Financial Markets

Financial Markets

Research

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.
Hester Peirce, Jerry Ellig | Mar 31, 2014
SEC Regulatory Analysis: “A Long Way to Go and a Short Time to Get There”…
Adam C. Smith, Todd Zywicki | Mar 11, 2014
The Consumer Financial Protection Bureau (CFPB) is one of the most powerful and least accountable regulatory agencies in American history. Immune from budgetary oversight by Congress and headed by a single director whom the president cannot remove except under special circumstances, the agency wields unconstrained, vaguely defined powers to regulate virtually every consumer and small business credit product in America (Zywicki 2013a). In part, the CFPB has justified its ongoing intervention into financial credit markets based on a prior belief in the inability of consumers to competently weigh their decisions. This belief is founded on research conducted in the area of behavioral economics, which shows that people are prone to a variety of errors in their decision-making.
Hester Peirce, Ian Robinson, Thomas Stratmann | Feb 27, 2014
This paper presents the results of the Mercatus Center’s Small Bank Survey, which include responses from approximately 200 banks across 41 states with less than $10 billion in assets each, serving mostly rural and small metropolitan markets.
Patrick McLaughlin, Robert Greene | Feb 26, 2014
We apply the methodology of RegData—which quantifies regulations using text analysis of the Code of Federal Regulations (CFR)—to objectively determine the number of new restrictions the Dodd-Frank Act has created and will create. We estimate that Dodd-Frank will increase financial industry regulatory restrictions by 32 percent once all of its rulemakings are finalized, yielding more new restrictions than were created between 1997 and 2010.
Bruce Yandle | Dec 09, 2013
With autumn leaves falling and leftover Halloween jack-o-lanterns still grinning, first estimates for 3Q2013 GDP growth and news of October’s employment went bump in the night and rattled the spirits of Washington’s chatterbox. GDP growth came in with a “lofty” 2.8 percent real growth, which was much more than most soothsayers expected. Tapering is on the way! Or so it seemed. The stock marked tanked. Then the Bureau of Labor Statistics announced that 204,000 jobs had been added to the economy in October; this also exceeded analysts’ expectations. The market recovered; the economy can handle tapering!

Testimony & Comments

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.
Holly A. Bell | Dec 13, 2013
Enabling traders and exchanges to continue to work with regulators in a cooperative environment that recognizes the significant market incentives shared by all stakeholders to ensure trading system and market integrity is the best approach as we transition to technology-based markets.
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.
Arnold Kling | Oct 23, 2013
On August 20, the Federal Reserve Board, Office of Comptroller of the Currency, and Federal Deposit Insurance Corporation posted a proposed rule that would raise supplementary leverage ratio standards for large, systemically important financial institutions (SIFIs). The agencies solicited comments on a list of questions. This comment pertains primarily to question 2, “Would the proposed strengthening of the leverage ratio mitigate public-policy concerns about the regulatory treatment of banking organizations that may pose risks to the broader economy?”…

Research Summaries & Toolkits

Speeches & Presentations

Expert Commentary

Apr 06, 2014

A recent report conducted through internal investigation at the Consumer Financial Protection Bureau (CFPB) found multiple instances of employee discrimination and harassment. Investigator Misty Raucci claimed, “I found that the general environment in Consumer Response is one of exclusion, retaliation, discrimination, nepotism, demoralization, devaluation, and other offensive working conditions which constitute a toxic workplace for many of its employees.”…
Mar 30, 2014

We should always be willing to learn from the past, and I do count Marx, for all his flaws, among the great economists. But we should not forget that he was in fact wrong about most things, not just about the totally impractical nature of his communist alternative.
Mar 26, 2014

Last Thursday, without any fanfare, the Office of the Comptroller of the Currency released the economic analysis for the Volcker Rule. The timing-approximately three months after the OCC and its fellow regulators released the final rule-and the substance of the analysis are troubling. Financial regulators' failure to conduct and use thorough economic analysis in their decisionmaking means that they are reshaping our post-crisis financial markets without critical information about whether new rules will do more harm than good.
Mar 20, 2014

Small banks didn't cause the financial crisis that led to the Dodd-Frank Wall Street Reform and Consumer Protection Act - and the act's framers said they didn't intend for the law's burdensome requirements to hit smaller institutions. But the results of our recent small-bank survey published through the Mercatus Center demonstrate the futility of these good intentions. Small banks are facing rising compliance costs and are finding it harder to serve their customers.
Mar 12, 2014

Thanks to crowdfunding, Lammily, an intentionally average-looking doll designed to compete with Barbie's unattainable perfection, should be on the market by year's end. If the SEC permits crowdfunders to share in the profits of these new ventures through direct equity participation without unreasonable constraints, we can expect to see many more innovative items made available to consumers.
Mar 06, 2014

Middle-class stagnation and the "decoupling" of pay and productivity are illusions. Yes, the U.S. economy is in the doldrums, thanks to a variety of factors, most significantly the effect of growth-deadening government policies like ObamaCare and the Dodd-Frank Act. But by any sensible measure, most Americans are today better paid and more prosperous than in the past.

Charts

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

Tyler Cowen is Holbert C. Harris Chair of Economics at George Mason University and serves as chairman and general director of the Mercatus Center at George Mason University. With colleague Alex Tabarrok, Cowen is coauthor of the popular economics blog Marginal Revolution and cofounder of the online educational platform Marginal Revolution University.
Garett Jones is a senior scholar and BB&T Professor for the Study of Capitalism at the Mercatus Center and an associate professor of economics at George Mason University. He specializes in macroeconomics, monetary economics, and the microfoundations of economic growth.
Arnold Kling is a Mercatus Center–affiliated senior scholar at George Mason University and a member of the Financial Markets Working Group. He specializes in housing-finance policy, financial institutions, macroeconomics, and the inside workings of America’s federal financial institutions. He also is an adjunct scholar at the Cato Institute in Washington, DC.
Hester Peirce is a senior research fellow at the Mercatus Center at George Mason University. Her primary research interests relate to the regulation of the financial markets.
J.W. Verret is a member of the Financial Markets Working Group at the Mercatus Center and an assistant professor at George Mason University School of Law. His primary research interests are corporate governance, securities regulation, and executive compensation.

Podcasts

Jerry Ellig | September 17, 2013
The scope and number of regulations continues to grow, but proof that problems are being solved remains elusive. Several reform efforts are focusing on ways to improve economic analysis so that agencies can make better decisions about when and how to use regulation for problem-solving. New research indicates several reforms that could have a positive impact.

Recent Events

The Mercatus Center at George Mason University continues its “Future of Finance” series of events with a timely event focused on the regulation of consumer credit products.

Books

Jerry Brito, Andrea Castillo | Jan 23, 2014
Como la primera moneda digital descentralizada del mundo, Bitcoin tiene el potencial de revolucionar los sistemas de pago en línea de una manera que beneficia a los consumidores y las empresas. En lugar de utilizar un intermediario, como PayPal, o entregar información de tarjeta de crédito a un tercer partido para su verificación—ya que los dos incluyen cargos de transacción y otras restricciones— Bitcoin permite que los individuos paguen directamente entre sí para bienes o servicios.

Media Clippings

Hester Peirce | Feb 12, 2014
Hester Peirce quoted at Reuters.
Benjamin M. Blau | Oct 27, 2013
Benjamin Blau cited at The Washington Examiner.
Benjamin M. Blau | Oct 24, 2013
Benjamin Blau cited at International Business Times.
Tyler Cowen | Oct 23, 2013
Tyler Cowen's book, "Average is Over" cited at Los Angeles Times.
Keith Hall | Oct 04, 2013
Keith Hall cited at The Hill.
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