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you. can. start. to think. oh and welcome across takahiro is more or less better this is the question still being asked when there are calls for regulation of the financial markets of the lessons of the two thousand a price list and learn the speculation control the markets and can free markets do better things than regulators. can.

start. to cross out 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 d.v. advisors and editor of the gathering storm and imagery and we go to glen while he is an assistant professor of economics at the university of chicago all right gentlemen cross titles and i mean if you can jump in anytime you want to i first i'd like to go to glenn in madrid are you in your co-author erika posner caused a bit of a stir by coming out with a paper titled just recently a proposal for limiting speculation on to rivet is a f t a for financial innovation ok now there was 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. we

have to heart of a time figuring out on their own with such complex effects 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 do 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. regulation in finance has to be done and 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 it's definitely 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 are explain the idea of testing products doesn't really work for that 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 test something 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 in your sample will translate to the fall of that spirit. 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. 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 are good for society because clerics because they are just good because well in his core they're talking about social values which i think is interesting in terms of finance ok patrick go first i want to go to. sleep there's

a lovely concept in here there's a beautiful idea but the fundamental problem we harvey's it's comparing science with economics night economics calls 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 to see in 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 that the fact that actually in history there has never been a single instance where one regulatory ball 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 in finance degrees and the problem is you can't do anything to really just a sophisticated way to give you you know give theory to decide whether or not to go to the bathroom alternately has a large dose to build a lot of money to jumble into the financial markets that doesn't 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 on was by governments and that's actually got nothing to do with financial regulation all right there are all we need to look at is intelligent pragmatic regulation or into our old plan where this whole program was designed around you are is that ok the whole program was designed around this paper that you wrote so i want to hear you as much time as one two days ago here i wonder if the internals point. yes so arnold's point was that you know science. and.

academic and economics are fundamentally different and there are regulations that are purely based currently on economic analysis. in particular the review of jer's by the u.s. and the european union even though you can't do controlled experiments in a you know small part of the market there are still techniques that are used and i don't think almost any one 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 where there are nine here is what we need 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 to 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 multiple other financial centers perhaps none by 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 has helped. me. here because we've got 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 pier question i don't think you should take want to extreme you shouldn't have faith in that markets are you know this is television ok so i'm trying to make it is simple for my viewers as possible go ahead i was in investment banking there years i understand ok ok and you shouldn't have faith that banks are always wrong

one important point i'll 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 on qualified borrowers getting better mortgages than they deserve so it's very appealing to have a simple narrative of one side is right one side is wrong but the fact is it's 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 not my simple point is the controlled experiments don't apply in financial products you experiment in there once and circumstances and you

say gee when we tried a 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 speak that they worked because house prices were appreciating and they don't work in a different environment where you can say the portfolio insurance in the middle of night hundred eighty is work find it on with a small group of people who are using it reposed line jump and go ahead. but that's just now we're advocating in the proposal we're advocating the use of economic data and no i based on prior prior experimental trials based on projections of demand for products in the same way to 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 the industry is the army analogy the

n.d.a. analogy 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 to getting 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 why we can't argue yes and no as to regulation and this on 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 know there are 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 doors 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 of that short break we'll continue our discussion on the regulation of financial instruments state park. if you want to. wealthy british style.

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a computer all about trying to we're talking about the regulation of financial markets. can start. ok i'd like to go back to going in 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 is certainly not enough and what you advocate and please correct me if i'm not if i'm wrong you're just saying we should go back to an environment of a nine hundred ninety s. are not advocating a revolution you're advocating going back to what made sense 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 break for people who insure themselves against fluctuations in the value of their crops were 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. that's why we have prohibitions against wagering and gambling in most countries and i think all that eric and i are trying to do is to restore basically a long standing tradition that tried to distinguish between abuses of financial markets for speculation and betting from beneficial uses of financial 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's 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 of 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 ok what i would argue for if you want to clarify that it's your paper you want to clarify the. yes we think that in the modern world in order to have an effective regulatory agency it needs to like the f.d.a. preapproved products he needs to like the. f.t.c.

in the european commission use data to determine whether the products are net 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 what i try to i'll try not to make it too simplistic here but it seems to me we glenn and his is coauthor 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 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 a power for harm the thing about derivatives 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 has quite rightly pointed out have been hugely beneficial he brings up this point which goes back to the site the bubble of seven hundred twenty you can't buy life insurance on other people that is quite feasibly a reasonable concept the difficulty i have and here i suppose now i am also agreeing with arnold is that you three color me if you're 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 i can advise italy 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. 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 a nightmare coming up 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 hold because actually i think arnold said it best first of all you can't be extreme you can't have total regulation because that star one isn't 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 ny 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 have another degree of complexity to the regulation it's not going to work here's my suggestion bottom up not top dime let's go ahead here and really avoid you and your good ground on now for two thousand years glenn jump in head. so it's ok to trick you you admitted not being able to buy life insurance on someone who you're not related to is a creator you know it's 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 bond that you didn't own and then the state of new york he decided i wrote article you might want to ninety those revelations on that easy life and i quote it is it was a trillion dollars we wanted we want to do is unfortunately record a short it's on future and i think they should ok are you jumping to a oh no no i will hear a little bit of minutes ago during that is that it was good ok jed arnold jump in where you stand. is going to arnold in washington on the air leave. it on our ship to know about it 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 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 inappropriately 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 two came along but arnold says if it's so simple why is it you

know your steps. because we're stuck on the idea of letter of let me try to give you let me show you this and you have to line 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 audit against companies ability to implement that to have that principle imbedded 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 by product i guess you doing it is how you want to resist one or all street would like that because then they would make as much money when you want to jump in there go ahead. yeah i mean i think that

if you offered the banks the choice between what arnold's proposing inforced vigorously and what we're proposing i have no doubt that they would choose what we're proposing because 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 their company wasn't doing well and so they. and they decided that it was the fault of the banks i mean i think relative to the world where you really inforce what arnold is saying they would much prefer to have the certainty that they would have a pretty and prove all that would protect them against the possibility of frivolous lawsuits going forward i don't think it's really feasible i didn't. think if you think i don't think regulators can determine the value of of a particular product how is a court expose some judge going to figure out whether it was in the consumer's interests or not to have brought this product. arnold you want to you have to set

up you know you'd have to set up a lot of examples and presidents 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 a private company or 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 year by we your regular mortgage will buy weekly mortgage and charge you such a high fee that you can't possibly benefit from their 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 pound breeze which is going to happen is that the financial 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 to jail i want you to reach a last word on this program we're stronger like i actually. want to. get i don't know what's the what's the plan what's the compromise package you got the last word peter you know something i think what we're hearing here is we've got some very good sign docket 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 the old days the stock market worked on the basis of my word is my bond there has been terrible excess in this market there have been terrible problems there has been an issue with c.d.'s became too big i wrote about it in the late one nine hundred ninety s. i got high big a bubble there was a bringing these things there have been liar loans the regulators themselves have not behaved particularly well but simply throwing lots more regulation at the marc . it isn't going to help because here's the rub as the market evolves 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 prepare to focus x. to work all right we would run out of time here so i really like what you had to say tactics finance and principles ok many thanks to my guest today in washington warsaw and in madrid and thanks to our viewers for watching us here r.t. see you next time and remember across. the. street. you know sometimes you see a story and it seems so you think you understand it and then you play.