Wow, it's wonderful to be here, as I said this morning. For any student of regulation, Regnet is the center of the earth. And I'm delighted to be here. I've been delighted to be invited and honored to speak here. And it's a special treat to have Neil, my longtime collaborator, one of the great field researchers I've ever encountered to be my host here today. So my talk today is entitled Fear, Duty, and Regulatory Compliance. So I hardly ever see news stories about businesses that are complying with governmental regulations. They may be only focused, as far as I can tell, on violations with horrible consequences. And those disasters do happen, of course. But they're not happening every hour. And why is that? It's partly because most businesses comply with most regulations, most of the time, at least in economically advanced democracies. Thank goodness. Hard question is, why do they do so? That was the topic of a chapter that Neil and Dorothy Thornton and I contributed to Christine Parker and the book in Neilson's edited volume published last spring. Today, I'll just very briefly say some of the conclusions from that research. I won't take the time to go through all the methods and things like that. Then I want to talk about what those conclusions might help us understand about regulatory failure, and particularly the disastrous home mortgage bubble in the United States and the related meltdown of the whole financial system. So let's start here. So why do individuals usually comply with the law? Sociolegal scholars point to three motivational factors. Two involve fear. One is fear of legal punishment. The other is responsiveness to social pressures. That is fear of the social consequences of getting a bad reputation. The third factor is an internalized sense of duty, duty to conform to one's beliefs about right and wrong. Well, Neil and Dorothy and I concluded from our research projects and business response to environmental regulation that all those factors influence business firm behavior, too. And that's consistent with research by other sociolegal scholars. In one of the projects, we studied 14 pulp and paper bills. We had long on-site interviews with mill managers and environmental managers. And we learned through that that they feel constrained by a three-stranded license to operate. The first strand is their economic license, the firm's obligations to meet the financial expectations of its investors and creditors and customers and suppliers. The second is the facility's legal or regulatory license, the applicable to comply with the applicable laws, regulations, permit conditions. And third was the mill's social license, meeting the demands or expectations for responsible environmental performance that they felt from neighborhood organizations, from their own employees, news media, environmental advocacy groups, all of whom could complain to officials or generate adverse publicity for the firm. These social license pressures mattered, we found. Mill's that had experienced more intense social pressures had better environmental performance. So in addition to fear of legal and social sanctions, John Prathwaite, Peter May, and others have found that many firm managers are motivated by a sense of normative duty. And true here, here enough too, the pulp mill managers felt a sense of duty to comply with the law. Mill's with ambitious and more environmental management styles, we found, particularly higher levels of commitment to environmental goals had better records of environmental compliance and performance. Another thing we paid attention to are the ways in which fear and duty interact. One of our findings in that regard is that reliable regulatory enforcement is a key to building normative culture of compliance and keeping a sense of duty alive. In what we called our deterrent study, we interviewed managers responsible for compliance in 221 companies. We are intrigued to find that they approve of tough regulatory enforcement and penalties against other firms in their industries industry who had completed, who had committed serious violations. Why? Because enforcement creates a sense of a level competitive playing field. It creates a sense of a world in which one does not feel like a sucker if one spends money on compliance, but your competitors get away with cheating. Enforcement reinforced our respondents' felt obligation to comply with the law. But where did their initial normative commitment to comply come from? In our deterrent study, Neil conducted in-depth interviews with 18 chemical companies and 17 electroplating companies. Even among the small electroplaters, a culture of compliance had developed. The electroplaters recognized that they had been doing harm and so accepted the need for regulatory requirements. But that sense of duty had not always existed. It grew, they told Neil, only after a governmental enforcement campaign that targeted electroplaters and made compliance seem inescapable, inevitable to company officials. What about the economic license of business firms? Managers fear being punished for declining profits or financial losses, and most have a sense of duty, or at least the desire to prove their worth by improving profits. Nevertheless, in the pulp mills we examined, regulatory license pressures generally trumped economic license pressures, at least in certain ways. Even in hard economic times for the industry, all the mills we studied had made very costly investments to comply with ever-tightening regulatory requirements. Moreover, social license pressures had led some of those mills to spend substantial sums on odor control measures that were not required by law at all, but were very much desired by their neighbors. So that's on one side, economic license pressures can trump regulatory requirements. On the other hand, only specific regulatory requirements and the probability of enforcement we found could trump economic constraints when it came to making very costly environmental improvements. Only specific regulatory requirements and the threat of enforcement could make a credible implicit promise to each pulp mill. You have to make a large investment in chlorine reduction technology, to pick one example. But believe me, your competitors will have to do it as well. That's also the lesson of our third study, which focused on 16 small and medium-sized diesel trucking companies in California and Texas. Few of these trucking firms had purchased the newest model of least polluting diesel trucks. The truckers knew that the new engines emitted much lower levels of toxic particulates, but they were not legally required to buy and use that best available control technology. The new model trucks, which are prohibitively expensive for small trucking firms, they couldn't afford to buy them. And these companies, unlike the pulp mills, had not experienced strong social or normative pressures to reduce emissions. So there's a difference between the truckers and the pulp mills in this regard. The pulp mills would go beyond compliance. Truckers did not. And the big difference was the presence of regulations that required the installation of control technologies, use of the best available control technologies. What regulation does, it seemed clear, is crystallize and enforce normative standards. It provides the benchmark, the foundation, for social and normative pressure for corporate social responsibility. Because regulatory requirements were absent, the diesel truck study also highlights three other ways that regulation can strengthen social and normative pressures. First, to use a term I just mentioned, regulation crystallizes general normative intuitions or beliefs that don't drive dangerously into explicit requirements and prohibitions to precautionary standards, such as speed limits. Second, specific rules like speed limits stimulate the development of standard ways of measuring risk, which makes degrees of risk more visible, both to the regulated entity and to observers. Speed limits breed speedometers. And breeds police radar guns. And breeds speed governors in the engines of some of the trucking fleets we studied. Third, regulatory systems gather data. Mandatory pollution measurements and reporting systems show a factory's management how well or how badly it is doing. And it also helps regulators and environmental groups calculate and publicize the aggregate harm generated by that industry. It teaches people in the industry, because the data is there, what are the consequences of their collective actions, as well as their own. The absence of that capacity, as we'll see, was a crucial agreement, a crucial ingredient in the Wall Street meltdown, which I want to get to now. Let's see. How come bankers, whom historically we've pictured as concerned about their reputation for solidity and prudence, took on such enormous and untenable risks? Where was fear and duty then? When I first agreed to address this topic and this talk, and it was my idea, but when I first committed myself to doing it, I didn't realize quite what I was getting into. I'm not an expert on modern financial practices or on financial regulation. Some of you might know a lot more about this than I do, but I've read a few analysis, including parts of a lengthy report by the US National Commission on the Financial Crisis, kind of a post-mortem. So I'll share with you what I've gleaned so far and welcome your comments. First and most important, most of the risky financial practices that led to disaster did not violate any specific regulatory rules. In many areas of activity, there was a regulatory vacuum. Regulatory policy makers had simply not kept up with the rapid proliferation of new practices, new risky financial practices. So let me just give you this cascade of regulatory failures. First, as the American housing bubble gained momentum during the 1990s, there were virtually no laws, no regulations other than traditional criminal prohibitions and outright fraud that restricted lending institutions from issuing risky subprime loans to seriously underfinanced home buyers. Subprime loans are those that didn't meet the underwriting standards of two government-created mortgage insurance companies, but are nicknamed Fannie Mae and Freddie Mac. Second, the regulators did not stop Fannie Mae and Freddie Mac, which historically had been stabilizing factors in the home loan market from relaxing their underwriting standards in 2005, which further encouraged home loan institutions to make risky home loans. Third, there were no regulatory controls over the huge Wall Street financial institutions' practice of bundling hundreds of home loans into complex bonds that purported to limit the risk of default by mixing safer home loans with risky ones. Spreading the risk, or so they thought. Fourth, there were no regulatory controls over the major private credit rating agencies who gave these mortgage-backed bonds very high, very coveted AAA credit ratings. That was a key factor in supporting the resulting trillion-dollar market in mortgage-backed securities. A large proportion of those bond ratings later had to be downgraded. Fifth, there were no regulatory rules governing the large financial institutions' creation and sale of mortgage-backed derivatives. These are contracts that purported the hedge of the risks inherent in the mortgage-backed bonds. So there were no regulations that governed this explosively growing multi-trillion-dollar international trade derivatives among giant financial institutions and hedge funds. No regulation meant inadequate data. The true dimensions of the huge liabilities that were created were not visible on financial statements, not visible to regulators, to financial analysts, or even to the financial institutions themselves in many cases. And it was that trade in mortgage-backed derivatives that kept pouring billions of dollars into the American home loan market, stoking the price, housing price bubble, drawing buyers into the market. And sixth, not finally, but I'll stop here, the giant financial institutions were not subject to mandatory reserve requirements with respect to their holdings of mortgage-backed instruments and delivered derivatives. The reserves are truly minuscule compared to the gigantic sums they borrowed on a short-term basis in order to finance their trade in the mortgage-backed financial institution. So there are lots of ways in which the legal and regulatory licenses of home loan companies and financial firms and various kinds were too narrow, too lax. Fear of legal punishment was virtually irrelevant, which takes us back to the diesel truck regulation story without the normative benchmark and threat of enforcement provided by specific regulatory requirements, social and normative pressures and firms to avoid actions that might harm our others are likely to be weak. You'll want to know of course why there was such a regulatory vacuum. That's a complex political story with many strands, but almost all of the strands as I read the post-mortem accounts point to two primary factors. First was the intense, very sophisticated political lobbying efforts of increasingly wealthy, ever more economically important Wall Street firms. They consistently fought against the imposition of regulations on these new financial markets that they were inventing. In the 1999, 2009 period of these firms reported spending $2.7 billion for lobbying the federal government and gave more than one billion in campaign contributions. They had strong allies chairing key Senate committees and a number of powerful government officials in the cabinets of both the Clinton and George W. Bush administrations were alumni of Wall Street firms. That's one reason. The second reason for this regulatory vacuum was the anti-regulatory ideology of important governmental officials. For example, the chairman of the powerful Federal Reserve Board, the key regulatory body in this sector was Alan Greenspan, a conservative economist. Greenspan believed that market pressures would push the large Wall Street financial institutions to limit and control risk prudently. And that regulation not only was unnecessary, but would stifle useful financial innovation. So together, these two elements, political influence and anti-regulatory ideology, led to the repeal of some regulations, deregulation, much more importantly, to the rejection of proposals for new regulations to deal with new risks. For example, I read that some low-income housing organizations and governmental officials, including one member of the Federal Reserve Board, lobbied for legal prohibitions on the reckless subprime mortgage practices. But their complaints and proposals were cast aside by Greenspan. Even worse, the Fed and other federal bank regulators went in the opposite direction. They preempted and nullified some new state government laws that had been prompted by complaints about unscrupulous lending practices. Similarly, in the late 1990s, the head of the Commodity Futures Trading Commission proposed to regulate the exploding trade and derivatives by making those transactions public and more transparent. Her initiatives was fiercely opposed by Wall Street firms and blocked by Greenspan, who approved the derivatives as a way of hedging risk, and was opposed by like-minded top officials and economists in the Treasury Department. And finally, in late 2000, a Republican majority in Congress went further forbidding regulation of derivatives by any federal agency and by state governments. So regulation lagging behind these new financial practices, or intentionally sidelined, was absent. So what important leg in this street-legged stool of license pressures was absent? What about the financial firm's economic license pressures? Many major financial institutions committed financial suicide. They went bankrupt or tottered into takeover by larger banks or takeover by the United States government. Why did the institution's managers ignore the risks to their stockholders and creditors or left with huge losses? And what about normative pressures? Didn't putting their shareholders and creditors at risk, much less putting the entire financial system at risk, violate their self-images as responsible bankers and citizens? I gleaned two different explanations from the National Commission Report. I call one the Frankenstein story. Dr. Frankenstein oversimplified it, created something new and imaginative that he thought would be terrific, would contribute to science, contribute to human progress. But he deluded himself. Unwittingly, he created a destructive monster. The second explanation I call the Faust theory. Faust, to simplify again, deliberately sold his soul to the devil in order to achieve great earthly pleasures and wisdom. First, let me talk about the Frankenstein theory. The National Commission Report tells a tale of massive self-delusion, at least among Wall Street firms. They apparently convinced themselves that what they were doing was not unduly risky. And it starts this way. It's an interesting tale. In the late 1980s, analysts at the huge bank and investment banking firm JP Morgan developed derivatives known as credit default swaps, or CDOs, as a way of controlling and spreading risk on the bank's portfolio of loans that it had made to big business corporations. Through the CDO, JP Morgan bought a kind of insurance policy from Bank B, which promised for a fee to compensate JP Morgan if some of Morgan's loans were downgraded or defaulted. And that counterparty, as they're called Bank B, could in turn hedge its risk by trading the CDO to hedge fund C, who might have thought that it was less risky than Bank B. More and more Wall Street firms started making and trading CDOs, thinking that they were reducing their risk, while also freeing up funds to be, they didn't have to hold as much reserves against the loans that they had out, against the risk of default. The next step was making and trading CDOs that were backed by securities that bundled together home mortgages and increasingly backed by subprime home mortgages for they offered higher returns. The international trade in subprime CDOs grew into trillions of dollars, and that greatly increased Wall Street's demand for subprime mortgage loans in order to bundle, which create the pressures on the incentives for the home lenders to issue subprime loans. But in retrospect, the National Commission reports, there are really no guarantees that the contractual partners or the institutions who ended up holding the CDOs could actually pay up. They weren't like insurance firms. They offered insurance, but they didn't have to set aside reserves like true insurance companies do. Moreover, the training of derivatives tied the fates of all the major financial institutions, not just in the United States, but in other countries, tied them together in a web of mutual obligations so that ultimately a run on one bank was more likely to pull them all down. And here's that key point again. Because of the absence of regulation, the market in CDOs was opaque. So no one had any idea of the total volume of mortgage backed derivatives on the books of their counterparties, and regulators didn't have a handle on the amount of systemic risk that was being created. In addition, in order to manage the thousands of huge trades that went on in a giant multinational financial institution, each day, the leaders of these financial institutions came to rely on complex quantitative risk models. So it's conceivable between the CDO hedging and the risk models that the leaders of financial giants sincerely convinced themselves that they had created a brave new world in which financial risk were adequately controlled, adequately hedged. They certainly talked as if they had. Fed Chair Alan Greenspan and the chair of the Securities Exchange Commission apparently agreed. So these captains of finance may even have felt that they were not violating any normative principles. They were something like well-meaning Dr. Frankenstein's. But the risk models, it turned out, couldn't anticipate unusual but major disruptions. And the models were only as good as the information and the probability equations that fed into them. You just give the sense of how hard this was to sort out, to comprehend. The Federal Reserve Bank of New York started investigating Lehman Brothers in the weeks before, a month before, when it seemed to be in trouble. They tried to get a handle on the amount of risk that they had. They were, at the time of the collapse, they were still seeking information on the amount of exposures created by Lehman Brothers more than 900,000 derivatives contracts. So the volume of this is enormous and the problem of keeping track of the risk created was escaped everyone. So you can think of this as a massive information failure, which is the kind of thing that justifies regulation. And the Wall Street firms creating what they thought was insurance had created a moral hazard problem, the bane of any system of insurance, but worse than most insurance risks because they didn't have to set aside reserves. Now, let me come back to the other theory, the Faust theory, let me move past this self-delusion theory. The Faust theory was the captains of finance were consumed by old-fashioned greed and they faced no countervailing pressures from regulators. And so they consciously made a deal with the devil and through business morality overboard. Well, my question is why then, and not always, why did greed overtake prudence for so many firms in this particular market at this particular time? My thought in that regard is that the economic licenses of the large financial firms had changed, producing unusually strong incentives for short-term profit, not long-term growth and stability. In the early 1990s, respected investment banks like Goldman Sachs were run as privately-owned partnerships. They went public, making them more sensitive to shareholders' demand for higher earnings and stock prices. More importantly, as the market for derivatives exploded in the late 1990s, old-line investment banks and commercial banks found that their profits from short-term trading far surpassed their profits from traditional underwriting, advising, and lending operations. Leadership passed to the hyper-competitive hot shots in the trading operations. These are people I imagine are focused not on service to clients, but on making quick killings and on making bigger kills than the next guy. Moreover, financial firms had long been offering top executives and traders' incentive-oriented compensation packages, such as stock options that were valuable only if the company's share price went up, but no clawback if the price declined. They increased the incentives greatly in order to keep the best traders and keep the best CEOs. So one might say that the large firm's financials, large firm's economic licenses had become much more demanding. It was no longer sufficient to produce steady profits and long-term growth. It was necessary to produce enormous profits in the short run, and that could be done only by jumping further into the riskier markets for derivatives and other complex, less prudent financial lines of business. I'm not even sure that's enough to explain it, so I want to think about, I found myself thinking about the housing bubble itself. Like commercial bubbles and crazes in the past, it seems bubbles change economic incentives. As money flowed into the home lending and derivatives markets, the volume and pace of activity became blindingly fast. Think of those 900,000 contracts. The gains to be made became extraordinary, and in this environment, the devil's song became harder to resist. The National Commission inquiry concluded there was a systematic breakdown in accountability and ethics. A bond raider from Moody's, a major bond rating firm, later told investigators that when he first joined the firm, the individual analyst's worst fear is that he would get the rating wrong and harm Moody's reputation for probating. It's just what you might expect. By the mid-2000s, he said, he could lose his job for jeopardizing Moody's market share or damage its reputation with the financial institutions that hired Moody to rate their bonds and CDOs and to do it really fast because they were churning them out at an incredible pace. From 2000 to 2007, Moody's gave nearly 45,000 mortgage-related securities. It's coveted A rating. In 2006, it gave that rating to 30 securities every working day. 83% of the securities rated triple A that year ultimately were downgrade. Now, I don't think I can really judge the relative weight of this Frankenstein self-illusion story against the deliberate Fausti and bargain theory, at least with respect to major Wall Street firms. I suspect that there's an interaction. I suspect that during high-speed trading bubbles anytime, the opportunity for extraordinary and rapid financial gain stimulates self-illusion. Self-diluting theories provide a rationale for improvement risk-taking. And that suggests that trading bubbles and commodity booms are very likely to weaken normative restraints and pose special, very difficult problems for regulatory regimes. If we shift our attention from these Wall Street firms to Main Street, there the story is clear. The new lending institutions that leapt into and dominated the subprime home loan market clearly did realize that they were steering millions of homeowners into highly risky contracts. Many of these firms continued to do so even as default rates started to increase rapidly. The commission heard testimony from a risk manager at AmeriQuest, one of the largest subprime lenders, who was fired after warning top management that many loans were too risky. The mortgage issuers incentives had changed too. They could quickly shed risk by selling even very bad loans to financial institutions, hungry to repackage and resell them. The very bad loans they could charge, they made more money on, so they could charge higher fees. The only possible restraint was the mortgage issuers' own sense of morality and concern for their working class customers. There's no legal controls. But that own sense of morality is a weak read, it seems, when the opportunities for financial gain are immense. Here, the score is clear. Level 10,000. Or maybe when you think of the owners of these mortgage lenders, it was more of a tie, because I think the owners and lenders surely had pocketed millions before their companies collapsed. So again, the lesson is that without the normative standards that regulation and legal rules crystallize, and without some level of fear of legal punishment for doing or risking harm to others, business people's normative concerns can be overwhelmed, especially if good behavior would cost them or their companies a great deal of money or status. I take some comfort in the fact that many traditional home lenders nevertheless stayed away from the subprime mortgage machine. But certainly not enough of them to stop it from blowing up and hurting hundreds of millions of people around the world. So with that, I will stop and hear what your comments and questions might be. Well, I've got one while you're thinking about it. What about sort of an office you did in Shades of Green? You have an economic license, regulatory license, social license. So the economic license here, as you characterize it, was very powerful and directed to short-termism. That might not have been too bad in itself if it was counted or balanced in some way by the other two licenses, but social license, very difficult to apply in this context. I mean, these are hugely complex financial transactions ordinary people don't get it. And even if there had been much more transparency, which there wasn't, it's still not something that you can characterize in a way that captures the public attention. So we found pop mills smell and local communities know their smell and they respond to that. What's happening in the financial markets is there's no there, there. So the social license was also missing in action, which leaves the regulatory license, which for a whole bunch of self-interested political lobbying in conjunction with an ideology that said the market will win, meant that the regulatory license was also missing in action. So I guess my question is about long things. So what's changeable in all that? From the point of view of normative issue, what could be done differently? I wouldn't hold out great hopes for the social license simply because the nature of the problem is so opaque that it's very hard to marshal those sort of sources. But with regulation, could have more farsighted regulator have done it differently and what would doing it differently have looked like? I mean, it seems to me that the market is constantly changing, morphing into something else. So any prescriptive rules are probably going to miss the boat because by the time you've got prescription in the market there's about three steps beyond you, which may leave you are wonder with something that was tried in this country a number of years ago by reformist government in the consumer protection area, which was to say, look, the deceptive practices of business are going to continue to advance and we'll never be sophisticated enough in the law to precisely pin them down. But what we can do is we can have a general provision that says that shall not engage in misleading or deceptive advertising. Sorry, misleading or deceptive conduct, which is very vague, but nevertheless can capture all those different activities as they come along. The criminal lawyers would say, well, that's not fair because businesses need certainty and you can't have vague criminal provisions, which was handled by making it merely civil rather than criminal. But actually over the years it proved to be a very successful provision because even in civil actions, that the financial consequences of getting it wrong were high and it more or less worked. So my long rather rambling question is if we have to look for salvation from either the social or the regulatory licenses, doesn't it be going to find it in the social license? Could you find it in the regulatory license? If you did, what would it look like? Yeah. Great question. Before giving up entirely on the social license, it's, I agree, absolutely. I find no evidence of anybody complaining loudly or may have been people who noticed that there was no public organization that was railing on about excessive risks at Wall Street. However, there were a lot of organizations that noticed what was happening in communities where lots of people were taking out loans and almost immediately defaulting or coming in and said I don't understand this loan, suddenly I'm getting adjustable rate mortgages and sudden big payments that were required and we're in trouble right away. And they did complain. Some state attorney general sued AmeriQuest, a large subprime lender. But when they complained to the regulators, they didn't get anywhere. And here's an interesting idea of how strong the, you might say the greed pressures were. AmeriQuest lost this suit to the state attorney general because they had to pay $300 million settlement. It took about five years between this time the suit was started and the time they paid up. In that time, they continued making subprime loans and selling them in the billions. I mean, they just didn't care. So I think it's true that without very strong regulations, it would have been impossible to stop. What would be the equivalent of a regulation that the consumer don't deceive people regulation? The equivalent would be don't take excessive risks. They'd say I don't. There's been a long history of dealing with banks' safety and soundness with very specific rules, reserves. You have to keep a certain ratio of reserves to outstanding obligations. That got eroded. And most importantly, the obligations for derivatives were treated differently. They didn't, again, there's two things. One, for banks, the obligations for derivatives were not treated the same way as loans. They're a different animal and it was not, I guess, apparently recognized or at least fought for hard enough that they ought to be some quantitative limits on the ratio. The ratios for banks would go up, which had been like 8% or something like that, 8, 10% of reserves to outstanding loans. For derivatives, they were like, they were like companies had 40, 50 to one relationships. So it is possible in some areas to devise sensible risks. It doesn't tell them exactly what risks to take, but it says whatever you do, here's some floor you have to maintain. Certainly for home loans, it's not so hard to think about rules. For many years, the role that Fannie Mae, Federal National Mortgage Association, its role was to purchase or ensure home mortgages. But it would only do that if they met their own writing standards. And they required 30 year fixed term self-amortizing mortgages with usually a certain, at least 10 or 20% down. Even at rules, the monthly carrying charges should not be more than 33% of the homeowner's income. That stabilized the market. It created the post-World War II housing boom. But that, first of all, a whole new shadow banking system emerged. In the United States, large financial institutions that were not banks and not regulated like banks, including financial institutions that entered the home loan market were not subject to, and would issue loans that Fannie Mae wouldn't guarantee. It's sort of like an end run around that process. And then Fannie Mae didn't behave so well either. They're constantly trying to increase their market share or their own earnings. And they started gradually reducing their own underwriting standards. So it was certainly not impossible for me to imagine a set of rules. It would be less lively and it'd be harder for poorer people to get housing. And there are certainly some pressures from Congress from both parties to extend home loan ownerships. The Democrats wanted to do that because of kind of a concern for poor people. The Republicans wanted to do it because they believed that home ownership made people Republicans. And I don't know, I think it's probably true. And at least they cited some evidence. So one of the problem was whatever your rules have to be, they have to cover not only the regulated industry but the competitors for the regulated industry who go and run around it. Seems to me, public the history of regulatory failure has to do with people getting innovations of one kind or another that get out of the channel of regulation as something else. And the question, all that what they have to do then is block new regulations, which is easier than trying to pass new regulations that would deregulate. So I'm not, let me say one more thing. The Obama administration got through the Dodd-Frank law in 2010 over fierce lobbying opposition from the Wall Street firms that the government had bailed out. It doesn't have very many specific rules. What it tries to do more, it seems to me, is create internal structures, mandatory internal structures within large finance institutions that require reporting, keeping track of risks, making derivatives more, making it more transparent. So there's more data available, not trying to control it so much with specific rules, but at least trying to let regulators get a handle on the total amount of risk out there. And presumably, and with greater powers, should they need it to jump in and impose specific rules or limits? That's putting a lot of responsibility on regulators who were not omniscient, certainly the first time around. But it's responsive that the difficulty when you're dealing with complex financial markets to ban certain things rather than or decide, you know, make specific rules. But they do have some, and they certainly have specific rules requiring reporting of derivatives and many more rules. And with the home loan market, they haven't really worked that out, it seems to me. They do have a consumer finance agency that has the capacity to make new rules. But they haven't done too much of that as of yet. Chris. Pleasure. Thanks, Bob. It was a really interesting talk. As you were talking, I started thinking about politics because of course, in Australia, we didn't nearly have that the global financial crisis was a European, North American phenomenon. I mean, Asian banks were fine, Australian banks. Congratulations. I'm not finding it that bad. It raises the issue of the role of governments and it raises the issue of politics in all of this. It's possible, and we know that what a regulatory agency does, how effective it is, how credible it is, depends on support of government. And so if a regulatory agency puts itself in a situation where it's going to define itself in terms of what government says it should do, then it's always going to be vulnerable to governments that are carried away by particular ideologies where they are about these, or using the shorthand, or what happened, or something else. If we reconceptualise regulation as not simply something that a regulatory agency does, but it's done by a regulatory community that includes government, includes the regulatory agency, includes the NGOs or the other actors in the community, then perhaps then we have a regulatory capacity within a democracy that can catch those things early, because in a way that you told the story, ignorance and self-deception and, oh, this is too easy, we'll just keep going, that kind of lack of critical thinking on the behalf of the problem. So surely then the way that we should think about a regulatory corrective mechanism in terms of thinking, well, what is it that can help us expose those kinds of issues? I agree that there were great complexities with derivative, et cetera, but people taking out bloods for houses that they couldn't afford was, as you said, obvious, and that should have set those things, and there should be mechanisms that actually allow the government requires where all actors come to the party to discuss those kinds of things before they escalate into a financial crisis of the kind we're just seeing. Well, that makes a lot of sense. How to construct that. I'm asking myself, why didn't we have that? Why were there not more voices being heard? And I think of several things. For many, many years, it seems to me, the American financial regulatory system had a pretty good reputation. The Federal Reserve Bank is like a lot of central banks insulated from politics. It's members of the boards of government, governor are appointed for many years. So the chairman Greenspan had been there since 1985 and was very, very well respected through both Republican and Democratic administrations. He may have been reappointed by presidents of different parties. And his reputation was one of not being political. There are strong norms against trying to even criticize it very strongly. It's almost like Supreme Court put on a pedestal. And there you're very subject with so, so you might say it's relying on expertise. It has people from banking, it has people from regulation on it. And you're just always vulnerable to ideological thinking. Experts have their theories. And there was not, certainly not a very strong counter reaction to that. It's a way it's a little bit surprising to me. A little bit surprising to me. I've had colleagues from Berkley's Department of Economics who are on the Federal Reserve. People sort of I know to be political liberals. It's not terribly political. It's just that sometimes a set of views develops and he was particularly powerful I think because he'd been there so long and it required a period of very good control of inflation which they took to their major job. So he had sort of super status. The second thing is that I think there was a sense that these Wall Street firms are really super smart. They hire the smartest young people out of the colleges. They have all these quantitative models and expertise. They seem to be, they created a set of institutions that just drew in money from around the world. It just flowed in like a river of gold to Wall Street. So they seem to be, this is sort of like, this can happen, a good thing. Maybe it's like power corrupts, success corrupts. And it becomes harder and harder to criticize it. And as Neo says, the institutions, the only institutions I think of that could have played an important role, critical role, are the managers of large pension funds both public and private who they're mostly concerned with. They hold stocks and traditional bonds. Why aren't they a voice for sort of a public, yet another version of the public interest story? Actually, I've been working with a PhD student, former accountant, who's been studying them. And his story is that there's two things. One is they're legally obligated to spread their investments. And so their response to companies, they think are taking undue risks, is not to intervene but to sell, exit rather than voice. And they don't have the time, they don't have the resources, it's not their ethos. Or because of the risk-spreading, not the incentives to monitor particular, they do have their analysts. But most of the all the really good analysts work for Wall Street firms. So it was a particular kind of a problem. And I do think it's one of these problems. Well, I guess you're right, it doesn't, I can't explain it by saying, well, there's something new is invented. Things are being invented all the time, but you do have sort of turfs and bureaucratic ways of going, people monitor what they monitor and they rarely monitor what's going outside until the problems start developing. And in this case, I think it turned out to be too late. Peter. Well, thanks for a paper. I mean, like you, I haven't really studied this problem in detail, but it is a very training one. I mean, from my perspective, it seems there's the political economy story here is the really important one. And we have a different kind of capture problem here. We tend to think of agencies as the subject of regulatory capture, but it seems to me that the global financial crisis was much more a story of systemic capture, where all the players in the system in one way or another were captured. So you think of the ratings agencies having a business model that depended on giving high ratings and getting rewarded by those whose products they were selling. If you think of the regulators, well, if you did a network analysis, you'd see that the regulators, the individual regulators would end up on some of those wall street, working for those wall street firms. And the superannuation funds and all of these people having incentives to maneuver in and out of the system, so that no one actor was uncontaminated by what was going on and all, in a sense, were candidates of the system. That's a very tough thing for regulation to change if you're dealing with systemic capture. Moreover, if you look at what's happened since the GFC, it seems to me that the reforms can only be described as modest as far as I can understand. And that this has actually deepened the problem of systemic capture, because now the moral hazard problem has deeply intensified, because essentially the wall street guys brought down a system and the worst that's happened is they've been bailed out. So from a political economy point of view, and if you do all this network analysis, you would say, actually, we've just simply set ourselves up for even a bigger systems crash and regulation is rather powerless to do very much. But we're running out of time, so if you have a succinct answer to Peter, I think we'll have to call it a day. I'm not quite ready to give up on it. I don't find the word capture quite right. It's not that there were voices of dissent, there were people who wanted to regulate, who came out of the system who wanted to regulate derivatives. It really was a political struggle between people who wanted it and people who didn't and the people who didn't want it were had more power, had more power. They were in the driver's seat, so to speak, and they were able to reject it. I think we're always, it's not that they were captured, it's that they, well, maybe it's where they were captured. It's partly a matter of belief, the ideology. The weakness of the new law is a matter of straight power politics. It was, the Democrats had to compromise and compromise and compromise to try to get anything through at all because the lobbying against them, the money spent against them, and there was a new anti-regulatory spirit in the country that came from the Tea Party movement, oddly enough, and so it is a weaker law than one might want. I guess, if I wanna come back to one other thing, it's just, there's always a system going on where people agree with each other. That was true in the 1950s, 60s, 70s, 80s when the system was relatively stable. So there's something different that has to be added. I do think, the more I think about it, I do think that the way that a bubble was created changed people's, it just changed people's heads and it made them much more vulnerable and much more eager to defend what they thought was working well and that was enriching them. So it may be that it's not just the system, it's the tides that run through, that create shifts in the economics and economic niches and new products that change people's incentives and those are really hard to anticipate in advance. You don't have a theory, all the economists say, we don't have a theory of bubbles. And so it may be you just need to have someone, you have to trust someone to watch and as Dr. Frank Law does, gives people more capability of monitoring and more capability of intervening whether they'll have the courage and the wisdom and the support to do that will depend a lot on what administration we're in and who they are. On that rather troubling note, nevertheless, we're left to conclude. Thank you all for a terrific seminar and look forward to another one tomorrow. Thank you.