter and i think that's the fundamental difficulty we have with the concept of applying f.d.a. style regulation to products because actually you can't go and simply take a control group of markets and go and test things out the same time do we need to review and revise and look at regulation i think we do i think we need to look at

regulation at all times but i think we need to kathy up against the fact that actually in history there has never been a single instance where one regulatory bought body in any country has managed to actually see the next crash coming and i think the issue that's actually very interesting here is that possibly science is almost a billion with the sophistication of recent financial markets because. you know in the old days you had bunches a guy some of the went to business school some of them just went to school until they were sixteen or eighteen the problem now is everybody comes out with m.b.a.'s masters and finance degrees and the problem is you can't do anything if you're really just a sophisticated way to give you you know give theory to decide whether or not to go to the bathroom alternately has allowed us to build a lot of novel jungle into the financial markets the gloss and help anybody and actually i would even contend it doesn't help the one percent because i think that in itself is somewhat overblown were the one percent was saved which was wrong was

by governments and that's actually got nothing to do with financial regulation are either all right they are what we need to look at is intelligent pragmatic regulation or into our old ok for you grant i mean it's this whole program was designed around you or is that the whole program was designed around this paper that you wrote so i want to use my charm is one two days ago here on terra last point. yes so arnold's point was that you know science. and. academic and economics are fundamentally different here and there are regulations that are purely based currently on economic analysis. in particular the review of mergers by the u.s. and the european union even though you care to control the experiments in a small part of the market there are still techniques that are used and i don't think almost anyone advocates getting rid of the regulation of mergers based on

pre-approval using economic data analysis so the fact that it's an economic science or they're in line here is to see is that you need to appreciate that we can't do it in a controlled circumstance i mean there are two hundred fifty major financial centers throughout this world if you say for example the united states of america in the united kingdom two of the hugest financial markets in the world are going to go through this f.d.a. approval then what you're going to get is shanghai hong kong singapore notable other financial centers perhaps moon guy who knows they're going to go and just implement the product anyway and i think that's the difficulty i don't disagree with you that there are methodology used that can be deployed but to put in a full on a and turn around and say you can't list a new product until we've decided whether it's good for us or not actually that would have stifled incredible financial regulation that is held. by gentlemen. here because we what we just heard there from patrick and i want to go right now to

arnold do markets do better than regulators arnold. that's not a there's not a pure question i don't think you should take one extreme you should have faith in that market or you will this is television ok so i'm trying to make it as simple for my viewers as possible go ahead i was in investment banking for years i understand ok. and you should have faith that banks are always wrong one important point i would just make about the financial crisis a lot of people talk about how consumers were hurt by predatory lending and some of that took place but most of it was not predatory lending is when a qualified borrower gets a mortgage that's worse than they deserve who was really going on in the housing bubble was a lot of unqualified borrowers getting better mortgages than they deserve so that it's a very appealing to have a simple narrative of one side is right one side is wrong but the fact is it's

a nuanced and i just want to go back to this issue of the f.d.a. if you're going to use the f.d.a. as an analogy what the f.d.a. symbolizes to me is the controlled experiment that's what they brought in and if you're just talking about pre-approval well pre-approval is it's a whole different story and all my simple point is the controlled experiments don't apply in financial products you experiment into ones and circumstances and you say gee when we try to sample of subprime mortgages in two thousand and three it worked really well so we should have proved that you don't realize that that's that they worked because house prices were appreciating and they don't work in a different environment or you could say that portfolio insurance in the middle of one nine hundred eighty s. works fine when a small group of people are using a proposal let me jump in and go ahead. but there is now are advocating in the

proposal we're advocating the use of economic data and not based on prior prior experimental trials based on projections of demands for products in the same way a trust authorities use to project the effects of mergers which is a methodology that how if you disagree with it but it's one that's been used for more than forty years but but my other side of it in terms of is the f.d.a. analogy d.l.g. is very misleading ok patrick jump in but also i think fundamentally i mean the problem i have is that using this analogy of existing data then in that case we'd never have got futures and options markets i mean there was a new demand as such that people could forsee for them yet as a result of their coming into being a huge amount of risk transfer has taken place farmers in india are able to hedge their crops in a way more efficient way than the top down indian government was ever to do able to do by dictating what they should do so i think that's the problem i would see here i think it's

a very well intentioned paper but frankly i think the problem is you know while we can't argue yes and no as to regulation and this and the other arnold is quite correct you can't vilify the banks all of the time despite what many people would like to say avoid them they are wrong sometimes and at the same time not a single person has been yet prosecuted for signing a liar loan so you have the regulatory failures throughout this market what i see is that we really need to try and find a way of being more pragmatic and certainly perhaps not dogs involve using data to a certain degree but pre-approval would be very worrying to me all right gentlemen i'm going to jump in here and we'll go to a break and out about short break we'll continue our discussion on the regulation of financial instruments state park. taking. steps. to see if you can.

wealthy british style. markets. find out what's really happening to the global economy with a much stronger or a no holds barred look at the global financial headlines tune in to the report. you know sometimes you see a story and it seems so sleek you think you understand it and then something else you hear or see some other part of it and realize that everything you thought you knew you don't i'm sorry welcome to the big picture.

and you can start. to. welcome back your problems i'm curious about you were talking about the regulation of financial markets. can you. say. ok i'd like to go back to glenn and madrid i read your paper with with enormous interest ok because it seems to me that what has been done since two thousand and eight as certainly not enough and what you advocate in please correct me if i'm not if i'm wrong you're just saying we should go back to an environment of the one nine hundred ninety s. are not advocating a revolution you're advocating going back to what made fans before speculation went wild. yes and not just in the one nine hundred ninety s. but for hundreds of years prior to this in the common law tradition coming out of the united kingdom there's been

a doctrine that you can't buy insurance against the life of someone like the present in the united states whose death doesn't affect you negatively you can't just go out there and in buy insurance against things which you have no interest in and effectively what's happened in financial markets is rather than being an opportunity like patrick said before the great for people who insure themselves against fluctuations in the value of their crops or against you know bad things that could happen to them in their lives it's just become a venue for people betting on the sorts of speculative endeavors and that's not what the financial markets were set up for that's not why that's why we have prohibitions against wagering and gambling in most countries and i think that all of that eric and i are trying to do is to restore were basically

a long standing tradition that tried to distinguish between abuses of financial markets for speculation and betting from beneficial uses of free natural markets that allowed people to insure themselves against risks and spread those risks more evenly across the economy ok arnold what do you think about that that seems really reasonable. well i've heard i've now heard three versions of the paper one for asian is that we're going to we want the analogy with the f.d.a. but then when i raised the issue experiments he said no no that's not what it meant i meant pre-approval and now i'm hearing a third thing which is going back to some common law tradition about defining what's a legitimate financial instrument and what's not so first we're going to use experiments then we're going to use data and then we're going to use common law tradition so i really don't know what i'm arguing against okayplayer what i would argue flame you want to clarify that it's your paper you want to clarify it. yes

we think that in the modern world in order to have an effective regulatory agency to like the f.d.a. preapproved products it needs to like the. f.t.c. in the european commission use data to determine whether the products are beneficial and harmful and it needs to draw on the traditions which inspired those principles from the common law. but which need to be modernized using the techniques of modern economic analysis ok patrick it seems to me and i was trying not to make it too simplistic here but it seems to me we glenn and his co-author are advocating is cutting out an enormous amount of speculation because when we see what's happened in the financial markets when derivatives were introduced and all that things went nuts ok and some people made an enormous amount of money and a lot of people lost their livelihood what are my reading of it is that it's controlling speculation. well i got to say you know the problem i see here is first

of all i disagree with you actually derivatives have been more of a power for good in many respects than they've been apart for harm the thing about their images are they like icebergs you only see the little bit on top which is the bit that ultimately sinks the titanic the thing that's you know two thirds or three quarters under the water that's the thing that helps many people which in fact glenn himself is quite rightly pointing out helping hugely beneficial he brings up this point which goes back to the so i think model of seven hundred twenty you can't buy life insurance on other people that is quite feasibly a reasonable concept the difficulty i have in here i suppose not i am also agreeing with arnold is that you three major precepts i mean if we look at what's going on in the world at the moment there's this huge bill going through america called dodd frank huge advisedly i mean it's now up to something like six and a half thousand pages how can anybody in their right mind expect to use that to create any sort of a framework apart from a large amount of paper that you can go and sit on or possibly make

a soup and i think that's the problem we're running into here peter is that actually we can talk about these lovely concepts all day but actually we've got our nightmare coming out because everybody's going to be potentially in danger of wearing an orange jumpsuit because they won't know what they're able to do and if we don't have any markets whatsoever then reasonable commerce is going to come to a whole because actually i think arnold said it best first of all you can't be extreme you can't of total regulation because that starlin ism and those markets didn't work terribly well and you can't have complete are not capitalism which admittedly we've never really seen in the world but i suppose you could argue happened during the industrial revolution because that's going to be a mess my argument is as a practitioner we need pragmatism and that means simplicity and the problem is as we go on and on and on and every time there seems to be a question we out another degree of complexity to the regulation it's not going to work here's my suggestion but i'm not not top time let's go if they're. going on tour here we haven't done that for two thousand years when jump in head. so

patrick you you admitted that not being able to buy life insurance on someone who you're not related to is occurring you know is a very reasonable proposal but prior to two thousand c.d.'s volume credit default swap volume in the united states was essentially zero because there was a rule that you couldn't buy insurance on a brand that you didn't own and then the state of new york he decided i wrote article you might want to ninety percent of your issue on that is your client and i quote if this really was a trillion dollars we did we want to do is unfortunately the time for glory shorts on future earnings they shouldn't ok arnold jump on a second hey you know when i was here with you know minutes ago during that it was good ok jeff arnall jump in where do you stand on all this. is going on with the washer going on here. let's go to washington arnold jump in please. if we had the choice between if we knew the

difference between. dangerous speculation and valid investment we wouldn't be here today if human beings and regulators understood that we wouldn't be here today the regulators sauce credit default swaps they saw our mortgage securities and they said it was good i can show you quotes from ben bernanke he's saying how much better in two thousand and six risk management was in the financial sector because of these products so if you yes if you assume that regulators have godlike powers and absolutely give them total authority the problem is they don't and so there's there are two cases for simplicity and regulation one is that it's better for markets but the other is that it's better for regulators to just play within their game so to speak and so on consumer product safety regulation you just need some simple principles of not selling products in appropriately to people not

fooling people and not and not selling them products that they have no chance of benefiting from and you just want to implement those too ok i mean what arnold says to make it so simple why is it you know yes absolutely because we are stuck on the idea of letter and let me try to give you a center you have to define it in terms of products were not it needs to be i would argue for a principles based regulation where you put out the principle that you don't sell somebody a financial product that they can't benefit from and you don't sell them a financial product that they can't understand and then we ought it against companies ability to implement that to have that principle invested in their corporate structure and to train their employees in that way. that to me is the most natural approach rather than trying to do product and i guess you doing it is

how the wires are easy to have to wonder where all street would like that because then they would make as much money when you want to jump in there go ahead. yeah. yeah i mean i i i think that if you offered beings the choice between what arnold's proposing in forced vigorously and what we're proposing i have no doubt that they would choose what we're proposing this his broad principle that you don't sell anyone anything that they won't benefit from i mean you would have a zillion lawsuits from people who just you know their company wasn't doing well and so they angry and they decided that it was the fault of the bank i mean i think relative to the world where you really influence what arnold is saying they would much prefer to have these certainty that they would have a pre-approval that would protect them against the possibility of frivolous lawsuits going forward i don't think it's really feasible i didn't. go through with the if you don't think regulators can determine the value of of

a particular product how is a court ex-pro some judge going to figure out whether it was in the consumer's interests or not to have bought this product. do you want to you have to set up you know you'd have to set up a lot of examples and precedents examples in the legislation and precedence over time so you say well i mean we have examples of suitability requirements that are hard suitability requirements for whether you can let's say invest in a in a start up private company and you have to be a qualified investor and what have you now those are hard requirements but you could use examples like that or examples of products that don't give people a chance to benefit like my favorite example is somebody who converts your regular mortgage to buy a weekly mortgage and charges you such a high fee that you can't possibly benefit from that product you can set up examples like that and say here's an example that clearly violates that here's an

example that clearly doesn't and use those as precedence in court i agree it's not there's nothing perfect here but when you set a precise. breeze which is going to happen is that the financial the businesses are so much smarter they go right to the boundary stay within the boundary and still rip off the consumer ok i want to go how do you know when you have racial last word on this program where's the crime rate i actually don't hear incredibly what every child what patrick and i don't what's the what's the problem is the compromise factor it got the last word peter you know something i think what we're hearing here is we've got some very good sign doc a democrat ideas originally in this paper the difficulty is the complexity and ultimately what we need with regulation is something that can be encapsulated relatively simply i must say i like the idea of principles you know in the old days the stock market worked on the basis of my word is my ball and there has been terrible excess in this market there have been terrible problems there has been a nation where c.d.'s became too big i wrote about it in the late one nine hundred

ninety s. about how big a bubble there was growing in these agreing of these things there have been liar loans the regulators themselves have not behaved particularly well but simply throwing lots more regulation at the market isn't going to help because here's the rub as the market evolves so do that so too do the market players and therefore you know this is a little bit like defense you know the way we always go back after a war we analyze what happened in the last one and then we prepared of ok extra work all right we will run out of time here so i really like what you have to say patrick finance and principals ok many thanks to my guest city in washington in warsaw and in madrid and thanks to our viewers for watching us here to see you next time and remember a prostitute. taking a. stand.

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