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02/03/2013

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Michael Webster

Becker writes: "If the Fed had been following a rule that made its intervention dependent on some combination of inflation, output growth, and unemployment- as in Taylor rules- it probably would not have intervened before the crisis hit since all these measures were doing well."

No, by late 2004 the FBI had serious concerns that the mortgage industry was rife with fraud.

It was too easy to mimic mortgage paper.

This was never a signal that the Fed understood - largely because nobody wants to entertain the notion that entire enterprises can become criminal in nature.

What the Fed needs are not rules, but rather the general discretion to decide that what looked like investments were in fact gambles. Gambles are for the most part unenforceable agreements.

The Netherlands took this approach in 1636 and it arguably confined a possible financial run to the taverns where the auctions for tulips had taken place.

Pointsnfigures

interesting as traditionally the SEC is a rules based regulator, while the CFTC uses principles. The CFTC has a less fragmented marketplace that is more robust, and creates more equality among its users.

It might be better to throw all the rules out-since they have been lobbied-and all the discretion out since it's lobbied and offer up the entire place to a wild west marketplace with the players setting the rules through their actions and interactions.

Neilehat

Michael,
Criminal, Corrupt or both? As for the gambling nature of investments, the old saw still applies, "You puts your money down - you takes your chances - and above all, beware the "fixed" wheel. Not too mention, Pigs in a Poke". In order to combat this problem, the IMF and World Bank have come up with an idea called, "Good Governance". Which ties back into the issue of, "Rules, Standards and Discretion...

Ed Rector

How does one know what the correct rule is??

Remember Milton Friedman's rule of an unchanging 4% annual growth in the money supply would render Fed discretion superflous and give us constant economic growth with little inflation? Who would advocate such a rule today?

Jdwalton

Rules replace trust.

bean spout

The difference between rules and discretion, is the difference in role between the judiciary and the executive. In a business context it would be the distinction between the "business model" or the firm or industry's habits or custom, versus actions that are taken. Which might change those habits or customs.

bean spout

The country seems to believe that if we write up a ton of rules, the more the byzantine the better, all that is bad in the world can be prevented. A Deist clockworks. The Emperor's Mechanical Nightingale. We already had all the rules we needed—the Securities Act of 1933. The regulators failed to see that the privatization for resale of a large national insurance scheme for mortgages needed them to set up just a few simple rules for that security type, about loan quality in any resold pool. The complexity of the rules we are constantly writing and adding to, just invites hordes of con artists and manipulation by special interests.

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