Comments on: Accountable Financial Regulation

By: Overcoming Bias : How To Pop Bubbles

Overcoming Bias : How To Pop Bubbles — Tue, 07 Jul 2009 17:01:17 +0000

[...] don’t let us see very easily if regulator actions helped or hurt on net. Two years ago I suggested a more accountable way for regulators to reduce [...]

By: Forbes

Forbes — Tue, 06 Mar 2007 20:33:42 +0000

Robin Hanson: I believe you to have a very wry sense of humor, as any rational actor should have seen the comedy behind such a regulatory proposal. The very concept of a free market is the information obtained by buyers and sellers in their discovery of the market clearing price. It is the outcome of price discovery that contains such information, i.e. quantities demanded and supplied across the time horizon. Such a regulatory scheme to prevent price volatility presumes foreknowledge of that information. In fact, it presumes an alternative price discovery system, one that will set the “right” price because it “knows” the right price. It also presumes a straight line for prices, as under the foreknowledge of such price information incumbent in the regulatory scheme, no volatility would be acceptable, as any price volatility would be the result of an exchange made away from the “known” price.

It is unfortunate that some of the comments made missed your humor, as Pearlstein’s suggestion is based on the notion (backed by no evidence) that Tuesday’s volatility was unreasonable and unwarranted. That Pearlstein suggests regulators could know what volatility is reasonable and customary, in a manner he doesn’t specify, is not only foolish, but demonstrates his naivety of, and likely hostility to, free markets.

And such a concept as offered by Pearlstein is more of the “equal outcome” mantra fostered by the Left, i.e. price discovery is discrimination, and we can’t have any discrimination.

By: Matthew Crandall

Matthew Crandall — Tue, 06 Mar 2007 20:26:43 +0000

If markets behave irrationally, it’s because they are influenced by humans, who also behave irrationally. The problem is, any proposed regulatory body would also be controlled by humans, and thus would also behave irrationally.

I rest my case.
-Matt

By: Robin Hanson

Robin Hanson — Sat, 03 Mar 2007 08:01:20 +0000

Hal, in a non-accountable regulatory regime to reduce volatility, there is also the possibility of rare very costly regulator misjudgements. The difference is that we can’t very easily see such mistakes, to evaluate how well the regulation works.

By: Hal Finney

Hal Finney — Fri, 02 Mar 2007 17:19:40 +0000

To perhaps state the obvious, if it’s profitable to curb market volatility, you don’t necessarily need a government program to do so. Investors have incentives to take positions and profit from excess or inappropriate volatility, thereby reducing or eliminating it.

Seems like the big problem with making this kind of program self-funding, and one reason why people don’t do it voluntarily, is what Keynes described. This plan can work pretty well most of the time and generate profits, but eventually it will fail catastrophically. You keep buying as the market keeps dropping, until you run out of cash, the market drops further, and you’re wiped out. (Or vice versa for market bubbles, where you’re taking a short position.) Even a hundred billion dollars won’t last forever, not in a global market.

By: Robin Hanson

Robin Hanson — Fri, 02 Mar 2007 00:37:39 +0000

Spencer, how does Congress deal with a regulator who refuses to do their assigned regulation task? Fire them of course. I don’t see why regulators need all inside info to just reduce volatility.

By: spencer

spencer — Thu, 01 Mar 2007 21:54:10 +0000

You may have a good idea here on one condition. The regulator must have advance access to all the
“insider” information that moves stocks. The most common problem regulators deal with is insider information. So if you can figure out how to provide the regulators with this insider information
I’ll support your proposal.

But how can you deal with the efficient market problem? If the regulators simply index the funds provided them over the long run they will beat essentially every portfolio manager. So if congress gives the regulator a sum they could simply index and live nicely off the dividend income without ever having to do anything — about what the typical owner of inherited wealth does.

By: TGGP

TGGP — Thu, 01 Mar 2007 19:48:46 +0000

Peter, if the regulators accept the premise that by inducing trading halts you will reduce error by traders, can’t they impose that on themselves (say, if they always had to use a computer program to trade their inventory of money and stocks that would automatically start refusing commands when the news/market has a certain volatility) and thereby make better trading decisions and beat the market?

By: Robin Hanson

Robin Hanson — Thu, 01 Mar 2007 19:14:31 +0000

Stuart, Alex, Peter, I did not propose this regulator scheme to achieve all possible regulatory goals, but only to achieve the goal of reducing “excess volatility,” which is the problem Pearlstein complained about.

By: Peter McCluskey

Peter McCluskey — Thu, 01 Mar 2007 16:50:25 +0000

While there are probably many proposed regulations for which your reaction is appropriate, I think there are some possible regulations for which your analysis is misleading. In particular the word “push” has connotations that tend to obscure some possible effects of regulations on prices.
I suggest that rapid market moves tend to cause traders to act less rationally than normal. The speed with which some trading decisions need to be made is partly a function of the speed with which competing traders are making their decisions, and in times when news changes unusually rapidly these competitive pressures cause traders to devote less thought to any particular decision. (By news, I mostly mean financial price information rather than English-language style news).
It’s possible that temporary trading halts can cause traders to have more time to think about their decisions and come to wiser choices as a result. If so, that would alter prices in a way that doesn’t imply that regulators could make money by better trading, since the regulators would be subject to the same competitive pressures that cause other traders to act less rationally than is optimal.
I’m not at all confident that rules causing trading halts are wise, since they probably have some harmful effects that I don’t know how to measure. And I have no reason to think that government regulators would do a better job of creating such rules than stock exchanges would.
There are some rumors that part of the problems with Tuesday’s trading resulted from rules that temporarily suspend some types of automated trading during big market moves, which redirected some trading to human specialists who may have been overwhelmed by the volume. These rules seem to have been the result of one conspicuous case (the 1987 crash) where automated trading caused as least as much harm as more direct human trading, but this seems more like what military strategists call “fighting the last war” rather than a reaction to a persistent pattern of problems.