Financial Markets Working Group

Financial Markets Working Group

The Financial Markets Working Group is a collection of seventeen university-based scholars with expertise across a wide range of economic issues relevant to the recent economic crisis. Drawing on Mercatus’s long-standing expertise in economic and regulatory analysis, members of the Financial Markets Working Group conduct research that addresses the causes and potential solutions to the economic downturn to offer productive ideas to address the serious problems in financial markets and encourage a sustainable economic recovery.

Research

David Beckworth | Jul 10, 2014
Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system.
Jason J. Fichtner, Jacob Feldman | Jun 19, 2014
The $69 billion mortgage interest deduction (MID) is often viewed as an element of the tax code that promotes middle-class prosperity. However, 64 percent of the benefits, as measured by effective tax reduction, goes to households earning more than $100,000 per year. The large variation in nominal benefits is one of the reasons why many economists state that the MID is regressive.
James K. Glassman, Hester Peirce | Jun 18, 2014
This policy brief outlines the regulations that give PAs their power and the nature and adverse consequences of that power, and offers suggestions for reforms.
Hester Peirce | May 01, 2014
American International Group, Inc. (AIG), a large insurance company, received a massive bailout during the financial crisis in response to difficulties centered on the company’s multifaceted exposure to residential mortgage-backed securities. The company is back on its feet, albeit in more streamlined form and with a new overseer—the Federal Reserve. This paper focuses on a piece of the AIG story that is rarely told—the role of the company’s securities-lending program in imperiling the company and some of its insurance subsidiaries. The paper argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but better risk management. The markets would have conveyed that message clearly had regulators not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an effort to challenge the notion that more regulatory oversight for companies like AIG will prevent future crises.
Hester Peirce, Robert Greene | Apr 02, 2014
For decades, money market funds (MMFs) were thought to be safe, low-risk investments. The financial crisis of 2007–2009 cast MMFs in a new, less favorable light, which prompted calls for reform. Our paper offers a reform alternative that builds on MMF boards of directors and their well-established responsibility for making key decisions for MMFs. After a brief overview of the regulatory history of MMFs, we describe the responsibilities that boards have under current law, the problems MMFs encountered during the crisis, and market and government responses to these problems. Evidence shows that during the crisis, investors were discerning in deciding whether and when to run; more risky, less liquid funds experienced higher volumes of redemptions. This finding, along with our assessment of funds’ boards of directors’ responsibilities, helps to lay the groundwork for considering the various options for addressing problems still facing MMFs, including our proposal to allow boards to gate their funds when faced by potentially destabilizing redemption pressures.
Todd Zywicki, Robert L. Clarke | Apr 01, 2014
In response to the financial crisis that began in 2008, in 2010 President Obama signed into law the Wall Street Reform and Consumer Protection Act, commonly referred to as the “Dodd-Frank Act." A “centerpiece of the [new law] was the creation of the Consumer Financial Protection Bureau (“CFPB”),” which was established in response to the perception of widespread failures in the federal consumer protection regime with respect to financial products and the belief that these regulatory failures contributed to the financial crisis.

Testimony & Comments

Hester Peirce | Jul 10, 2014
As the Federal Reserve celebrates one hundred years, reform efforts are timely. Consideration of fundamental questions about the Federal Reserve’s role in the regulatory landscape and in the markets should accompany those efforts.
Hester Peirce | May 21, 2014
The flaws in the Bureau’s design impair its ability to operate effectively for consumers. Although more fundamental reforms are needed, incremental reforms will help the Bureau to set appropriate priorities and seek relevant comments before acting. Making the agency more accountable, more transparent, and more focused will also make it more effective at ensuring that the financial system is serving the needs of consumers.
Lawrence H. White | Mar 12, 2014
So long as monetary policy is conducted in a discretionary manner, it is important to maintain the independent input of the Reserve Bank presidents on the FOMC. The Reserve Banks should therefore not become mere outposts of the Federal Reserve Board in order to eliminate commercial bankers’ representation on their boards of directors. A better way to remove the potential for conflicts of interest is to require the Federal Reserve System to leave the formation of fiscal and credit-allocation policies to Congress and their execution to the US Treasury.
Hester Peirce | Dec 12, 2013
When the Dodd-Frank Act was being developed, one issue under consideration was whether the Board should lose some of its regulatory powers in view of its poor regulatory performance prior to the crisis. Instead, Dodd-Frank substantially increased the Board’s regulatory powers. One of the most important new powers is the authority to regulate nonbank financial institutions designated systemically important by the Financial Stability Oversight Council. So far, General Electric Capital Corporation, American International Group, and Prudential have been so designated, with additional entities likely to follow. These financial institutions will present the bank-focused Board with new regulatory challenges. It is important that the Board respond with well-vetted, tailored regulations that recognize that these entities are not banks and cannot be effectively regulated as if they were.
Hester Peirce | Dec 03, 2013
Chairman Schweikert, Ranking Member Clarke, and members of the Subcommittee, thank you for the opportunity to be part of today’s hearing on regulatory burdens on small financial institutions. In financial services, as in every other sector, the United States is not a one-size-fits-all nation. Financial institutions of all different sizes coexist, and customers choose among them based upon their needs. A regulatory environment that is increasingly unwelcoming to small financial institutions may curtail customer choice.
Hester Peirce, Robert Greene | Nov 01, 2013
The report was prepared in order to assist the Financial Stability Oversight Council (FSOC) in “its analysis of whether—and how—to consider [asset management firms] for enhanced prudential standards and supervision.”2 A full response to the FSOC’s request would have included an analysis of whether subjecting asset management firms to enhanced prudential standards and supervision would undermine financial stability—an issue that was not addressed in the OFR report.

Charts

Veronique de Rugy | Apr 01, 2014
The large numbers that spill across Ex-Im balance sheets concern all US taxpayers. Although names like JP Morgan and TD Bank are listed on these records, taxpayers are ultimately responsible for these liabilities. The US government should not exploit taxpayers’ credit to funnel risk-protected assets to large private corporations. It is past time to put this cash cow for cronies out to pasture.

Experts

Videos

| July 22, 2014
This two-day conference, hosted jointly by the Mercatus Center at George Mason University and the Cato Institute, explores some of the most hotly debated aspects of financial regulation and policies to improve financial markets in a post-Dodd-Frank world.

Podcasts

Tyler Cowen | September 12, 2013
In his latest book, Average Is Over, Tyler Cowen lays out his prediction for where the U.S. economy is heading on NPR's Morning Edition.

Recent Events

Arnold Kling, Lawrence J. White, | May 02, 2012
Please join Mercatus Center financial services experts Anthony Sanders, Arnold Kling, and Larry J. White in discussing the future of GSEs, Fannie Mae and Freddie Mac, and the government's role in the U.S. housing market.

Books

Tyler Cowen | Sep 12, 2013
Widely acclaimed as one of the world’s most influential economists, Tyler Cowen returns with his groundbreaking follow-up to the New York Times bestseller The Great Stagnation.
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