 His last panel is meant to kind of bring a bit of a summary to our discussions by considering the extent to which we would invite the role of the public sector into either helping to perform some of its traditional responsibilities of protecting against risks associated with innovation or indeed fostering innovation by creating a landscape that Allows it to flourish and we've heard a little bit about that over the over the last three days Joining me today just starting closest to me is Oliver good enough with the Vermont law school Next to him is Amar. I'm not allowed to say his last name because I'll mispronounce it From Tufts University and down at the end Chris Brummer from the Georgetown University Law School All of these two three of the four of us, I guess our lawyers We have three from the academic world and so I'll give a bit of a perspective to open up and it'll be fairly short Focusing on perhaps the role that the public sector might have in thinking about how we think about regulating in a world where Financial technologies innovate at lightning speed so So what is the goal of our financial services industry it is the provision of basic services This is risk management liquidity transformation and so forth it is creation of Reliable infrastructure whether that's a payment system or banking systems and it is I would argue maybe most importantly the creation of trust and confidence in the system so that the system is something that people will continue to go to in order to receive these basic services Now we all know that That trust and confidence in our system is I guess most obvious in the banking world But I think a lot of what we've talked about over the last couple of days is the extent to which The the the providers of technology have gained some level of trust By people who are using these technologies perhaps without even Contemplating whether that's appropriate. I think I forget who was who it was that made the comment yesterday that Everybody has a higher rating than Congress most people are higher rating than government But and even lawyers I think are improving right now But technologists and technology firms have this Remarkably high rate even in light of things like the aquifax breach and things like that and it's really quite remarkable And I think I'd like to think a little bit about the role that government plays in that so the tools available to governments are Our excellent rules regulations laws One of the complexities that I'll talk about it in a minute is you know, these are very cumbersome slow-moving processes undergirded by constitutional rights and interests to Access to information and informed decision-making Perhaps not very well suited to a fast-changing environment Another are the X post rules the ability to use enforcement or other Inspection mechanisms to try to control and persuade behavior that difficulty there is the harm may be done But the difficulty there is also that the the the rules get made by exception Rather than through these more open processes Then there are other solutions that are perhaps more adaptive things like moral suasion So we of course know that bank regulators will use these inspection processes to coddle Their regulators into into certain behaviors We I think increasingly have been talking about Well, there's certainly self-help disclosure mechanisms and so forth. We have been increasingly focused I think at this event about governance systems. I've heard many many times people raise the existence of a governance system as a as an ability or a Mechanism that can help bring the level of confidence and trust in whatever it is The thing is and that will then drive people toward the infrastructure or the technology. I Don't have the ability to look here for some reason. So I have to look up to see what I'm going to say On the rulemaking process a couple of thoughts about this one. It's a very difficult Process it requires generally speaking Governance under something called the Administrative Procedures Act I'm sure most of you are familiar with that public comment somebody before had a slide that talked about, you know, all of these Chain letters for some reason. There's a I think it's University of Wisconsin at Madison There's a there's a class when I was at the SEC that we would get 150 letters every rule We would write from this one group of students and you see this over and over again That you have to parse through all of these all of these public comments I think the the lifecycle of a rulemaking is Every three years is is really the the fastest opportunity to revisit a rule. A law is every seven years I'll turn to some of the human complexities of creating some of these rules The the political Bandwidth for bringing a rule or any kind of regulatory Solution is very limited. You have the people that come into office Generally speaking serving a two to three year term in these regulatory agencies sometimes a little bit longer often a quite a bit shorter They have limited time to focus on the very few agenda items that they want to focus on sometimes They're imposed by outsiders either a crisis or a law So the last seven eight years have been all around the implementation of Dodd-Frank And that is occupied most of the regulatory calendar for a number of these regulatory agencies You also have this history of the of the civil service as opposed to the political class in many ways being the one Continuous thread that guides the rulemaking and I would say as a civil servant That risk aversion is probably the principal driver of when you put something on the agenda because if you put something on the agenda and it fails so does your career and and if you if you Have the the luxury of being able to try to see the agenda You're certainly going to see it with things that are Potentially just selfish right most advantageous to your career, but also most defensive So it's very difficult to try to think proactively about what kind of of Rulemaking agendas should be appropriate that would seed a better market for example in the future And and instead we find ourselves quite reactive So some of the alternatives to regulation given that this is such a cumbersome process Would include guidance. I think a friend from the CFPB was talking a little bit about that in the last panel There are great upsides to staff guidance even Agency guidance in that it can be far more responsive and nimble to a request for guidance no action and things of that Sort the downside of course is that it does avoid this process that you know by our Legislature that created the administrative procedures act Is viewed as a positive process of gaining as much input as possible to make the best set of decisions as possible if you have No action guidance or staff guidance They have a far more limited highly expert but far more limited group of people making decisions that ultimately even if they're Narrowly tailored around the specific institution that has sought the Relief the lawyers bar will get out there and make sure that their clients all know that this relief is out there And it has the effect oftentimes of becoming Something of a regulation itself Policy frameworks more general principles is another approach that can be more flexible in terms of fostering a more innovative Environment relying doing nothing and sort of a wait-and-see environment. I think Elizabeth talked a little bit about that With the FSB principles on Fintech that approach has been like we see potential risks here, but we don't think we're going to do anything yet We're going to rely on typical or existing rules and Enforcement mechanisms to be able to control against the kinds of risks We see as possible and and we'll monitor closely and then governance frameworks and a brief word about So anybody that's ever seen me in front of a microphone knows that I don't pass up an opportunity to Talk about the lei, which is the legal entity identifier And one of the one this is a it's like a barcode for financial companies as of today about 750,000 entities around the world have an lei Largely in part because of two authorities one the US CFTC Which required that you get one in order to do a swap in the US and one because of the European securities market authority Which is now as of January 1st requiring under method 2 that you get one before you engage in any kind of a trade Those regulatory mandates require entities to go out and get this 20 character code from a not-for-profit Organization or one of these 30 Utilities around the world that are not government entities yet They baked into the regulations the requirement to go and get this code and the only reason authorities were willing to do this is Because we had created a governance system that we felt like we could rely upon so we have an oversight board that looks over a Foundation in Switzerland that we created that foundation has a fiduciary obligation to our requirements open data high quality data even an equal access to market Participants and then we have a set of contracts between that foundation and the utilities around the globe that hand out the leis That also require adherence to those principles So there's an example where the public sector working with the private sector was able to create a governance system that we then could Rely on to the extent that we were willing to write it in the laws that we can't change for three or four years And and know that the private sector could provide the solution in a more flexible way, but on an ongoing basis The last point I wanted to make was to Talk a little bit about the complexity that we face in in these I just like monkeys. There's really nothing to this The the complexities that we make we face in in trying to decide whether and when to involve ourselves In a particular problem that the market faces or the or more broadly that the public faces And I do this I'll introduce this as a way of ceding our conversation with three basic questions the first one would be How do we handle these tribal issues that Gillian Tep was talking about the other day? We are highly specialized in what we do I I'm not but there are securities lawyers who are focused very discreetly not only on securities laws But on the 33 act or the 40 act there are banking lawyers There are all kinds of specialists in economics that are highly specialized in what we do and none of us are really Focused on the technology piece of it to the level that would be necessary to truly understand and comprehend The potential risks exposed by the technology There's this concept of regulatory capture, but there's I think a more difficult concept of soft capture Where those that are regulated know more than those that regulate the regularities and the difficulty in technology I think is even more pronounced because we are in a position of having to rely upon What the technologists talk about As as the technology being capable of doing and the little risk that they provide and so forth And we heard a bit about this before and I think that's one of the first questions I would have is as authorities how do we how do we avoid these issues? How do we equip ourselves to be able to understand enough to do our jobs a second and related question is You know, how do you know when to spend time and resources and money? And your limited political agenda focusing on any new innovation What are the threshold signals or questions that we should be asking to decide whether is this blockchain thing really for real? Or do we need to focus on it? We know it I think it has taken several years for us to finally get to the point where we're seeing Capital flow into investing into these technologies and so now we're paying attention What are the other markers for us and then finally unattended consequences? I think tomorrow might talk a little bit about our rating agencies and it provoked in my mind that Anecdo and I had learned some years ago About how the how the Xerox machine created the crisis of 2007 and 8 And it did so because this is a stretch But you know it used to be that our rating agencies were paid Well, they made their money by selling their ratings to the brokers And they would do so and you would get your rating book every whatever it was every quarter every month And that's how you would provide your advice to your clients and make your decisions And then Xerox was invented and people started Xeroxing those ratings and handing them out on the trading floor And so all of a sudden the business model of the rating agencies was broken so they turned to the issue were paid model and that of course has led to questions around the the conflicts of interest between an issue of paid model and the ability to shop around for those ratings and then of course we follow that with the the rather Helpful ratings of all these mortgage-backed securities that eventually led into the crisis. So the bottom line question is how do we that's a 30-year attenuation, but how do we think about unintended consequences as we're looking at some of these Innovations that maybe don't have obvious implications now, but could have other implications down the road So I'll turn it over to I think Oliver was going to speak next. Thank you Thank you very much One of the things of following Matt is you've got to always readjust the microphone down if you're my height I'm going to talk to you today about sort of two and a half principal points a little background in two and a half principal points and When when when the machine comes up, you'll see that the two Principal points I'm going to make one of them is to explore the notion of Generativity as a lens to look at regulatory processes through I'm not going to suggest It's the only piece we should look at but it's it's certainly one of the pieces I'm then going to do do what my my my former friends of them my still my friends, but my former colleagues at the OFR said was my pants on fire act, which is to talk about where I think Some of the next problems for the financial system are coming and and what we can do to remediate rather than then to prevent and Then finally a little fun for for us as academics or for me in any rate is academics to think about Okay So framing first of all going to remind a little the goals and tools of regulation and some traditional ideas of good rules Frame one generativity frame to remediation and repair and a final thought By the way in my final thought I'm thinking about money and finance differently I've been trying to come up with a term and I like the term credo currency for it instead of fiat currency Which is you know currency because they said so this is credo currency currency because I believe it Now I went online to look for it and see if somebody else have done that and there's a company out there called credo currency So there we go. I'm behind the curve there as well So common goals of government you've heard some already. This is this is government 101 right preventing harm Providing an institutional framework for private creativity. That's a piece I'm not going to talk so much about today, but it's a key element in in the government's role with all of these these financial innovations for instance in Vermont where I'm from Vermont past the first blockchain evidentiary recognition bill in the United States which I had a Modest role in helping to draft and with the goal of enabling this stuff Okay, there. Yes blame us and indeed the legislature there is thinking about what else it could do to help put an enabling Rapper out there for some of these these financial innovations Again, I'm not going to talk so much about that but we should never forget that that's a piece of what government does Is that it is it helps these things have frameworks within which they can be reliably pursued? Raising public revenue got to get taxes got to get taxes We're in Vermont again. We're talking about legalizing marijuana partly so we can tax it If you if you put a regulatory structure on on on fintech, you know, you can do some of some of the same thing If we had an enabling structure for cryptocurrency should Vermont take its taxes in the cryptocurrency If you layer it on as a as a charge you're shaking his head No, you layer it on as a charge of like mining, you know and create new currency and it goes to straight to the state Maybe that makes I don't know anyway. We'll talk about that later Protecting existing interests. This is the capture piece. It's not just capture We do sometimes intend to protect existing interests because damaging them can be can be difficult Mitigating wider and secondary effects clearly Systemic concerns the office financial research particularly tasked with that You know thinking more broadly about harm and then this notion of repair and remediation, which I'm going to come back to Occasionally and then with that set of kind of goals in mind. What are our tools as as Matt has already said to some degree? We we have a set of x anti regulatory tools where we can put in requirements and prohibitions and filings and approvals and qualifications and best practices and all these ways of sort of putting different shapes of hurdles in front of the activity itself that you you need to come out and then we can also think about ex post regulation and and Outcome linked often. You know if something goes wrong, then we'll come in you take care of making it all right But if something goes wrong guess who's on the hook, but even there we've got we've got nuances. We've got civil liability We've got negligence style liability. We've got strict liability We've got as we'll see in a little bit the corporate limited liability all these different approaches to it You would have criminal liability. We tend not to invoke that that much in the in the Financial industry the meltdown Could have led to a bunch of prosecutions perhaps and and didn't one can argue back and forth about the effect of that on the moral hazard calculations anyway, the It's out there except in cases of really sort of intentional fraud. We I think in the financial industry We rarely see them invoked and again repair and remediation as an ex ex post kind of kind of a Effect now traditionally when we're considering what is a good rule? What is a good rule? The classic sort of economic calculus that has often come in has been one of optimization we have a risk benefit analysis We are seeking to internalize the costs and benefits providers and users so that the incentive structures Align properly we think under those circumstances We sometimes avoid trying to avoid burdening the activity with it with with undue kinds of burdens that would get in its way We Try and avoid rent seeking and predation, you know, obviously If you can get a monopoly power we get that rent seeking again These are all all the classic sort of sort of economic style analysis I would repeat creating a reliable transaction framework not to be underestimated Economists sometimes presume that the any transaction that could occur can occur because it should occur and unless you've got a Some kind of reliability pathway there. It may well not occur. You have to get there. There's pathways there And then there's private and public goods characteristics of the activity again. We'll private will private incentives line up to create a public Benefit of some kind if not then it's you know, we have public goods style things Anyway, there's a classic set of these these these markers that we would would put put out there in Imagining into this another one of us is social acceptance. Sorry. This is an economic. This is more sociological social acceptance Does it fit with cultural norms and conditions? The US is a much more? Sort of sort of economic libertarian country than say the European many of the European countries You're just going to see a different thing that was Lithuania that was mentioned as the spot Where where where the government is now that I don't know that that we get that in the US There's some skepticism about whether that would be a cultural fit with our norms and conditions and then fairness fairness The fairness argument is being invoked significantly these days around some some policy decisions in Washington Again, it is it has has some traction about fairness in application and distribution Let me think ask you to think about a slightly different one I think at any rate is somewhat different and I've been working on this for a little bit which is the notion of Generativity, I think this is particularly important if we're going to be talking about innovation style regulation Why because Jonathan Citrin at Harvard? Had an article which affected me to a significant degree, which was the generative internet goes back to 2006 and the criteria of generativity is It's essentially to have kind of open standards within which you can build something a framework to give coherence But the end result are things you did not anticipate when you came up with a rule so the generative idea is is that that you're going to have a Set of things you put together that that that you're just not going to know whether that what's going to happen once you turn them all loose for instance His definition of generativity is a systems capacity to produce unanticipated change through unfiltered contributions from broad and varied audiences It's not the same as efficiency. It's just not that same thing It's again if it's a it's a capacity of a system not the motivations of actors within the system Okay, the mode I have them motivation to fly if I could do some some physical thing and fly to the back of the room I would be you know, you millions of dollars will flow my way I have a huge motivation to do that. I don't have the capacity and again Systems that that are open to to new stuff is a capacity of the system rather than a motivation of the individual players within it So again, we're talking about a kind of a capacity thing. So it's not the same as that. What are some of the examples of this? We see many instantiation genes genes have this many often it's building block style things the genetic building code gets us it gets Little microbes it gets all of this when when the when the the for DNA elements came into into being however that happened Humans were not yet or elephants or or whatever it is. We're not yet anticipated Language has this language the recombination of nouns verbs etc within a grammar have the capacity to do things I can make a sentence here in front of you, which no one has ever said before And it had taken me a minute to think about Microbes eat donuts on Sunday Maybe someone said that but maybe not, you know, but I can I can I you know I you can you can do stuff with that which which you did not anticipate when you started up Law law actually has a lot of this not not not necessarily the regulatory side so much But but private law I teach corporations the corporation is a hugely generative legal structure When the corporation was initially done people did not anticipate, you know a bunch of the stuff that happens in preferred stock But the laws made it possible and people could do it contracting contracting is this all over the place, right? People are sticking together obligation sets Constitutions actually are generative documents typically I'll have that argument back with with some of my friends on the with another philosophical view of them But I view them as as being purposefully generative that we can create things We didn't anticipate when we started out internet as sitrin Zitrin says is that way finance finance Finance has a lot of these properties partly because it rests on on on contract and corporation It has that ability for people to stick the building blocks together the Lego of finance can be put together in new ways and poof You've got something else and that you didn't fully anticipate and that's partly. It's genius, right and partly. It's danger partly. It's danger because Generative systems have dangers They're less stable than locked down systems, right because they they inherently are supposed to be less stable They're supposed to be open to things. You didn't know we're gonna happen the new may be accidentally damaging Oh, where did that come from? This is your unintended consequences piece, you know that we if we open to generativity We are open to unintended consequences. We can try and anticipate but the entire ethos says we are going to open to stuff We didn't know what was gonna happen Secondly the new will be disruptive. That's the intended consequences. The new will be disruptive It'll be it will be at least in the disruptive even if not the damaging Lee so and The possibility of predation increases a zitrin wrote a book called the future of the internet and hard how to avoid it in which he Was was basically arguing that we were going to retreat back from this open structure Which was full of the opportunity for predation and back into more regulated and constrained and and and and Guarded kinds of structures because the predators were going to figure it out faster than we did and and and we would have to retreat and to some degree That's that's been the case and to some degree that may be the the the financial systems story I mean think about the loan packaging before 2008 You know folks who had figured it out not everybody, but a lot of folks were doing kind of kind of a fairly predatory activity in that in that context so anyway, we see that this this this Generativity principle has has dangers, but it also is a the property is a very good one if you're trying to move the ball forward in some way because because It allows you to it allows you to discover innovation and not just plan innovation so What do we see in our regulatory thing? I've said in the slide. I sort of skipped through a little bit Are we wanting to think about regulatory? Generativity as as a as a property to consider when we're doing This this regulatory structuring that we view Prescriptive regulatory screen schemes are clearly the antithesis of generativity prohibiting the new most Antigenerative the precautionary principle the precautionary principle is inherently on any generative because it says if you don't know what's going to happen Don't do it That and it's rawest most thorough version of the precautionary principle is that and that's that that is directly against that now If you're dealing with radioactivity or or or or reintroducing the smallpox virus, I know I'm on board You know, I'm on board with the probably the precautionary principle there. You're dealing with finance You know, where do we go with that? It's an interesting interesting question set of questions So anyway, you can accomplish this indirectly as well by prohibiting or burdening the risky shutting down openness in a variety of ways Entrenchment of current practice Motives can be good best practices today's best practice is tomorrow's state jacket There we go. We can protect incumbents a bunch of things there So if we're trying to create generative rules, we need to favor ex post over ex ante probably I mean these are just some principles to think about because you know ex ante tends to shut it down Ex post says okay do do your worst and by the way if it doesn't work then we'll get you Create positive frameworks tax as I said create sandboxes and other permissible innovation spaces with low intervention in ex ante rules create safe harbors industry oversight and rule structures that the No action letter might fall in here as a relatively Low burden piece an ex post punish negligence and fraud rather than well-intentioned mistakes And then a business judgment and limited the liability we see already in corporations laws doing that. Are we too uncomfortable? Feel better the next crash will happen anyway. All right. It's cuz it's just gonna happen. All right What's the regulator regulator to do? What should the industry ask it to do? We can say no tech Well, you know that's not gonna happen So we can seek to prevent it and yes, please please please let's try and do the best we can But I also say we should add a focus on Remediation and repair why because I've heard some of the folks at Treasury talk about 2000 the fall of 2008 in the early 2009 and it was like what can we do what's there? You know they go home and read the read the regs and go. Oh, we can do this and then they come back and try it I'm really gonna urge the regulators in the room to think in advance about a a financial FinTech based crash and I know people are doing some of this I've heard that the Treasury is actually doing some of this cool. I encourage it do more. I anticipate it Scenario development gaming and simulating malicious and accidental, you know, plan it out see what what's happening And then develop responses that would be suitable to those and then get the response authority So it's legal of illegal power to act in that context and do it in advance rather than running around when when everybody's Pants are on fire and trying to figure it out now You're not gonna be perfect this but if you set up, you know Get get get congressional and regulatory authority to do some of this stuff that you know You're gonna need to do when this does happen It would be a good idea to plan that way think about the ethereum and the hard fork Right the ethereum had to do a hard fork, right? That was when they when they said Thursday didn't happen and they were over here Okay, and and and we may have to do that for elements or indeed the entire financial system when something happens Why because already as has been discussed the Trojans are sitting there in the swift system You know that I mean the swift systems got Trojans from our from folks who could be potential adversaries And when the time comes they're gonna hit the button and all the money is gonna go to to to to I don't know someplace else, right? And when that happens, we've got to have the legal authority not to sit around and go But instead to say oh that happened Okay, the legal authority is that that day didn't happen swift. You're just sorry about that. We're back there We're gonna do something else. So anyway, that's that's my second point is we need to be ready for that Final thought is that the new models of for money and finance and fintech are just fabulous in What they're providing me as an academic. I know they're dangerous to whatever they're providing the rest of the world But me as an academic they're so cool because we're actually able to really Rethink the special role of money and currency among everything's all these finance things. They're open up again This private money. We're getting private money. We didn't we haven't had private money in 150 years, right? We've got private money again credo money versus fiat currency. Whoa, you know, is that possible? What does it look like? On the money supply regulation without a central bank my friend Mark over here tells me no we can't do that. They're doing cool And it's provokes notions like a biology analogy for instance the emission and Reabsorption of money by the system Can I think being allogized into a homeostasis in biology because with that kind of process going all the time with Neurotransmitters right that serotonin is getting pushed out and reabsorb and pushed out with strikes me as what kind of what's happening with money With banking and think anyway, it gives us a chance to rethink this so Points first of all think about generativity when we're creating rule sets It's a different criteria and a useful one to add to our our classical Economic efficiency and other models secondly Yes, my my trousers are our blazing You know get ready for that meltdown and have the authority in place to do something about it rather than then run around when the time comes And finally let's in the meantime. Let's have some fun with what fintech makes possible for us to exam. Thanks very much So Roughly ten years ago ten and a half years ago that about I'd written a book on on innovation and I shared it with my senior finance colleague at Columbia He said this is a terrific book, but you are not that you should be a chapter than why American innovation is so good So I said pray tell wise American innovation so good. He said it's because we have a terrific financial system Now this is an early 2008 And I said, you know, we have to agree to disagree. I think we have a Terrific innovation system in spite of a pathological financial system not because of the financial system we have This and I am sorry to say that the pathologies which I had in mind then have not gone away in the last ten years and Many of the innovations that you see in in fintech. I mean fintech has become sort of a catch-all phrase for practically anything I Have to do are a reaction to this foundation this pathological foundation which has been in place for the last 10 20 30 years The view I'm going to offer is not a mainstream finance view So let me start with some someone which is someone's view which is sort of quasi mainstream And I take this from Rajan celebrated 2005 speech and it was prophetic because he pointed out that there were Significant Misalignments of incentives and these incentives were systemic systemically dangerous, etc, etc But if you go through that speech carefully You'll find that there's a second part to it and the second part to it celebrated the developments in finance that had taken place over the preceding 30 years and Essentially this is This is go forward and that one Essentially what it said was over the last 30 years we had witnessed a revolutionary technology-led transformation of finance and the revolution had entailed Turning virtually all financial transactions from being relationship based Transactions based in an arm's length anonymous market Raghu attributed this change principally to exogenous information technology and finance financial technology Advances and he basically said regulation. Oh, that's just basically an accommodate has played an accommodative role Particularly deregulation and so sort of these exogenous changes came first deregulation accommodated to it and therefore we we got this change and he said this is a fantastic boost to Entrepreneurship and and economic growth and oh by the way, there are also some mal and mal aligned incentives I Disagreed with most of this there certainly has been this revolutionary change. I do not think it has been led by Exogenous technological changes. I don't think it has been led by exogenous changes in finance theory. It has been led by regulation And and it can only be undone if it needs to be undone by regulation So here's my view of the world So these are There's a great fascination for completing markets. I mean, so it's a wonderful rhetorical device Isn't it? I mean, who could be for incomplete markets? You have to complete markets that that that's necessarily an advance and and this is a seductive shimmer I believe amongst policymakers and amongst amongst economists that we we must complete markets But what are the minimal conditions and I stress the word minimal? Required for having arms length anonymous market one clearly in is an adequate supply of the float of interchangeable Of interchangeable claims you have to have say an issue of a billion dollars For this for stuff to trade Secondly and most subtly you need demand for these claims from buyers who are willing to forego the information That they would they could or would get in a private transaction and these are two minimal claims historically these two minimal conditions have been satisfied by treasure and by treasury bonds and by high-grade debt and You could do this because it is easy to create float. It's not difficult for IBM to issue a billion dollar Billion dollar bond the treasury finds it even is easier to issue a Billion dollar bond With IBM There's tons of information available in naturally available in the public domain or which can be made available With treasury bonds, they may not be so much information available But people really don't care to get private information because they are considered risk-free and then add to this there are underwriter and issue Issue a reputational incentives to produce this that these conditions do not exist For securitization particularly of securitization of mortgages or the securitization of small consumer loans In order to create a billion dollar issue you have to put together something like two or three hundred thousand credit card receivable so the So there is There's a fiddling that you have to do to create this Billion dollar loan Secondly, you cannot disclose information about the two hundred thousand borrowers. It's impossible. It is just practically impossible and Sort of who really knows if you're going if you're going to have three hundred thousand ultimate borrowers Who the underwriter was who figured out whether this this was a credit worthy borrow or not? So none of these conditions exist and therefore I would argue have not had if you did not have until about the mid-80s any Securitization market in mortgage-backed securities or to speak of or in credit card debt But then we had a takeoff The stuff grew like topsy it grew from a few hundred Billion dollars to in in in the 1980s to something like six or seven trillion dollars. That's trillion with a T there was a a Retreat and the but it's pretty much come back to where it is So how did what what is not a naturally tradeable market become tradeable and in my In my explanation, this is not because someone had some fantastic idea innovation Or someone came up with a with a finance theory that did this in my in my account It's principally regulatory forces that elevated FICO scores to a central position or brought in FICO scores to a central position in In the in the issuance of of consumer credit and the issuance of mortgage credit They enabled in the first instance of vast a huge increase in GSE Securitizations those of you who are familiar with the history of of GSE's it was roughly in in in 1995 That that the GSE's went from underwriting standards, which are based on thick underwriting books to virtually exclusive reliance on FICO scores as the principle the artistic of of Borrow credit worthiness most subtly They have mitigated the problem of information problems in in in issuing credit card debt and Calone debt etc. Because essentially there's no information asymmetry problem If the credit card issuance is look the only thing we are going to look at about the borrow is the FICO score And that's all we know so we are not going to sell you our lemons If the only thing that someone who's who's issuing a car loan is looking at is is a FICO score Again that information asymmetry problem completely disappears now clearly if you if you collect in less information Defaults are likely to go up, but the investor doesn't care as long as there is an interest rate commensurate with the high rate of defaults That goes along with this reduced information I would suggest Vame strongly that this strange Elevation of FICO scores was not the result. It's not because we are a libertarian society It is it is that it is the result of of regulation the use of FICO scores in by the GSEs in 1995 was explicitly driven by by the trillion dollar initiative and The only really quick way to do this was was was to switch over to an underwriting process based principally on FICO scores in consumer in consumer debt the the mechanism is somewhat peculiar again to some degree you have to attribute it to laziness and There were there were and there are these fair lending laws and the easiest way To enforce a fair lending laws to penalize anyone who does looks at anything beyond the FICO score Because if you look at a FICO score, you can't you and nothing else if you do not see the face of the person Who's coming who's coming in through the door then and you had no control over the FICO score then you are Then that provides a safe harbor to any and to any credit card debt You issue and if you go through the fair lending examination guides of say the FTIC this they tell they tell you this They tell you this explicitly the fair lending examiner first looks to see whether or not you're using a judgmental system if you're using a judgmental system you are you're already in in Regulatory hot water then they look to see whether you're using a customized scoring system or you're using a generic scoring system If you're using a customized scoring system, then you have to justify that the scoring that that you do is Okay, and then they look at the degree to which there are Discretionary overrides if there is more than a certain percentage of discretionary overrides all of these discretionary overrides are exercised at the level of the branch Again, you're in trouble. So what do the lenders do they say fine? We're simply going to look at FICO scores More or less and we're going to turn this into a lending machine and you know, yes So we get quote-unquote fair lending as a process, but we also get this massive securitization Since I have two minutes I will Finally, I would say we've created enormous demand for tradable assets through an ideology that that favors pay as you go that has gone from pay as you go savings to To a system that says you must say for retirement and this has principally been done through IRISA and IRISA says you have to fully fund your pension plans and Interestingly enough the IRISA also very strongly leans on fiduciaries to invest in tradable diversified assets But in the natural cost there are only so many tradable diversifiable assets available And this has created a huge incentive for Wall Street to produce tradable assets which did not exist before and don't be whole we have produced six trillion dollars of tradable Credit card debt and mortgage debt. So all this stuff has come together because of regulation not because of Exogenous changes If you if this seems kind of weird to you Let me point out the difference between what's happening in financial markets Versus in real markets if one looks at the real economy There are very very few things that are actually traded in anonymous markets grains pork bellies metals pre-industrial stuff very recently Memorizations pretty much nothing in the real sector virtually nothing in the real sector is traded in in anonymous markets what you find in in the real sector is That this anonymization of transactions is decrease is decreasing not increasing so historically when Many transactions which you have to do blind without knowing the identity of the seller or without knowing anything about the about the idiosyncrasy of what What you have has been steadily decreasing it's been decreasing in this thing in Things like Yelp in the old days if you if you wanted to get a plumber you looked up the yellow pages You had no idea who the plumber was today. You can go to Yelp and look up the person's ratings it has increased in In Airbnb So you can you can now actually you can actually see Again when I was a kid you went to you ordered a Bed and breakfast you had no idea what you're going to get today with Airbnb You can actually see the pictures of where you're going to land up with Uber Taxi you basically wave down off the street. It's an anonymous transaction with Uber You can now see who the what the name of the driver is what kind of card Is being driven what what what the ratings of the car are and believe it or not This has even been happening in BDSM intermediation. Let me not get into details and the This thing is this completely messed up so what we are getting in the real sector is better matching and less commoditized anonymity and What we have in the financial sector is completely the opposite Is this going to change because of fintech my answer is sadly no And it will not change unless you change the underpinnings which have made Financial markets so anonymous and so arm's length. Thank you So what I think is particularly funny is that I you know Matt mentioned the fact that I was a big promoter of slides Actually, we're probably just going to have One slide that we're going to focus on in part because the entire conference has discussed many of the issues that we'll discuss today both on this panel and Both because I recognize that I am the last speaker on the last panel of a two-day conference Despite what you believe there is self-awareness with academics And so we're just There's also a certain irony When during a fintech conference there are problems with PowerPoint Okay, I can also I can use I can use my fingers, okay Okay, so my comments today are going to be based off of a paper I guess there will be two slides. I'll tell you how to Where to get it with my co-author Yashiyada who's back there and it's a paper called the fintech Tri-lima the fintech tri-lima and the idea behind the tri-lima Besides the fact that it's in today's world of artificial intelligence and that human beings can't really remember more than three Digits to their telephone numbers. We thought that there were effectively three critical elements to rule making when thinking through why exactly is it so difficult or regulators or financial regulatory authorities and others to come up with a suitable regime for dealing with Financial innovation and financial technology. One of the questions that you've heard over the last two days is Amongst the many questions are number one. How do you regulate fintech number two? How do you create a regulatory regime that's adaptable enough to? Engage ever-changing financial innovations number three How is it that you can avoid? The soft capture that Matt had mentioned for this panel These questions are so difficult We argue in the paper that when you look at the history of regulating financial innovation General not just from a finite a fintech perspective, but just financial innovation generally we argue that you inevitably see a kind of policy tri-lima that when seeking to provide clear rules Maintain market integrity and encourage financial innovation Regulators generally are only able to fully achieve at best two of the three goals For example encouraging innovation by simplifying rules to expand access to financial markets as typically created risk for Market integrity where rules are designed for example to ease barriers to entry and lower compliance costs to encourage financial innovation We've seen in the past risk emerge as firms fail to adopt proper practices And fail to internalize the proper costs of their activities. So think of things like the quality futures Modernization act Among amongst many others Meanwhile if an agency seeks simple rules that attain market stability rules will Largely be disabling as opposed to enabling And not much financial innovation will likely be permitted in other words You in order to promote rules simplicity to achieve market stability regulators are likely to install bright line legal limitations to innovation like banning financial products are selling Fix or setting fixed boundaries as to the scope as to what firms in any particular market Someone's asking me to actually talk louder Don't always see that so I'll just to repeat the big idea Again if regulators or if an agency seeks simple rules to attain market stability rules will be Often more disabling as opposed to enabling and you won't see too much financial innovation In other words in order to promote rules simplicity simple rules and in order to achieve market stability regulators are likely to install bright line legal limitations to innovation like banning financial products or setting very discreet boundaries For the scope of permitted activities regardless as to how much technological advancements are made and then finally and some people would would would argue that Different kinds of rules historically you could see Glass-Steagall fitting in some parts of it But finally if regulation wishes to enhance market integrity and to maintain financial innovation Any rules that regulators will ultimately devise will inevitably be very complex And usually to match the intricacies of new financial technologies. So the jury's still out still relatively new Dodd-Frank could be considered somewhat complex and falling in that particular category So you end up with a little bit of a try limo right because everybody wants to hit this very interesting Sweet spot where you can achieve all three, but at least historically If you're thinking about achieving all three Uh, particularly in their in their most robust sense. You're not able to do so And we argue in the paper that This is not again A problem that you've only seen with fintech, but fintech Exacerbates this trial and it makes it even more difficult And it's made it more difficult for many of the reasons that we've talked about over the last two days of this conference That you have a reliance on smaller non-incumbent firms Uh many with very limited track records and with untested technologies, but with exciting prospects for changing the delivery of financial services And perhaps financial inclusion and other worthy goals You also have a heavy reliance on big data and the design of fintech products And it's not often easy to understand the exact financial Or technological architecture supporting That along with the automation of the delivery of financial services And then finally you have the very quick ever-progressing Changes in the market ecosystem and in technology itself Which means that Innovation is changing at such a rate that it's hard for regulators to keep pace with those innovations, right? So these three aspects of fintech Are combined in a way That is different at least from historical precedent, particularly when you look at the pace of innovation and change and when you look at the fact that Non-incumbent new upstarts are effectively Intermediating traditional gatekeepers and traditionally dominant players in industries many times So how do you deal with those with these kinds of changes and with these kinds of regulatory challenges? Well again, we've heard about more than a couple from Elizabeth Jacobs. We've heard about no action letters also from the CFPB You hear about pilots There are charters and licenses and then there are regulatory sandboxes Now for those of you who happen to watch the regulatory politics of these kinds of things When you discuss the different tools in the toolbox, it's a little bit of a kind of west side story where some people will say No, no, no, I don't do sandboxes. I only do no action letters or I don't do No action letters what I do are pilot projects and instead of trying to demarcate and sort of Demonstrate the superiority of any one particular approach We argue that it's best to look at these approaches as really operating on a kind of a spectrum Right and that each are dealing with either the limitations of their own regulatory and administrative mandates Or the technology in question and obviously the political Priorities that different kinds of regulations, excuse me regulatory jurisdictions may have And you go and evolve along. Let's let's say a a an ever More ambitious Set of policies that I guess you could say are culminating right now in sandboxes Which tend to pick and choose and to combine various actions or excuse me various Tools like no action letters, pilots Licenses and the like in order to experiment set parameters test and gather data and information We'd like to Nonetheless say that these these kinds of strategies Are useful. They should be recognized as an attempt to bridge this Trilemma they can be also viewed as a weak means of operating perhaps not at the polls, but but mitigating some of the trade-offs But even these have to be supported by additional supplemental administrative strategies In order to mitigate but not eliminate The fintech trilemma Amongst the kinds of tools in the toolbox That are necessary are some of the themes that I think we've already heard in the conference But it's useful to think through particularly in light of Matt's suggestions We know that in order to achieve effective regulation, you're going to need some domestic agency cooperation That is at the domestic level At the same time, you're going to need international standard setting And a better private Self-governance of emerging technologies now They sound very simple, but I think that Thinking about things in terms of a fintech trilemma can be a useful Framework for just thinking through different kinds of problems. So just now mad mentioned the soft capture problem Like, you know, this is a real challenge. Like how do you end up? Making sure that you don't over rely on the information and the data that are provided to you Well, that's a good question. Well, at least when you're engaging in a good deal of domestic agency You can not only compare x ante the kinds of rules that you're setting For developing your own domestic regulatory experimentation But you should be able to have data inputs from Similarly situated market participants and you can at least compare discrepancies Particularly that emerge within a different regulatory ecosystem Internationally Those kinds of gains can even be even more pronounced. That is that you will be able to compare Perhaps different kinds of data fields. It'd be very useful to begin to harmonize some of those data fields But you can certainly Think through what kind of information that other regulatory agencies may be gathering from their own testing And then finally You can think through best practices In terms of not just supervision, but also The rulemaking process for those sandboxes for those pilots and the like and you don't really see to my knowledge That much work being done thus far In this way. So when you sent tend to see news reports about fintech hubs coordinating and cooperating you're not really hearing things about Establishing benchmark parameters For different experiments and then sharing the useful data in a way such that there is a collaborative National interagency coordination To gather as much information as possible for establishing best practices If you look at the mo use between major financial hubs, there's very rarely an enforcement Actually, I've never seen an enforcement component to those mo use instead They're more along the lines of how can you get different domestic market Participants into another jurisdiction as well as sort of thinking through a multifaceted more robust deeper coordination Again when it comes to setting data parameters Testing that data gathering that data and sharing at least some of the results of that data So that different jurisdictions can not only develop interoperable rules But also the rules that really fit an ever changing Market ecosystem and landscape at any rate. I know my limitations and I know on the last person so If you're interested The other slut. Oh no, okay fintech tri lemma Fintech tri lemma, that's it. Thanks About 20 minutes. I think if uh, if you like we can open it up for For questions and maybe while I'm waiting to see any hands go up I'll ask one of the group which is maybe was melissa earlier was talking about this question of when Some sort of an infrastructure is developing thinking about the extent to which you're creating a public good and want to create that kind of opportunity for you know The public good to develop in the role of government of that or whether you want to allow Whatever is being created to bring created with the you know Potentially initially a a financial incentive or otherwise. I think in the paperwork crisis of what was it 66 When q-sip evolved the thought was well We'll have all the industry get together and they'll create this way of identifying securities and we'll get rid of the backlog of You know the after-trade activities and we'll solve that problem and here we are some decades later dealing with a A vended product That's done terrific good But often creates complexities because there's a proprietary structure over over q-sip itself and so Maybe I could get the reaction for for each from each of you about how to think about that trade-off First of all, I think that's a very interesting example in part because the that paperwork crisis was itself ironically a product of of a desired shift even before the regulatory intervention to introduce more Computerized record keeping that didn't really work out at quite as well as people had intended and it was a story of the partial and not fully integrated Reg tech into Your back office Work and and and I think that's going to be a constant challenge Is is how do you develop the appropriate standards and to really make sure that whatever Both fintech and reg tuck tech Delivery of financial services arises actually does what people Say it's going to do, you know and and and and that's that's extraordinarily difficult And I think it also poses real questions for An administrative for today's administrative state people don't really think about the fact that our administrative state was premised on A society in which change itself was was moving at a more incremental Speed and when you think about the administrative procedure act it was not it was just not built right to be able to um Respond quickly and to adapt quickly to These these these kinds of challenges and just as you in my view just as as you have to upgrade Your supervisory practices. You also have to upgrade your administrative practices to get precisely To that question is is is what your best? Regulatory response is going to be And I don't want to say that's just a you know that all this is just a question of process But when there is no it when there is no process you have to start somewhere and I think that Uh, in order to get to a proper substantive decision You have to have the the appropriate structures in place and what I've heard repeatedly um From folks in lots of different regulatory agencies is that that structure Um is not always in place if it's dominated by one shot Rulemaking that gets heavily politicized. I mean frankly even notice and comment processes are are are themselves Bias to the extent to which you have stakeholders who may have their own agendas and providing only certain kinds of data that they may have so it's That that the problem or the question of soft capture, for example is not exactly one that may be limited uh to Regulatory experimentation in the fintech space. I mean are you really getting rid of it when you're just getting no responses to your proposals from certain segments of You know industry or even Uh consumer folks, you know, are they are they not coming with a certain interests involved? Having having spoken against The thought that that we should look at incentive structures. I'm not going to say that we should in this context because at least portion of the problem you're talking about is is What what is the the structure of the game is is the game? One where where there is enough alignment of interest Without a a an external coordinator that that you can expect the the solution to emerge The driving on one side of the road or the other is is a good example of this Once once you you have a the crystal set of be on the right. It becomes very quickly self enforcing Um, yes, there will be occasional odd people who will drive on on on the wrong side But they they they are they're weeded out of the population fairly quickly Um, so so again, there is no incentive counter incentive to say. Hey, I'm driving on the other side And I'm going to take reap the benefits of that So but but many many coordination problems involve Some some discordance of of incentive structure. So so setting up Oliver so in that regard, I mean, how do you view that? I mean, do you view fintech regulation as as implicating largely harmonious objectives and incentives I view it as as as a mixed bag I mean, there will there will be pieces of the puzzle that will be like driving on one side of the road There'll be other pieces of the puzzle that won't I'm actually trying to set up in in a standard setting of exercise where I'm trying to help coordinate a process to set Standards around the data specification for legal contracting Which is all over the place. We're kind of in that in that early, you know, a word perfect word, you know all these different standards floating around out there and and the It's a it is a coordination problem where there is enough divergence of interest that it's not it's not naturally occurring So That doesn't mean you can't have a private process to bring those interests together and that's if you talk to the folks at NIST You know, they're experts at that where you know, what what's going to work with the private? What's going to work with the public, you know, where where you where you do that piece? And and as you say the meta game of Will be played where where folks who have actually got got at stake and not solving the problem We'll we'll try and make sure we don't it's it's a layered process A really clever governmental intervention can be very helpful in that and I again I point to NIST is put folks who are in the in the business of that The financial regulators are not are not unaware of those problems and that their best can can can hopefully do a pretty good job of that But yeah, it's not a one-size-fits-all So I have a Quick comment for Amar and then a question for chris. Um Amar and your framework In terms of the effect of regulation on financial innovation The two examples you picked out for that role seemed odd. I'm always a little worried about or skeptical of claims that A regulation that is relatively marginal with respect to the financial system Drives that much change in the financial system. So fair lending laws I think are Not an especially plausible channel for what you described and I think that Interdisciplinary approach that we've been talking about may we may need a little bit more economic historians involved on that question to To better answer it, but that open to your suggestions Chris this really comes out of your comment in response to matt's first question, which is Um Is your triangle really more like a parallelogram or some other shape? So that your three corners are all Elements of what you could think of as efficacy. That is trade-offs among a set of values having to do with Whether the proposed rule or approach is accomplishing some end But we also have lots of standards for and this is consistent with your comment We have lots of standards for rulemaking that are not about the efficacy of the rule, but about its legitimacy So, you know, is it responsive to democratic concerns? Is there transparency involved? Are the regulators accountable for enacting the rule? Much of our legal system is built on Not efficacy, but on legitimacy so Maybe you could brainstorm with us a little bit about how to think about the link between That legitimacy goal and your Trilemma so so first of all everyone should know that he asked me that really hard question only because I didn't say that he hadn't solved the trilemma himself when he was This is this is this is retaliation. Um, so that's that's a uh, that's an extremely good point and you know what the The simple answer is for the purposes of the paper I've been answered about the paper and then I have a larger Meta question that you're asking which is much more difficult. So the paper Is an academic paper and theory paper looking at sort of these three critical sort of Policy aspirations in the rule writing process and certainly there was some frustration. I think for Almost anyone who's who's watched everything ranging from Uh The implementation of financial reforms in the wake of the final financial crisis to The ability of our regulatory agencies to come up to speed and to get up to speed quickly enough With really some very radical and profound changes in the financial market. Um In the delivery of financial Services and a lot of some folks have said well, is this going to be big or is this not going to be big? I tend to think it's going to be big and I think I tend to think it's going to be big Largely because we're heading in a direction where you can have critical financial Intermediaries and gatekeepers like clearing houses potentially Disintermediated disintermediated by new technologies which raises certain kinds of questions about financial stability as well as effectiveness and as well as financial inclusion Some good some bad But I I think that to the extent to which they encroach upon Replace or are relied upon by these sort of critical elements in our financial market infrastructure And become part of our critical elements of our financial market infrastructure That it's extremely important that regulators are able to get up to speed In terms of understanding exactly what they are and then in terms of what they do And as a response to that sort of I think uh frustration, you know, you you can't help but just ask yourself Why is this the case, you know, and what is it about particularly fintech because it is the emerging issue of this particular Policymaking cycle, you know, what is it that makes it particularly different? And in my again in my opinion a lot of people say I have financial innovation It's always different and I'm like it's it's true But there's a certain matrix of problems that that that tend to make it difficult And so for the purposes of this paper We identified these three elements that are sort of germane to the rulemaking That you know rulemaking a process There are three things that regulators tend to aspire towards and we wanted to show that just getting those three things right much less other issues Is extremely difficult Now when you move outside of that space into the broader questions of legitimacy Then you get into the kinds of questions as to well, uh, you know, what is what is the language of regulation, you know How is it To what extent can you You know, I was talked I was joked to people about the fact that you know Who would argue that bank regulation is not Very legitimate or democratic. I always ask well, would the is the better alternative to ask Your friends and neighbors and grandparents about the intricacies of the leverage ratio under Basel three, right? Like that's that's not a that is not a a part of the You know of of the normal societal discourse And you know as as as society evolves, you know, there is a space by which The uh, you know to which I mean, you know, you rely upon experts in order to to reach, um To in order to reach sound policy goals, but the legitimacy itself has to be founded upon Oh, you know a certain level of transparency with You know elected representatives and that just brings about sort of deeper questions Not necessarily about the perhaps the administrator at what about the mandates and the missions and the degree to which elected representatives visit and revisit those mandates And I think that there is something to be said about making sure, you know How do you make sure that rules that are in place are are responsive to the needs of of of society and don't become Um unwitting obstacles to achieving the actually the policy goals that were ultimately Uh used to found them and and that's a bigger question. It's not it's not a question for the paper. Um, but I You you know, it's it's true like regulatory experimentation experimentation. How do you you know? I'm not entirely certain how you would introduce that particular traditional concepts of democratic legitimacy into a pilot program To try to check track Applications of a distributed ledger technologies. You know, I I don't know Oh I know you didn't ask a question, but since you made a comment I think I feel impelled to respond to it Uh, my I would have thought my explanation was preposterous myself three years ago So so and you you put it more gently than I did as I would have said what a pile of nonsense uh, but I am I I've subsequent in the last three years have done extensive interviews with lenders both in the united states and in europe And here's what i'm confident about and here's what speculation uh, I am highly confident that Fair lending laws have significantly truncated The information that lenders in the united states collect on consumers And i'm also highly confident that that this is increased reliance on pico scores Uh, I see that in small business lending in the united states where you do not have these laws You do not have this process I see that in europe where you have a different regulatory regime The regulatory regime has pushed lenders into exactly the opposite direction to collect more information and and uh, so Uh And this is what my bank of friends tell me that that we are We're terrified of this and this is basically frames how we lend to to consumers The degree to which this has or has not affected uh, securitization speculative and uh, the The only two things i'll say in defense of of my speculation Is that one where you have a different lending process in small business lending or Or or or lending in europe Securitization is de minimis Uh, I can see a mechanism for why uh Ignorance is bliss as far as in securitization is concerned. Uh, which basically it means that that you've taken away the Uh, the securitization problem and uh I don't see any other explanation So bending some more plausible explanation for why there are six trillion dollars more Of securitization of a certain kind of loan In the united states when there isn't in europe When european issuance of traditional bonds is now On par and in some years in in excess of american issuance issuance of copper bonds There may be some other explanation, but I haven't seen it Is this on now? I wanted to follow up on uh, matthew's comment About the rating agencies the broken model broken by the xerox machine certainly the Uh seller of the securities buying the ratings Proved to be broken bankrupt. Uh, not just broken a disaster Uh And that model is still in effect. We're looking at it more closely, but it's still in effect and over time Doubtless the problems will re emerge. There's a third model Which is very simple and I can describe it with 19th century technology which is issuer of the bond Not directly pay the rating agency But pay a fee to a government agency such as the sec The sec then says we have a an or a lottery earn with 100 balls in it And we will put as many balls in the earn as reflect current market share and when The seller of the bond of the instrument Wants a rating the sec has someone reach over his shoulder and reach into the earn And pull up a ball that says moody's or s and p or fit or whatever So that there is no No market incentive For the raider the rating agency to do a favor Because they didn't get selected by their by their laxity and then over time you can give them report cards And put fewer balls or more balls in the earn depending on how dependable their performances are It's really quite simple 21st century technology Could improve on the description i've given through a random Random generation of numbers, etc Yeah, that I was at the commission At times During the crisis and hasn't followed in that particular idea was discussed There are any number of reasons for why it didn't get adopted But I think a number may be having to do with the influence of the commenters and Industry itself having the ability to shape the business model You'll recall that for years there were only three rating agencies and it was quite some time before That was even opened up a fairly close system Can I say one quick? so Yeah, I mean I've heard this problem with rating agencies ad nauseam and I'm sure that There's no question that that there is a an incentive problem there But let me also say that there is there are exactly those incentive problems with the issuance of corporate bonds and the kind The incentives for rating agencies to to be paid by the issuer exists in traditional corporate bonds as well uh, there was There's a there's an underwriter incentive problem with traditional corporate bonds That has not that that did not prove to be a significant problem even in junk bonds It was so the question is why did it show up? just in In this in this particular corner of the Of the tradeable market and there my explanation Propost as it may be is that the problem is not with the rating agencies of people rating the issue It was the issue of rating the credit of the individual borrowers and the excessive reliance on those on those FICO scores But speculation so it's Could could I just say like could you could you also I mean particularly when you get into more exotic structured products where they're Where the the Rating agency is itself directly dependent on talking about soft capture the direct information given to it by Accrediting agency and you're not operating in a space where you have In a traditional vanilla Bond market context where you have other rating agencies who can provide their own ratings or there's there's less discipline Right and more reliance on the credit rating. So so so you have this begs the question. Why are there more exotic products? constructed around securitized mortgages and constructed around Around credit cards when there are not such exotic products constructed around traditional corporate large-scale corporate loans And it also begs the question. Would there have been This this level of slicing and dicing if the underlying raw material Of the securitized loans was not there to stop that I just to build a little bit on michael's comment on chris's financial Or rather fintech trilemma and I chris. I want to tell you I appreciate that because Um As an economist I've trafficked in the monetary policy trilemma and there's a financial stability trilemma As well. So i'm glad to see that Danny rogerick was a third trilemma that adds to the triangle but just to Make a couple of comments and ask a question You know, it certainly would be nice to have rules that are simple to address You know all problems just to point out state the obvious Some of the problems that we face are not simple problems. They're intrinsically complex And Consequently the rules are simple but to go back to the underlying A source of those rules they derive from Laws that are passed and the laws themselves Maybe we could aim more directly at making some of the laws themselves more principles based to make them simpler And would be easier to derive Simpler rules that could be adaptable More fundamentally You know Innovation is intrinsically dynamic And we could also think about Another leg of your triangle market integrity as something that evolves over time because what was constituted integrity for markets In the last century may not be applicable to the current century as markets evolve and And the and the moors and the and the standards for integrity change In contrast Even simple or complex rules tend to be static and to quote paul tucker It is a static rule book that is the meat and drink of regulatory arbitrage And that may be even promoting the use As mark flood would say to have financial technology enable regulatory arbitrage So in our quest for simplicity and rules that fit today's and tomorrow's world Should we be looking at a rule book that is more dynamic than static? Yes And and if I can take one second just to complete our festival of trilemma's When we were discussing this it brought back to mind to me when I've heard from computer programming folks And the trilemma there is your computer Programming project can be two of the following three, but not all which is fast cheap and good And on the topic of fast why don't we take one last question This will I think be more in the order of a comment on michaels and ummer's Discussion so so ummer I think you're on the partly on the right track with In blaming regulation, but you've picked on the wrong regulation And in particular I'd take it back to The first basal accord In the late 80s, which was implemented in the early 90s Which put 50% risk weight on on mortgages, which was basically too high. It was An arbitrarily chosen number If you're going to be charged a lot for mortgages, there's there's basically two obvious responses one is to to offload the mortgages and and Certainly the industry did that they started securitizing stuff off the banking book And the other is you can make the the loans more risky so that you're earning enough to justify the charge They did that too So we saw a gradual move into riskier and riskier mortgage products It's hard to change the credit risk. I'm sorry. It's hard to change the interest rate risk in these products but you can add credit risk and and You do that by digging deeper into the borrower pool and one reason why You see more securitization in the us than elsewhere is because the us is relatively overhoused compared to the rest of the world. We have Subsidization of home mortgages and we also have a much longer term mortgages than most other countries And a mortgage deduction for now So you're advancing the Bernanke loan hypothesis which is dates back to 1991 actually That it's all basically regulatory arbitrage. My the reason I find that unpersuasive is because it was a global standard And you could and why did this disproportionately hit the us Securitization market when it did not have a similar effect in europe As far as home ownership is concerned in the us It's a little bit higher than it is outside the us but there's it has long been high in there And there are other countries where home ownership is also high and there has not been The same level or anywhere close to the same level of securitization And certainly home ownership would not explain the other asset-backed securities classes Which are car loans and and consumer loans. So there's something Very peculiar about america, which cannot be explained by either the basal accords or by that by home ownership But that's my Okay, so i'm going to do two things We said we'd do things in groups of three, but i'm going to do two first is ask you to thank the panel And the second is just use My opportunity here at the mic to say Dick and michael are going to come up and say a few words to close out the conference and And all the thank yous and so forth, but as the last event that I will appear at with um deck Um Before he retires. I just want to take a quick moment to thank you For your service to the country and for having the vision to Engage the ofr and events like this That bring lawyers and economists and mathematicians and others together and I hope we can carry on your work So thank you