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Cliff Asness of AQR Capital Management on the pros and cons of government regulation.
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Americans want government to protect us.
Protect us from foreign enemies and from people in America who might hurt us physically or financial.
So politicians pass laws that claim to do that and then because they can't keep up but the constant changes in life -- create whole agencies to write and enforce additional regulations.
This is the result.
160000.
Pages of rules some contradict the job.
No one understands all of them and yet -- -- -- keep anymore.
Thousands of new pages every month.
The regulations might be worth it if they really make us safer but they don't.
Cliff SS has grown investment management fund from one million dollars to fifty billion -- So I assume this means you're Smart -- can help but.
Explain why then you say that these financially -- financial regulations meant to protect the poor investors who got hurt after.
The bubble burst.
Do more harm than good.
Well -- first let's step back I act I don't think.
No that is -- regulation world is right -- somehow I'm a fan of out shalt not kill.
That's pretty good.
On our last look well agree that the but the constitution's good daddy can't kill you can't -- classical economics.
Recognizes the need for some regulation now I won't do an economics lecture but.
Things like extra now these they're called tragedies of the comment.
Free rider problems -- call for some regulation the problem is when you take a politician -- -- particularly progressive politician.
And teach in these words.
They they tend to see you next are now -- everywhere they can see these things everywhere.
A lot less to do their own incentives not to become -- more famous politician you don't get more famous by saying actually everything's fine.
You get more famous by passing a bill with here with your name on it.
I'm so let's just back up because that you're talking about extra now -- one is pollution for -- is a classic example my factory pollutes your lungs ghost of many states.
They're regulation is reasonable against that to some degree and depending on the situation.
I got and even simpler example of -- nationality us speed limits.
If you were and you might -- a libertarian will be against speed limits because how Gator on -- what terra I am a libertarian.
And I -- libertarian yes it.
You might think a libertarian will be against speed limits because who'd who'd actually coming up fast to drive but when you drive too fast and too -- can be arguable.
You impose a cost of safety on other people you're not just on yourself.
Libertarians generally would be far less four or even against seatbelt laws -- helmet laws because those are cost -- impose upon.
-- yourself so some regulations needed but when politicians are given an open.
An open check book and the incentive to get famous and even let's given some credit even wanting to do good even wanting to help people.
It gets insane as you've shown very very rapidly.
And what's worse often doesn't even actually make us safer -- -- -- financial regulator well first we had Enron the scale.
And they pass congress -- we're gonna fix this -- passed sarbanes Oxley page after page of rules President Bush said this is gonna just fix everything.
It didn't stop the current bubble didn't stop Bernie Madoff now it's Dodd-Frank.
They say that's gonna fix things well there are things that that sadly we'll never -- Intentional financial fraud is very hard to catch that's usually more matter -- prosecution -- than fixing yet we hold out the dream.
And let me give you an example where Dodd-Frank and trying to regulate assault a perfect safety actually makes us less safe.
Bernie Madoff was registered with the SEC.
Part of Dodd -- reforms.
Are to make vast -- larger numbers of money managers register with the SEC.
The SEC's well meaning people -- that the people who do these at inspections and and and and they're trying to find fraud they're competent people but intentional fraud intentional.
It's very difficult to find -- is a Smart people trying to Fulham and it's very difficult to check every company.
So when you go out there and say alright everyone's registered the small -- Naturally assumes I'm sick I'm saying let's protect -- exactly so not only are these things tremendously inefficient -- tremendous burden.
Not always but often they actually -- the precise opposite -- what they're supposed to do Dodd-Frank does it all over the place.
Dodd-Frank claims to end too big to fail.
The idea that will bail out companies.
That that are really important to the economy.
I've read -- annoying -- large amounts of the bill.
I have yet to find where they ended in fact I think they instantiate forever they declare some institutions systemically important that's kind of a phrase they made up.
I -- -- like too big to -- and they kind of promise these things won't fail.
But that's -- -- -- -- -- -- -- the classic way because they gamble with other people's money because they'll be bailed out but imagine they do fail.
Imagining unthinkable happens how much worse is it to have a company -- that everyone knew might fail.
Then it is have a company fail that the government -- said we got -- back it's.
Incredibly worse.
To have a company -- work where we were told it's all going to be OK the government got it covered so very often in trying to stop these things.
They actually induce a lot more risk into the system so regulation -- because it makes as an efficient that are also states -- it often gets it backwards.
One conceit of the regulators is that this group can -- the next bubble and it's pull the plug before it happened if they could they should be really doing my job.
And we try to make our money from a lot of little things -- by pricing things a little bit better.
We find that incredibly hard.
So maybe that's just ego speaking but I have a lot of trouble thinking that eight bureaucrats in -- room are gonna predict the next bubble and by the way.
Predicting the next bubble has a cost when -- wrong with you cut off a lot of growth and innovation.
If you sit there and you too often and you say it's a bubble we need to stop.
You stop the economy from growing.
So the idea these guys are Alan Greenspan tried it remember 1996 he called -- irrational exuberance 34 years before the tech tech bubble.
-- and he eventually.
Changed his mind pretty much at the exact wrong moment by the end of the tech bubble this has been tried -- -- -- smarter than most of these regulate I I would certainly bad on him ahead of the rest of them and I want that -- nickel on him get it right next time either.
Sell the market just sorts it out and some people lose vast sums of money.
First yeah -- This the market does sorted out markets are not perfect they make -- they are far better than committees of bureaucrats.
Second.
I think if government stop -- with markets we'd have a lot --
