Readers of CERF blogs and forecast publications know that CERF economists are critical of the Fed’s monetary policy, and have been for seven years now.  The Fed’s policies starting in December of 2008 were extraordinary, unprecedented, not recommended by economic theory, and have contributed to anemic growth and wealth generation for the past decade.

Prior to December of 2008, the Fed mainly relied on one policy tool, the Federal Funds Target rate (FFRT).  During the dark days of the financial crisis, they added two more policy tools, quantitative easing (QE) and interest on reserves (IOR).  CERF is most critical of IOR.

There are a few things that economists agree on, and one of them is that financial intermediation is good for the economy.  This is the process by which banks use savings deposits as a pool of funds to extend credit to businesses and households.  The IOR reduces the quantity of loanable funds available for intermediation by taking them out of the banking system and locking them up as reserves at the Fed.  Lending falls, investment expenditures fall, growth slows, and capital accumulation and future wealth fall.  These are unmistakably bad economic outcomes compared with having those funds available and extended to households and businesses who are growing.

What’s more, it is not clear how the Fed would respond if there were a severe recession tomorrow.  If they raised IOR, this would further restrict credit.  They could reduce IOR, but in a severe recession, weak loan demand would make this less effective.

It is clear that the Fed wants to maintain a massive balance sheet, and they have documented various technical benefits.  However, it is fearful of rapidly unwinding it, and this is the real reason for the glacial reduction pace.  A consequence of the Fed’s massive balance sheet is that it destroys the Fed’s ability to control short term interest rates.  IOR, a rate that the Fed sets directly, provides the short term interest control they desire.  The interest rate on reserves may actually be the most impactful policy that the Fed is employing, but that is only because unwinding the balance sheet would wreak unknown but horrible damage to the economy.

CERF economists have also criticized the fact that the Fed’s policy statements highlight the FFRT and QE, but IOR information is no longer provided in the Fed’s main press release.  Since December of 2015, changes to IOR have been deliberately buried in a technical note separate from the press release.

At the panel, Chair Powell and former chair Bernanke stressed the Fed’s goal of being transparent.  They repeated their desire to clearly and frequently communicate their policy intentions to the world.  However, not one word was uttered about IOR at any point during the one-hour long discussion on Monetary Policy.  It was clear this was done on purpose.  Neither the press nor the economics profession have properly brought the IOR policy and the resulting economic detriment to light until recently.  In particular, the January 1^st Wall Street Journal article, The Fed’s Obama-era Hangover by Phil Gramm and Thomas Saving, highlights the powerful impact of IOR on credit.  The article also explains that the Fed is now an interest rate follower.  It is no longer setting or leading short term rates.

It is clear that the Fed’s stated transparency goal is contradicted by the reality of the Fed’s actions.

I have a theory to explain this contradiction.  As forecasters, CERF economists routinely promulgate their economic analysis and their forecasts to the press and the community.  This is a challenge.  Economics is a complicated undertaking.  There are subtleties and complexities.  It happens that we’ll interview with the Media and then read their article and wonder what went wrong because the written article miss-represents our views and/or our analysis.  This appears to be a reality of the interface between economists and non-economists.

We have tools to deal with this issue.  We tell stories as much as possible.  We try to pull back from talking about many relevant factors to focus on one key factor.  But these strategies do not always work.

It may be that the Fed does not talk about IOR because it is difficult to explain.  There is more to IOR than the financial intermediation impact, as the Gramm and Saving article reveals.  The complexities include IOR interaction with other policy tools and various aspects of the economy.  It is difficult to explain to the public, in fact, even to economists who do not follow monetary policy closely.  Perhaps more important, the Fed does not want to publicly admit they are deeply fearful of the impact of rapidly unwinding the balance sheet.  Chair Powell would loathe to discuss either the difficulties with unwinding the balance sheet, or the IOR’s impact on the economy in public.

The Fed needs to come clean.  The Gramm-Saving article is likely to generate greater commentary, more articles, and additional questions directed to the Fed about its IOR policy and its assessment of the impact of IOR on the economy.  I expect that the pressure will become large enough that the Fed will be forced to directly address its IOR policy to the public.

With greater Fed transparency in IOR, academic researchers should then contribute.  They can build theoretical models of monetary policy that postulate and analyze formulae linking IOR to reserve flows, lending, investment, economic growth, and capital formation.  Empirical papers should then be written that test and use these new theories, and in particular, they should measure the detriment that IOR has on financial intermediation, economic growth, and wealth formation.

As we await greater scrutiny of Fed policy, it is becoming increasingly clear to the CERF team that the Fed doesn’t know how to undo the mess it created during the financial crisis.  The need to maintain its massive balance sheet necessitates ever higher IOR.  It places the Fed in the position of following market interest rates rather than driving them, as highlighted by Gramm and Saving.  It jeopardizes the Fed’s activist mandate and renders it impotent if a severe recession were to occur tomorrow.  This is such a mess that we should assume the next economic contraction could be at least as bad as the last one that the Fed seeded.

Gramm P. and T. Saving, The Fed’s Obama-Era Hangover, The Wall Street Journal, Jan. 1, 2019 https://www.wsj.com/articles/the-feds-obama-era-hangover-11546374393?mod=mhp

The post The Fed Needs to Come Clean appeared first on Center for Economic Research and Forecasting.

In popular culture, there are “good” industries and “evil” industries.

Oil has held the most hated position of the evil list for generations and is likely to hold it until there is no more oil. Farming, once solidly on the good list, is moving to the evil list because its critics claim it uses too much water and its use of pesticides and herbicides hurt the environment.

Banking holds a special place on the bad list, having resided there for more than 2,000 years. Indeed, Dante had usurers condemned to the seventh of his nine circles of Hell.

Banks still exist because they serve a valuable purpose. They are intermediaries between huge numbers of savers and huge numbers of borrowers. As such, they dramatically increase the return to savers and, just as dramatically, reduce the cost to borrowers. We need banks. We need a well-functioning banking system.

Since the Lehman Brothers collapse, banks have become even more unpopular. They are blamed for the 2008 financial crisis and the terrible recession that accompanied the crisis. Much of that blame is undeserved.

Criminal bankers didn’t cause the Great Recession. Every industry has its criminals. Surely, there were criminal acts by bankers that went unpunished but they were small players on a big stage.

Banks are among America’s most heavily regulated industries. Beginning in the mid-1990s, the federal government, with bi-partisan agreement, set about to increase the percentage of the population that owned their own home. Their methods included incentivizing banks to loan to people who traditionally could not borrow. The incentives included rewards for cooperation and punishments for failure to cooperate. Banks had little choice.

Traditional lending standards existed for a reason. Many who borrowed under the new, more relaxed, standards eventually defaulted, contributing to declining real estate values and the Great Recession.

Consolidation of bank assets in ever fewer banks is the other culprit in the financial crash. For decades now, regulations on bank mergers have been incrementally relaxed, while bank operations have been increasingly regulated. Consolidation was not a stated purpose of the regulatory changes, but they have resulted in fewer banks.

The number of United States banks has collapsed from 14,400 in 1984’s first quarter to only 5,309 in 2015’s third quarter.

The decline in the number of banks has been accompanied by an increasing concentration of bank assets. Today, only five banks control almost half of all American Bank assets.

Bank failures have consequences. Big bank failures have big consequences. The government has decided that some banks are so large, and the consequences of their failure so onerous, that they cannot be allowed to fail. Those banks deemed too big to fail are bailed out. This results in terrible incentives.

When banks merge, they claim that they are diversifying and gaining economies of scale. Research is mixed on these topics. There is evidence that our largest banks are far above the cost-minimizing scale. There is also evidence that economies of scale persist throughout the size distribution. Similarly, there is evidence that banks merge with similar banks, achieving little diversification, and evidence that diversification persists through the size distribution.

The lack of consensus suggests that banks merge for other reasons. Market power and the too-big-to-fail option are prime suspects. The typical consumer and taxpayer does not benefit from these mergers. Market power allows banks to make excessive profits. Being too big to fail encourages banks to take excessive risks.

Banks did take excessive risks and we all paid a share of the costs.

Banks, being heavily regulated, have a huge incentive to try to influence their regulatory environment. Banks hire former regulators, providing an incentive for regulators to go easy on their potential future employers.

Our largest banks are heavy contributors to political campaigns and, as we’ve learned in the current presidential contests, they have found ways to directly support powerful politicians. So, we see lots of empty verbal abuse thrown at banks but little more.

What’s to be done?

• Higher capital requirements would reduce bank runs and stabilize our banking sector. Some economists recommend requiring reserves amounting to as much as 100 percent.
• A 100 percent tax on all assets over whatever is determined to be too big to fail would eliminate too-big-to-fail banks. This, in turn, would reduce banks’ incentives to take excessive risks.
• Private deposit insurance would reduce the influence of politicians and regulators, reducing the return to banks’ political spending. Banks would cut political spending.
• Limits on market share would slow the decline in bank numbers and reduce market power.
• Differential bank regulations based on asset size would further reduce the incentive for banks to merge. Small community banks have been critical contributors to local economies. We need more of them, not fewer.

A weak banking sector has contributed to the anemic recovery. A vigorous recovery needs a vigorous banking system, focused on economic growth rather than regulation. To achieve a vigorous banking system, we need to change bankers’ incentives. We need to move past demonizing to real reform.

The post Change bankers’ incentives to get big appeared first on Center for Economic Research and Forecasting.

One of the Big Five banks is BofA, and I am one of their customers. It is convenient for me to walk up to a BofA ATM machine in Michigan, Florida, Oklahoma, or anywhere in the U.S. and withdraw cash without paying fees.

It is also convenient for regulators at the Fed, the FDIC, and the Treasury to maintain surveillance over just 50 banks rather than say, 500.

The justification for the consolidation in late 2008 went something like this: size helps offset the bad assets on the books and we (the Federal government) will watch over these institutions very carefully now.

I strongly object to current U.S. banking policy. This is despite the convenience to me and despite the convenience to the regulators, although these are trivial. Policy should not be justified by convenience.

Size matters. The risks that $7 trillion in assets pose to a $17 trillion dollar economy are massive. A loss of “just” $1 trillion in 2015 would be six percent of 2014 GDP. One trillion dollars is double the contraction in GDP from 2008 Q3 to 2009 Q2.

Further, the trend is in the wrong direction. This, interestingly, is despite one of the intentions of the Dodd-Frank legislation. The top five’s share of total U.S. banking system assets has grown impressively, growing in every year but one since 1990. In 1990, they held less than ten percent of total assets, and by 2014, they held 44 percent. Soon, the top five banks will be fifty percent of GDP.

Returning to the carefulness of the regulation, just because the government is more involved with managing these large banks does not necessarily mean that the economy is safer. There is often a revolving door between regulatory agencies and those they regulate. This creates the wrong incentives for protecting the economy, and these incentives worsen as the large banks get larger.

We should change policy to begin the process of breaking up these banks. It will not be easy, and it will take time, so we should get started sooner rather than later.

The post Size Matters appeared first on Center for Economic Research and Forecasting.

Economic research has shown clear benefits to financial intermediation. The collection of savings creates a pool of funds that can be used to finance business expansion. Banking is very important to economic activity.

The United States has some enormous banks, three of them with assets of about $2 trillion each, see data and description below. They are so large, that if any one of these intuitions fails, the economy will experience a nasty financial crises and a massive recession. This is why the Fed oversees “stress-tests” for them. This is why people are talk about “privatized profits and socialized losses”.

Here is a bit more detail on the banks. The United States economy now has 7 mega-banks. Collectively these banks managed over $10 trillion in assets at the end of 2011, according to the National Information Center.1

The mega-banks are:

J.P. Morgan Chase and Company
Bank of America Corporation
Citigroup Inc.
Wells Fargo and Company
The Goldman Sachs Group Inc.
Metlife Inc.
Morgan Stanley

The first three on this list are larger than the remaining four, each with roughly $2 trillion in assets. Call them the “enormous” mega-banks. The next four each have roughly $1 trillion each in assets, and are merely mega-banks. The top 50 banking institutions in United States had a combined asset level of $14.8 trillion at the end of 2011, thus the 7 establishments listed represented two-thirds of the assets of the top 50 banks.

The economic arguments for large institutions actually come from Microeconomic Theory rather than Macroeconomic Theory. They include: natural monopoly and economies of scale.

The natural monopoly argument is not defensible. This country has been well-served by many small local banks for many decades. The small local banks know their area, their business, and their clients very well, better than a large bank possibly could. Small banks, along with the small businesses that they serve, have been instrumental to job creation.

The economies-of-scale argument is also indefensible. Research has shown that economies of scale are exhausted at a size far below these behemoths.

Worse, there are offsetting “bads” associated with extremely large banks. One problem is that banks this large have at least a bit of monopoly power, which increases the costs of banking services. A more serious problem is that banks of this size pose a risk to the economy, which is why they are considered too big to fail. Being too big to fail creates a third, insidious, problem, excessive risk taking by the large banks.

The certainty of a government bailout for these very large banks amounts to a put option. In bad states of the world, the shareholders effectively “put” the insolvent bank into the taxpayers’ hands. Options are valuable, and the value of the option increases in risk. Banks therefore, though they will deny it ferociously, assume excess risk, increasing the probability that they will fail.

The failure of a small bank is a big deal for those persons who have their deposits in that bank, it is a big deal for those businesses who borrow from that bank, and it adds to the regulatory costs incurred by the FDIC.

The failure of a bank with with total assets of $1 billion would negatively impact the area where it was located, perhaps contributing to a recession in that area. The failure of a $2 trillion dollar bank may create a recession in the United States. Given that the systematic risks dominate unsystematic risks in a financial crises that would be caused by the failure of a $2 trillion dollar bank, the probability of the failure of at least two of these institutions is quite high.

This is not all. United States banking existed just fine, worked very well indeed, for many decades without enormous banks. And, the Macroeconomic risks of their failure did not exist.

There are no good arguments for the existence of mega-banks and enormous mega-banks. However, the macroeconomic risks inherent in such large institutions are clear. And, the incentive for risky behavior on the part of an institution that is too big to fail is clear.

These enormous mega-banks are the result of bad economic policy.

1 http://www.ffiec.gov/nicpubweb/nicweb/top50form.aspx

The post Why Must We Have These Large Banks? appeared first on Center for Economic Research and Forecasting.

Customers in California and six other Western states soon will pay a $7 checking account fee, the Associated Press reported today.

It’s misleading.  The next paragraph reads:

According to the AP, customers with a minimum balance of $1,500, or who make direct deposits of at least $500 a month will not be charged the fee.

That’s a different story.  Meeting the second requirement ($500 direct deposit) is pretty easy for most families, and if you do, voila, your account appears to be free.  That first paragraph should read “some customers,” or more accurately “unprofitable customers.”

Most checking accounts at banks are marginally profitable or losers, especially in today’s interest-rate environment.  It is pretty obvious that Wells is targeting the least profitable, or biggest losers.  Nothing onerous about that at all.

It is also probably not the case that low-income people will be the ones paying the bulk of the fee.  The amount is set low enough that if unemployment payments were directly deposited, the account would meet the minimum.  Even Mississippi, the state with lowest unemployment compensation, pays an average of $190 a week, well above Wells Fargo’s minimum monthly automatic deposit.

Actually, I think few people will pay the fee.

Most people who would pay the account fee are like me.  I have a condo I rent out, and the tenants don’t have a checking account.  I set up an account near my tenants to make it easy for them to pay their rent.  Since they always pay in cash, I wouldn’t meet the automatic deposit criteria if the account was at Wells.

I could meet minimum amount criteria, if I elected to not sweep out the money monthly.  That would be the equivalent of a 5.6 percent interest rate on the $1,500 I would have to leave in to avoid the fee.  Can’t beat that for an insured deposit, and that is exactly what Wells is hoping their customers do.

The post Well Of Course appeared first on Center for Economic Research and Forecasting.

The normalized TED, which is the 3 month LIBOR minus the 3-month Treasury divided by the 3-month Treasury, has reached a level not seen since the fall of 2008. The TED, i.e. the numerator or the LIBOR minus the Treasury, is normally interpreted as a wholesale banking spread. When this rises, there is greater perceived risk to the banking sector. The normalized TED can also rise if the 3-month Treasury falls, which can happen in “flight to quality” situations, as is also the case now. This spread appears to be indicating a rising probability of a change to the European Union. We at CERF now believe that it is not if the European Union will break up, but when. However, this spread is just one of many indicators that we have watched to form this opinion.

The second chart shows the ten-year Treasury, TB10Yr, and the triple-A corporate bond rate (ten-year) and the normalized spread between these two measures. The normalized spread has almost reached levels that occurred in late 2008. This measure is also indicating a “flight to quality” in financial markets because the ten-year Treasury rate is falling faster than the triple-A corporate bond rate.

I have argued in this blog-space that these indicators helped us see the regime shift to a serious recession that occurred in late 2008. The current levels are uncomfortably close to indicating another regime shift.

The post Rising Spreads May Indicate Regime Shift appeared first on Center for Economic Research and Forecasting.

If you are looking for a summary statistic on the United States economy, I recommend you consider bank charge-offs. These are the loans that banks have written off their books, because the probability of collecting them is so low. It doesn’t mean that the borrowers are off the hook, or that the bank will stop trying to collect the loan. It only means that a bank can’t consider a charged-off loan an asset.

Most people use GDP growth as a summary statistic for the economy, which leads to the current situation where policy makers and talking heads have declared a recovery while millions who have been unemployed for months or years continue to be unemployed. Indeed there were two recessions, based on GDP, in the 1960s where all of the job losses occurred after the recession was declared officially over.

OK, so why not use jobs as an indicator of prosperity? Actually, I’m sympathetic to that. It is certainly a better indicator of well being than is GDP. However, I think that charge-offs, particularly now, give us a little more information. Jobs tell us what businesses are doing. Charge-off data tell, at least in some sense, what business can do. That’s because banks don’t lend much when charge-offs are high, and without loans, businesses can’t grow.
So, what are bank charge-off data telling us?

They are telling us that a robust recovery is a ways off. Below is a history of real, inflation adjusted, bank charge-offs:

Prior to 2007, quarterly bank charge-offs had never exceeded $15 billion a quarter in today’s dollars. Then, they skyrocketed to almost $60 billion a quarter. Since then, bank charge-offs have fallen, but they remain well above $40 billion a quarter. You have to conclude that our banking system is still crippled.
This impacts small business much more than it impacts big business. Big businesses have direct access to capital markets and don’t need financial intermediation.

There are more reasons to be bearish on American small business growth. People who own small business own real estate, much more than the typical American. About 98 95 percent of all small business owners own their own home, but only about 66.5 percent of all American households own their own home. This means that small business was disproportionally hurt by the collapse in real estate values. Their balance sheet was suddenly over-leveraged, impairing their willingness and ability to borrow.

The inability of small business to use real estate equity to finance growth has impacts that are exacerbated by a banking sector that has forgotten how to lend to small business without the use of real estate as a secondary repayment source.

It used to be that small business had access to lines of credit secured by inventories or receivables. These were expensive loans, but they did not require real estate equity for the firm to grow, and in cyclical businesses they were self-liquidating, something that bankers just loved.

As real estate values climbed, banks lowered costs by moving away from these loans. Consequently, while some inventory and receivable financing remains, it is less important than it used to be. Perhaps worse, many bankers don’t know how to make and supervise inventory and receivable lines of credit. It was always a specialty. Today, asset-based lending, as this type of lending is referred to, is an almost forgotten specialty.

Still, those banks that are well enough capitalized to be aggressively seeking lending opportunities would be well advised to consider setting up asset-based lending units. It may be the only way for them to significantly increase loan volume in the near term. It would also be a service to small business and the economic well being of all of us.
The other alternative for small business expansion would be for real estate values to suddenly increase. That is not going to happen in this or next year. I go into the reasons more in the Real Estate Essay, but I have another summary statistic for you, Home Ownership Rates.

Home ownership in the United States is generally about 64 percent. That is about 64 percent of households own the home they live in. When the homeownership rate gets much above 64 percent, we have problems in our financial sector. Remember the Savings and Loan Crisis?

The United States homeownership rate climbed during the second half of the 1990s and the first half of the 2000s, until they peaked at over 69 percent. Since then, it has fallen, but not by enough. Until the United States home ownership ratio drops to below 65 percent, there will be no generalized upward pressure for home prices.

I think we have to conclude that this recovery is weak, because the normal drivers of a robust recovery, small business and real estate, can’t contribute.

Updated February 29th to correct data error.

The post United States Economy appeared first on Center for Economic Research and Forecasting.

Seeing a problem and knowing how to solve it are two different things.  So, we’re going to see lots of silly ideas proposed.  We’ll see demands for more government spending.  We’ll see demands for less government spending.  We’ll see demands for higher taxes.  We’ll see demands for lower taxes.  We’ll see demands for more consumer spending.  We’ll see demands for more consumer saving.

All of these recommendations can’t be correct.  In fact, they are all beside the point.  I’m not saying the proposals won’t have any impact.  They will, but the impacts will either be marginal or they will be some time in the future.  Our problem is immediate and very serious.  Here’s what we need to do to avoid a lost decade:

• Fix the financial sector
• Stop paying interest on deposits at the Fed
• Lower effective borrowing costs with an investment tax credit
• Reduce regulatory uncertainty and big-business bias
• Increase immigration

Any vigorous recovery needs a vigorous financial sector, and ours is not.  Fed policy has been ineffective, because the money multiplier has tanked, even as the monetary base soared.  There are two reasons for this: The Fed is paying banks to deposit at the Fed, and the banks–burdened with over-leveraged balance sheets, huge charge-offs, and bad assets–are in no shape to lend.  Fix the banks, and stop encouraging them to park money in Washington, and we’ll have a start on real recovery.

We have an investment problem; there isn’t any.  That’s because, even at zero, borrowing costs exceed expected returns on investments, and the future regulatory environment is extremely uncertain.  We can’t lower interest rates below zero, but an investment tax credit would effectively lower borrowing costs.  Do that and remove regulatory uncertainty, and our businesses will invest.  While we’re at it, let’s reduce big business’ regulatory advantage.

Finally, we don’t have any problems that couldn’t be fixed by a few million new immigrants.  We’d see an immediate increase in housing demand and construction.  Our inner cities would be renewed.  Our economy would see a burst of creativity, energy, and new business formation.

The post America's Lost Decade appeared first on Center for Economic Research and Forecasting.

“The U.S. financial system remains fragile and banks subjected to additional economic stress might need as much as $76 billion in capital, according to the results of International Monetary Fund stress tests.”

We at CERF have been long concerned about the strength of our financial sector.  In fact I suspect that the IMF study may be understating the severity of the situation.  That would be a problem.  Ask the Japanese what a weak banking sector can do to an economy.  The weakness of their financial sector, and their failure to correct those weaknesses, were a significant contributor to their 20 years of economic malaise.

Failure to promptly deal with our weak financial sector can have similar consequences for us.  You may think the new financial regulation fixes our banks.  It doesn’t.  It creates a new regulatory environment but it does nothing to address the problems that are keeping our banks from fully participating in our economy, inadequate capital and bad assets on their books.

The post Yes, We Have to Fix the Banks appeared first on Center for Economic Research and Forecasting.

• Keep it simple. Simple regulation is cost-effective regulation. Simple regulation minimizes both regulatory costs to the government and compliance costs to the regulated firms, costs eventually borne by consumers or taxpayers. Complicated regulation invites lawsuits and encourages efforts to avoid the regulation.

• Regulate the smallest possible number of firms. Regulation is a market distortion and tends to limit innovation. Because of the September 2008 collapse, some people are not convinced of the benefits of financial innovation. This is unfortunate. Financial innovation is, on net, positive. Consider the Farmer who hedges against bad weather by using futures or the airlines that hedge against higher gasoline costs. We need to encourage financial innovation.

• Preserve incentives. We’ve all encountered either government monopolies or government regulated monopolies. The DMV, the Post Office, and utilities come to mind. We’ve also seen the innovation that followed the elimination of the phone monopoly. Bad regulation provides perverse incentives. Good regulation maintains incentives for quality, service, and innovation.

• Maximize market feedback. Markets have built in incentives that are beneficial to society. Where possible, we should allow that feedback to do its magic. It is the cost-effective way to preserve incentives.

• Minimize moral-hazard problems. Moral-hazard issues result from free or under-priced insurance. It is currently pervasive, and it is our single largest source of unnecessary systematic risk. The too-big-too-fail concept in particular has resulted in excessive risk taking, with disastrous results. Similarly, FDIC insurance was under-priced, as evidenced by the FDIC accelerating the collection of future premiums, and the results are self-evident.

• Minimize political influence. Political influence in economic matters is counterproductive. It is clear to me that the vast majority of political types are trying to optimize something other than economic activity or efficiency. Whether the political objective is maximizing the likelihood of reelection, rewarding supporters, or simply greedy corruption, we need to avoid the results.

• Regulation is not protection. Regulators often become partners with the regulated. Sometimes this is because the regulator expects to be eventually employed by the regulated. The regulator may have been employed by the regulated, or may become friends with the regulated, or may be corrupt and accept bribes. In all cases, we are ill served when the regulator is protecting the regulated.

• Regulation should not be adversarial. The purpose of regulation is not to punish the regulated. We have a legal system to provide punishment when it is needed. Adversarial regulation will encourage evasion. The best approach is arms-length, fair, and firm.

The post Bill’s Principles of Regulation appeared first on Center for Economic Research and Forecasting.