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.University of Chicago Economics Professor E. Glen Weyl and Stanford University Finance Professor Darrell Duffie debate whether a “financial fda” ...
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One of the many causes of the financial meltdown of 2008 speculators investing in derivatives.
Now some proposed regulations are dividing the economic world university Chicago professor -- -- says these exotic financial products.
Critical drugs and is calling for -- kind of financial FDA that would test new ones and only approve them for sale -- -- deemed safe.
Here to weigh -- on the costs and benefits of the idea man behind the plan economist Glenn while.
And one of the voices speaking out against it there'll Duffy finance professor at the Stanford University business school welcome -- -- both.
And before we get -- let me say this about that no jargon.
I really want people out there out -- watch her show to be able to understand what you're talking about so the more you can stay away from.
You know fancy words the better off -- -- -- let's start with you that would explain -- idea the basics of your idea for regulating some of these products.
So -- -- basically what we're proposing is that new financial products should be subject to the same sort of screen for his safety and efficacy that the FTC FDA does four I new drugs.
Basically the agency would project how much of the demand for the product comes from investors trying to insure hedge themselves against risk they -- face.
And how much comes from their desire to take on new risks in order to speculate or gamble.
It most of the demand was for insurance the product could be -- freely.
I mean if most of the demand was for gambling there would be treated like -- gambling products.
So -- you -- -- ordinarily in here before it was and let him have a response here.
So it's all speculation bad -- No as a matter fact we need speculators -- those people that want to get rid of risk have to have some wonderful to take it off their hands that's going to be a speculator we do that all the time.
Equity market investors are -- speculators.
Well what products would be part of this review I -- is it just derivatives is did.
Is it commodities trading what do you put that back.
All new derivative products.
All new derivative products so -- later you're really regulated right how would this be different from with a CFTC is already doing.
Well so there's this big commodities futures trading commission in fact on Monday -- Do you -- financial derivatives to bet on the fall presidential election.
And they can do that with certain types of derivatives like -- based on political events.
But they can't do it based on economic events like you know credit defaults and so forth really -- we're saying is that they should apply the same sort of approach.
For really dangerous products that led to the you know 20072008.
-- right there already using for betting on political events.
-- and wouldn't this -- stop the mortgage meltdown.
Having having an FDA the reviews financial products.
Probably not.
I don't have any problem with regulating the safe use of derivatives the problem with the mortgage meltdown was that some of the users of those derivatives -- have enough capital to back their positions.
So what we need to do is to make sure that they do have enough capital and that those does have those derivatives are disclosed.
Properly capitalized collateralized.
The usual regulations that already exist with the securities and exchange commission and the Commodity Futures Trading Commission.
-- -- I think about more regulation particularly of the financial industry.
And I think about the regulators we already have I think about -- -- Securities and Exchange Commission.
I think about the Fed none of these institutions prevent -- the crisis that we had over the last few years why actually add more regulators into the mix.
Well so I think the big question is not how much regulation.
I think there's a lot of excessive stop and Dodd-Frank which is probably not.
Very productive the question is whether the regulation is Smart and focused on the core issues and we think the core issue really this trade off between insurance that reduces risk.
And as you know speculation and gambling that increases risk and the focus self.
It's not how -- -- -- -- it isn't really -- to tell the motivation -- investors when they go to put their money on the line is it always clear and.
Not and at every specific case and that's why we don't think you know today government should be coming in and looking an individual transactions and saying yes and now we should look at a whole product.
They should protect overall is gonna do harm.
You know or benefits is the same thing we do with drugs right you know you can't figure out in every case when you get -- and drug is it going to be good you have to say.
On average music and then you know be beneficial or harmful.
And yeah I'm right you know we we use science to figure that out well dare hello I'm at about the FDA there are lots of criticism of the FDA that they work -- really slowly.
That they're not always accurate deciding what should come to market and what shouldn't.
Is this a model that's terrific for the financial industry.
I was about to make the same criticisms.
As I said we can regulate -- -- in terms of the use of these instruments rather than or their arrival in the marketplace.
But if we were to regulate their arrival in the marketplace with an FDA like.
The agency they would be stepping all over the -- of the other agencies slowing down financial innovation where it's needed.
And possibly reducing the movement of risk from those at least who -- least equipped to bear to those who are more -- to -- what does that mean.
That means that if people wanna get rid of risk any financial instruments with which to do that.
And somebody is.
If you don't have the financial instruments there of two to trade you you can get rid of that risk.
Alright well as -- -- and -- -- quick answer -- quick rebuttal.
-- -- -- I thought you made a really good point -- which is that.
You know -- takes a long time for the FDA approved stuff.
Based on economic data you can do things much quicker than you have you can do if you have clinical trials and that's what.
Justice Department and FTC do when they're proving mergers and I think it's similar approach could be used here well I work.
We'll have to wait and see but it's an interesting idea that I'm sure it's gonna be -- a lot thanks guys for coming on really appreciate your time.
