Financial Markets

Financial Markets

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

Jerry Brito, Eli Dourado | Aug 14, 2014
As the Treasury Department’s Financial Crimes Enforcement Network has found, certain virtual currency businesses are money service businesses. Typically such money service businesses engage in money transmission and as a result must acquire a money transmitter license in each state in which they do business.
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.
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.

Research Summaries & Toolkits

Speeches & Presentations

Expert Commentary

Aug 27, 2014

The Financial Stability Oversight Council is rumored to be on the verge of designating MetLife as a systemically important financial institution. Through the FSOC's bureaucratic eyes, designating MetLife may appear to be a safer course than leaving it undesignated and facing questions later if the company runs into trouble.
Aug 25, 2014

A gaggle of state and federal officials just announced a $16.7 billion settlement with Bank of America. The federal government and participating states will take part of that hefty sum, and the rest will go to select underwater homeowners and nonprofits. This record-breaking settlement stems from the crisis-era mortgage activities by Bank of America and the two companies it probably now wishes it had not acquired, Countrywide and Merrill Lynch.
Aug 22, 2014

While the precise nature of the link between financialization and innovation remains elusive, a healthy financial sector clearly can play an important role in fostering innovation.
Aug 21, 2014

Many U.S. politicians, regulators, populists and small bankers want to convince us we should fear big banks. After four years, it seems the bigger concern lies with the regulatory burden made worse by Dodd Frank. That's because — to the extent that it greatly increases the cost of banking — those costs will be passed on to the customers in the form of fewer services, fewer branches, higher fees, and overall, even more customer dissatisfaction.
Aug 13, 2014

Last week's rejection of 11 large financial institutions' living wills was a dramatic gesture by the Federal Deposit Insurance Corporation and the Federal Reserve. The living wills are supposed to be a roadmap for the orderly resolution of these companies, should they run into trouble. Living wills make good sense, but until markets are forced to live by them, there is little incentive to get them right.
Jul 31, 2014

The mortgage interest tax deduction is often justified as promoting homeownership among the middle class and supporting industries that employ middle-class workers. The deduction also has broad public support: a recent survey found that six out of ten Americans oppose its elimination.

Charts

This week’s charts use participant record data from the Export-Import Bank to display the Bank’s top exporter beneficiaries in general and for each financial vehicle the Bank offered for FY 2013: loan guarantees, insurance coverage, direct loans, and working capital guarantees. The charts show that the Export-Import Bank’s top beneficiaries constitute a large portion of total financial assistance—and therefore have plenty of reasons to support the upcoming reauthorization.

Experts

Tyler Cowen is Holbert L. 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

Join the Cato Institute and the Mercatus Center at George Mason University for a two-day conference July 16 and 17 exploring policies to improve financial markets in a post-Dodd-Frank world.

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

Jason J. Fichtner | Jul 24, 2014
This excerpt originally appeared in FOX Business.
Jason J. Fichtner | Jul 17, 2014
This excerpt originally appeared in FOX Business.
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.
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