Should MetLife be designated “too big to fail”?

Here is one summary of the latest:

The nation’s biggest life insurance company isn’t “too big to fail” after all — at least in the eyes of a federal judge, said Renae Merle in The Washington Post. In a “significant setback” for the Obama administration’s financial reform efforts, MetLife last week won a landmark lawsuit over its designation as a “systemically important financial institution.” Prior to the 2008 crash, large, non-bank financial firms were subject to little oversight, but after the near collapse of insurance giant AIG, federal regulators decided tougher rules were necessary. So the government labeled MetLife, which has 100 million customers worldwide, and three other non-banks — AIG, Prudential, and General Electric’s financing arm — as too big to fail, requiring them to set aside bigger financial cushions to ward off collapse. But MetLife challenged the label in court, and to the surprise of many, it won.

That’s four non-banks, identified in discretionary fashion by the regulators without a cost-benefit analysis or fully objective standards for such a designation.  Not three, not five, rather four.  And with exactly what standards of regulatory appeal?  A thirty day appeal process?  Once you are on that list, I believe it is politically very difficult for the Financial Stability Oversight Council to take you off.  The regulators are not required to spell out any clear “exit strategy” for leaving the list.

Is this such a good idea?  You don’t have to favor “doing nothing” to think this idea of a “tag, you’re it” game might be counterproductive.  I am reminded of the wise words of Paul Krugman that a lot of crises can come from surprise corners and bring higher contagion costs than you might have expected.  And the whole point of systemic risk and mispriced asset classes is that such problems can affect the entire market, or an entire sector of the market, all at once.  Big firms or not.  (It is weird for regulators to simultaneously believe that breaking up big institutions would increase market risk, and then focus their monitoring on…the biggest institutions.)  What about money market funds, while we are on the topic?  It’s not about the size of the biggest one.

That all suggests it is better to build safeguards into the system at a general level, rather than playing the tag game.  Those safeguards can include corporate governance reform, better Fed monitoring of credit markets, better stress tests, better overall money market infrastructure and crisis procedures, and better monetary policy in downturns, among other ideas.

If you impose higher capital requirements on four relatively well-observed firms, you might just be pushing risk into other and less well-observed corners of the financial system.

On Twitter, Austan Goolsbee is very upset about this ruling.  Jack Lew has been described as “furious.”

I say it’s a blessing in disguise.  Any regulatory system whose success relies on singling out four firms is a system bound to fail.


Addendum: Here is a relevant article by Cass Sunstein.


We know, with near certainty, that if MetLife begins to fail, it will be bailed out by the federal government. (Less-observed firms fall ask the time).

I don't understand the conservative/libertarian fetish for less regulation for firms that will be bailed out. The position that regulation is good for de jure GSEs, but not for de facto ones, is strange. MetLife is a GSE. Worse still, another big insurance bail out will lead to nationalization of insurance regulation.

In the long run, this will be a very hollow victory

Since there are all kinds of possible or indeed likely bailouts in the U.S. economy, should all kinds of regulation always go up? MetLife is already regulated, in any case, with or without this designation.

It's the 21st Century, everything is regulated. Everybody also has some change of getting bailed out.

However, MetLife's chances of getting bailed out are roughly 100%. Some hedge fund (i'm not sure what other sort of less-observed sort of firm you're referring to) has a much, much lower chance of getting bailed out.

State insurance regulation, as we saw with AIG, is the sort of regulation that doesn't do what most people think regulation does. As best I can tell it serves to provide investors and market participants with a false sense that someone outside the firm actually knows what going on inside the firm. As we saw with AIG, no one inside the firm even knew all that was happening. I think these firms would be better off with no regulation than what they have now - at least investors would pay more attention.

My libertarian ideal is unlikely to come about though. The reality is that there are a set of firms that are certain to be bailed out. Should we acknowledge this reality and regulate them as such, or pretend that we might not bail them out and move along? There may be some decent arguments for the pretend camp, but to even begin to make them, you have to admit what you're doing. In the meantime, I don't think you'll go wrong if you think of these large insurance firms as the Republican version of Fannie and Freddie.

The disastrous part of AIG - where CDS were bought and sold - was not regulated by state insurance departments. They were regulated by the late, unlamented federal Office of Thrift Supervision. One of the ironies of Too Big To Fail is that the failure of a federal regulator was taken as a cue for more federal regulation.

If the regulatory failure was too little regulation, it would be rather more ironic if one were to argue that less regulation would solve things.

Was pretty sure they were bought in London explicitely to fall under the FSA's regulation.

Joseph Cassano's Financial Products Unit was located in London and had very few employees. I cannot figure why a savings bank regulator would cover it. You sure about that?

@bluto. Yes I'm sure:

A car loses control, and crashes through a guardrail, falling off a cliff. The state decides to replace the failed guardrail with a stronger one.

Is it ironic that the failure of a guardrail was taken as a cue to build a better one?

If I interpret the addendum correctly, this is where the whole discussion should be, in cost benefit analysis, rather than .. regulation homeopathy. You know, where concentration of regulation doesn't matter, dilute it and it still retains its essence.

Tyler, are you saying that eliminating "Regulation Q" (the conservative boogeyman circa 1970, as a proxy for every regulation on capital and interest) increased regulation?

I remember the promises of eliminating Regulation Q:
Checking accounts will pay interest
Savings will earn 5 to 10%
Personal loans will be easy to get and have interest lower than the 12% to 18% caps imposed by States

And money market funds needed to be competition for bank savings and open to small savers and be allowed to offer deposits and withdrawals on demand to make banking much safer than the bank system from 1935 to 1970, always on a knife edge of massive bank failures and bank runs.

And the prohibitions on interstate banking made banks certain to fail.

I find it strange that you consider the 70s, 80s, 90s, and 00s to be decades of ever increasing regulation on the financial system.

MetLife isn't regulated as a single entity, though. It's regulated by 50 state regulators at the individual state level, and by functional regulators by function. But there is no single regulator charged with evaluating the safety and soundness of the entire firm. And as we saw with Lehman, that can be a problem. (The SEC's regulation of Lehman was successful -- after all, all of the client accounts at Lehman were safe. That Lehman caused a run on money markets -- that wasn't the SEC's job to worry about.)

Where a black swan will come from is wholly unpredictable. The next one will have nothing to do with the 2008 crisis and all this regulation will have been completely irrelevant, just as the post-Enron crackdown had no salutary effect on the 2008 crisis.

"The next one will have nothing to do with the 2008 crisis and all this regulation will have been completely irrelevant, just as the post-Enron crackdown had no salutary effect on the 2008 crisis" [SNIP]

The reason that the piece of legislation enacted after Enron, Sarbannes-Oxley, has had no 'salutary effect' is because the US Congress has never invoked it to confront perceived control fraud by a listed company.

Because this [control fraud] has been decriminalised for corporations in the USA.

My point isn't that regulation is good. It's that we're in this very odd place where the one side (Republican) doesn't want regulation (except in the case of regulation against explicitly Democratic GSEs (e.g. Fannie and Freddie)) because it generally views regulation as bad. The other side can't admit that large firms will still be bailed out, because they love Dodd-Frank, which they all know ended bail-out (wink wink).

For those of us not personally invested in one of those sides, it would be ideal not to bail out large financial firms and barring that, to regulated them very differently than we do now (not necessarily more, but very, very differently).

I agree to a degree but cringe when I think about the down in the weeds nature of high regulation and oversight. Friction yes, but also capture and making every large enterprise in America a political football forever.

Too, probability of bailout may not be not the right way to look at it. What actually happened this last time was beyond certain name brands, the financial system as a whole was bailed out. In some cases firms tried to refuse the money and were threatened with

I don't know how to do this, but if we could come up with a coherent index of counter party risk, I wouldn't mind establishing some kind of sliding capital requirements rule to firms at various levels of that index.

What I don't understand is why we bail out the investors.

If what is needed is liquidity, well, I understand that such an argument would leave some reaching for their guns in the USA, but why not just nationalize the bank, keep the corporate structure essentially in place, push as much cash into the bank as needed to keep it running, ban all bonuses (presumably there isn't a lot of hiring going on with the competition in such a situation) and commit to selling it on the market in 2 years time?

Of course, whichever politician backed it would be branded a communist. But it seems rather more pragmatic to me, and also addresses moral hazard, if not so much on the part of the executive board, at least on the prat of institutional investors who buy large blocks of shares in banks.

Even when a bank is in crisis, there are going to be some profitable divisions. If you implement a blanket ban on bonuses, you're going to lose those businesses. A ban on bonuses would probably be politically popular, but it would destroy the bank. It's dangerously naive populism.

FXKLM - Yes, that makes sense. Surely there must be some middle ground, to avoid $10 million golden handshakes effectively paid for by taxpayers to executives who ran banks into the ground ...

I am rather fond of bonbons.

Are you saying 2007-8 was so totally different than 1987-8 that the 1990 TARP provided zero inspiration for the 2008 TARP.

I find the theory of deregulation that led to 1987 was responded to with a double down on deregulation which made 2007 a much bigger bubble.

A bubble I could see in 2003-6, but unlike the protagonist in the Big Short, I had no friend who could explain how to short bad debt financing the bubble. Or how to get the money to make the money. I just hunkered down debt free, ignoring the supposed million dollar plus price placed on my assets.

If that is the case, then surely this SIFI thing is complete nonsense, no? There's a far more elegant solution: 1) wipe _all_ equity when they're bailed out - this takes care of the moral hazard issue, 2) have them pay into an insurance fund in good times, use the fund to bail them out later.

Such things are easy to say, but legal? Remember that any bailout is a deal between bailee and government. No company will agree to zero out shareholders. That is the opposite of fiduciary responsibility. The only way to make a company do something is through the courts, a slow process. The courts are not fast enough to respond in crisis. (We can say that GM should go through bankruptcy, but there are extra social and economic costs to that.)

So for fast action we are left with deals companies will accept, which almost by definition are not ideal for taxpayers.

GM did go through bankruptcy.

As a it's only financial backer in bankruptcy (unlike Ford, GM had failed to secure credit when it could before the crisis), the US Treasury had its representatives structure the bankruptcy.

If a hedge fund had been willing to put up the cash needed immediately on better terms than Treasury, then they could have taken over negotiating the terms of GMs bankruptcy. Where was Mitt Romney?

You are correct. I remembered the negotiation but not that bankruptcy was part of it.

Mitt didn't have the appetite to lose that much money.

Well, in the long run, this should be overturned on appeal. The Judge included a lot of 'requirements' for the designation that do not appear in the law; it seems she rejected the general understanding of administrative discretion.
It is a temporary victory, but the appellate ruling could be much harsher than the financial industry would like.

Admittedly, it would definitely awful. One counter argument is that it is difficult to price vague pseudo-promises and when asset is some what Boolean (are you insured or not) this can trigger a panic when understanding of the nature of the pseudo-promise changes.

Of course Goolsbee and Lew are furious: they want the power of life and death over MetLife.

Didn't Paulson use the "no athiests in foxholes" line? Regardless, he proved it.

So people who pretend next time will be different are doing just that.

Because a slight change in capital requirements would mean life or death? That seems rather overblown.

To be clear, every bank with assets above $50 billion is automatically considered Too Big to Fail. The original post could be read as if only four non-banks firms were so classified.

The law drew a clear standard for banks but was unable to construct one for other firms, so regulators had to draw one up. MetLife objected to (among other things) the murkiness of the process and the lack of realistic ways to appeal a decision or get rid of the label.

The government keeps trying to control the financial sector with an increasingly complicated collection of levees, operated by central-regulators. Instead, we should regulate "systemically important financial institutions," and unimportant ones too, with wider floodplains., e.g., contingent bail-in capital, mainly operated by decentralized private actors. Harness the power of the private sector to monitor the private sector, and let the private sector absorb the inevitable floods.

If it weren't so predictable that we'd simply HAVE to bail them out if they took on too much risk during the boom times and when facing the eventual collapse, that would be nice. I understand the appeal and wish it were realistic. But I do not believe it is realistic.

Private sector to regulate the private sector.

That’s four non-banks, identified in discretionary fashion by the regulators without a cost-benefit analysis or fully objective standards for such a designation. Not three, not five, rather four.

There's your problem right there.

A Reading from the Book of Armaments, Chapter 4, Verse 19:
"Then thou must count to three. Three shall be the number of the counting and the number of the counting shall be three. Four shalt thou not count, neither shalt thou count two, excepting that thou then proceedeth to three. Five is right out."

Both MET and PRU look like they are headed for 2008-style collapses and equity investors get wiped out either way. The next bailout will require socialized losses via the currency.

It also occurs to me that if whatever lens you place on this doesn't also include GM, you may be missing something important about what is really meant by TBTF. It's a combination of real systemic risk to the economy as a whole and risk of political backlash by favored interests. Solutions should seek to isolate these conditions.

We do a pretty good job of not bailing out a single bank who has made a set of bad decisions. We have a method of unwinding that seems to basically work.

We accept our fate that when all of the banks and counterparties have made the same bad bets, or if there is some other very large shock that disrupts flows across bailing out is going to happen. There is no credible signal you could send to suggest in this condition we will not be bailing you out. You are bailing out the system. Capital requirements based on objective criteria seems not a bad way to mitigate additional risks of leverage in this situation, but if in this condition you are bailing out everyone through liquidity measures, it's hard to pick a given bank and say they are to be subject to some unique punitive action beyond the others. IOW, this particular situation is not too big to fail but rather risks of interconnectedness of all parties.

Which takes us to non financial bailouts. The risks in those cases are labor market risks, and in particular that politically connected interests may suffer unemployment. So we should break up the big car companies to spread the labor risk? Should we prevent them from hiring too many people? Of course not.

The Hamiltonian and Jeffersonian battle rages on, all these many years later, Hamilton exalted in the wildly successful musical based on the biography by Ron Chernow, John Quincey Adams exalted in the new biography by James Traub. In his review of Traub's biography of Adams, historian and Jefferson biographer Joseph Ellis states: "his [Adams's] presidential agenda was a double-­barreled anachronism: 30 years too late, as an echo of the Hamiltonian program of the 1790s; over a hundred years too early, as a preview of the New Deal. It proposed an activist federal government that promoted vast “internal improvements” (roads, canals) and public projects that featured a national university. In Jacksonian America such a robust expression of government power was dead on arrival". It seems inconceivable that, in America, the land of opportunity, the Hamiltonian large and positive vision could ever lose to the small and defeatist Jeffersonian vision. Yet, here we are.

What's most needed is bankruptcy reform. The reason Lehman was such a blow-up moment was that it froze a lot of assets pending court procedures with no definite time.frame. Modern financial markets can't work that way. What we had in the US till 2008 was a binary system of banks subject to forced sudden liquidation and archaic ponderingly slow court bankruptcy for non-banks. After Lehman all the big investment banks left standing were pressured to convert into banks, and then Dodd-Frank tried to introduce a bank-like rapid resolution for the very biggest non-banks. And Tyler's right that probably won't stop an actual crisis, likely instead several second-tier non-banks will blow up all at once. But however nightmarish it might sound to libertarians, the FICA system has worked very well. Something modeled on that does need to be applied to some non-banks, I think based on activities not on scale.

"The reason Lehman was such a blow-up moment was that it froze a lot of assets pending court procedures with no definite time.frame. Modern financial markets can’t work that way"

Actually they should be able to accommodate that quite easily. Look at mortgages. They take weeks to get even if all your paperwork is perfect, there's dozens, sometimes over a hundred pages even for a simple refinancing. Yet as slow as that is there's a rapid market still for collecting the mortgages and trading them in the financial markets.

In a bankruptcy there's no reason efficient financial markets couldn't develop contracts that represent the 'frozen assets' trading them back and forth until courts work out who owns them, at which time they would resolve as any other contract would.

How are you going to have more and better stress tests as a solution to systemic risk if a substantial segment of financial firms (insurers) aren't regulated at the national level and aren't subject to stress tests?

System and Systemic are very solid-sounding, meaningful seeming words. A lot of assumptions of understandings are required in their use in Financial Systems and Systemic Financial Effects.

From the beginning of the adoption of the term "Systemic Risk" there has been a lack of understanding (let alone definition) what constitutes the "system" within which some functions are "systemic."

Is there actually "system" of unitary function; if so what is it; can it be delineated in some comprehendible terminology?

There may be, and likely is, a false perception that conditions resulting from innumerable particular relationships in particular differing circumstances constitute a "system" that functions as a unit; rather than as the composites we can observe.

The terms “Credit Systems,” “Monetary Systems,” and others are used to describe, define and sometimes delineate, specific observed **conditions resulting** from particular relationships occurring for certain objectives in varying circumstances. Those, in turn, are generally incorporated into conceptions of “Financial” Systems, to be regarded as unitary functions. The very diversity of, say, credit functions, in forms and applications, shows resulting conditions from diverse relationships and objectives rather than “system.”

"Regulations" like all forms of administration of human conduct operate (to the extent they have effect) by influencing, ranging to determination of specific circumstances in which relationships occur; as well as by interventions in the relationships themselves. The relationships are further impacted by social constraints and other externalities, so that the conditions resulting are never "systematic."

And yet, there seems to be this expectation that they can be made systematic by means of determinations of circumstances and constraints of conduct creating a unitary function of a system.

Hubris and misconceptions.

The resulting condition may be a huge, constantly re-forming network of relationships with constantly changing nodes and links; but, that this constitutes a "system" remains to be proved.

The synopsis of this article doesn't come close to the findings of the court.

MetLife is certainly eligible to be a SIFI. The problem is that FSOC issued guidance defining how it would make its designation, and then changed that method in midstream without any explanation. In fact, FSOC denied that it had changed its definition altogether. When the judge found that clearly they did change, FSOCs denials were Prima facie evidence that it had not deliberated and communicated the change.

Also, consistent with the holding in EPA v Michigan, FSOC didn't consider the costs of SIFI designation nor did they attempt to quantify the benefits.

FSOC can still declare MetLife a SIFI, but it has to go through a minimal process of justification, and give Metlife notice and opportunity to respond. The arrogance of government is that it can do what it wants, for any reason it wants. The judges are smacking them down, and this is a good thing.

Thank you, Willitts. This is an Admin Law case about the agency decision-making process and documentation, not a ruling on the merits of whether Metlife is actually systemic. All of those commenting about whether Metlife should or should not be designated as systemic and subject to regulation have missed the point of the ruling, and its significance. And it is a significant ruling a victory for law and economics folks, but not for any reasons that Tyler has cited. This decision did not rely on Sunstein-style benefit-cost analysis.

Think of Sunstein/OIRA Benefit-Cost analysis as like advanced analytics for sports. Old-school coaches do not have to use advanced analytics, but they should be able to describe how they made their decisions. Eg., "yes I know that the analytics guys say we should have gone for two, but we had a lot of problems executing our short yardage offense and our blocking tight end had gotten hurt in the previous series." Under an arbitrary and capricious standard, the court will not substitute its judgment for the old-school coach, but the coach needs to articulate a reasoned decision-making process (even if the numbers don't crunch his way).
For judicial meaning of arbitrary and capricious, see pages 1-2 of

This generic requirement for a agencies to consider costs and benefits is not the same as the requirements for a formal Benefit-Cost analysis with specific methodologies for measuring the value of... as administered by OIRA that applies to executive branch agencies. The FSOC is not subject to those executive orders and related statutes. The judge did not rely on those formal Cost-Benefit requirements in making her ruling.
Here you go for Cass-style Benefit-Cost with capital B and capital C (which the ruling is not related to)
And here is an example of the related executive orders (which the Metlife ruling does not refer to)

The chair of the FSOC's asserts that Congress's decision to make FSOC determinations subject to the arbitrary and capricious standard, but not formal OIRA-administered Benefit-Cost Analysis, means that the FSOC does not have to take into account both costs and benefits in this generic sense in its rulemaking process.

As a matter of Admin Law, Secretary Lew is wrong. Under standard Admin Law, the agency cannot consider the benefits of something without also considering the costs (if any) at all. It doesn't mean that the agency's calculation needs to be pristine. Now, the FSOC can still win on appeal if the rulemaking record is more robust than we can tell by examining the information contained in the judge's decision. Either way, going forward, the FSOC can be more careful in how it documents its administrative decision-making record. The arbitrary and capricious standard is very deferential.

This is a victory for law and economics because it is part of a long line of decisions that remind agencies that they cannot make policy irrespective of the analysis of the economists on their staff (and that the agencies must document the reasoning in this regard). The SEC is revamping its rulemaking process because it lost challenges and its IG office also noticed - and again not because of OIRA. I expect the CFPB to lose some early challenges until it adapts.

A SIFI designation's primary effect is to give the Fed the authority to impose safety and soundness requirements (e.g., requirements/restrictions governing capital, liquidity, risk management and resolution). That regulatory regime is in theory supposed to be tailored to each individual SIFI's risk profile. I'm not sure how a cost/benefit analysis could be performed at the SIFI designation stage, as the SIFI-specific regime would not have yet been specified.

I think most, including the regulators, would agree that "it is better to build safeguards into the system at a general level. . . ." However, those generally applicable safe guards are based largely on legal formalities (e.g., charter type and size) that have proven vulnerable to regulatory arbitrage. This is the old "rules v. standards" debate. The tag game seems inevitable. That leaves the important policy question as to who should do the tagging - Congress or the regulators.

(Of course this is not to suggest a view on MetLife's designation.)

"I’m not sure how a cost/benefit analysis could be performed at the SIFI designation stage, as the SIFI-specific regime would not have yet been specified."

FSOC made exactly that argument, the judge acknowledged the fact and rejected the argument. Presuming that the judged erred on this portion of the ruling, FSOC still changed its definition of a SIFI, failed to explain the transmission mechanism and calculating the benefits of the rule. Had FSOC relied on its second criteria or a custom criteria, it probably could have won.

The comments above demonstrate the predilection of people to react to the personal ramifications of a decision rather than the legal reasoning behind it. FSOC just did a poor job doing its job, and the court had no choice about setting aside it's determination. The law gives the judge zero latitude about what to do when a decision is arbitrary and capricious.

Just to be clear, my comment here is a comment to Tyler's blog. I'm not close to the facts and don't have views on the legal reasoning here. "(Of course this is not to suggest a view on MetLife’s designation.)"

That said, re MetLife, I might hazard a guess that FSOC has some easy fixes even under Michigan.

Thanks for the clarification.

Yes, perhaps easy or perhaps not. If it were easy, then why didn't FSOC do the proper analysis the first time? Are the government employees arrogant, stupid, or merely lazy?

Or is it the case that despite MetLife's size and interconnectedness, it poses very little risk to its counter parties. I have not read Met life's briefs, and the judge did not reach its other arguments so I can't answer that.

The bottom line is that an agency can't just tap dance around its rationale for a rule or decision.

This case is not itself precedential. It was the first case, to my knowledge, to apply the USSC holding in EPA v. Michigan. The EPA case is a capstone of efforts since the Ford administration to either restrain executive agencies or to hold them accountable to Congress.

EPA had an even easier fix than FSOC. It could have rescinded and then reissued its rule after notice and comment. It had already done a sufficient analysis of relevant factors, but did so after passing the rule. Instead, EPA hoped the USSC would give carte blanche to its discretion.

This is probably one of the greatest slap downs of government power in our lifetimes, and few people outside of law and government understand this. Few citizens understand the power that government agencies have on their lives and what they can do about it.

I don't see this as an aggressive ruling at all. Under Dodd-Frank, if Congress had wanted to remove FSOC designations from all court challenges, it could have. Or, more common, Congress could have limited the factors to consider during a challenge more narrowly, as it does in many places in Dodd-Frank Title II. Instead, Congress chose the arbitrary and capricious standard under Title I. It is deferential, but an agency does have to explain how it used reason to establish its findings based on the evidentiary record. In a very generic sense, not OIRA sense, explicit consideration of both costs and benefits (pros and cons) is generally considered an essential part of reasoned decision-making. Easy fix for FSOC going forward, and primarily one of agency competency in the way it presents the rulemaking record. I predict a similar smackdown of the CFPB within the next 2 years - again because of what I hear about the agency's administrative culture, not because of any new aggressiveness among judges.

I'm not saying THIS case is aggressive. I'm saying that the case upon which it relies, EPA v. Michigan, is a sea change in administrative law. It is part of a turning tide against agency overreach. The judiciary handed the reigns back to Congress. Since the decision in EPA was 5-4 along party lines, we see clearly the ideological preferences. Clinton, and to a slightly lesser extent, Obama, exerted unprecedented control over the agenda of the bureaucracy.

The separate powers of the executive and legislative branches are struggling for control over the "fourth branch" of government.

Here is what I do not understand. At its heart all finance is means of allowing individuals to pool their resources so they can maintain easy access to those resources while also allowing others to pay them for the temporary (perhaps decades long) use of said resources.

Individuals want their principal to be as safe as possible, but they also want their principal to be earning as high of return as possible. Risk increases returns, but makes principal less safe. Society would be better off if no one chased inordinately high returns with principal that needs to be safe, so we have many regulations to limit risk.

Essentially, this creates a black market for high return investments that masquerade as also being low risk. Individuals who do not know what is best for them want this commodity. So financial firms, somewhere, will provide it; some will even provide it after deceiving themselves that their paper really is high return/low risk. They may go to jail, they may capture regulators, they may cycle funds through eight countries, but someone, somewhere will find a way to deliver a highly sought after, albeit illegal, commodity.

This is why financial regulation surprises me from many doubters of prohibition. If the state cannot stop the movement of tonnes of bulk chemicals through multiple jurisdictions that is sold by sub-minimum wage dealers ... why exactly would they be able to stop the sale of high return/"low risk" paper which is not physical, cannot be spotted except by extremely talented individuals, and can shop jurisdictions to a large degree?

Worldwide, cocain is something like a $100 billion market and large numbers of liberals take it as a given that the government cannot drive up the cost enough to stop this market in spite of that fact that the providers often die, serve jail time, and make below minimum wage. Finance is something like a $1,300 billion market in the US where everyone can have trophy spouses and get invited to the parties of politicians. Why would we expect a 13 times larger market with far fewer downsides to be more amenable to government coercion than drugs?

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