Thinking Strategically About Regulations
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MARKET INCENTIVES THINKING STRATEGICALLY ABOUT REGULATIONS
Friday, October 23, 2009
1
PRESUMPTIONS
SUSTAINABLE ECONOMIC GROWTH REQUIRES TECHNOLOGICAL INNOVATION AND LABOR BE APPLIED TO KEY SECTORS OF THE ECONOMY TASK OF MARKETS IS TO ALLOCATE CAPITAL TO MOST PRODUCTIVE PARTS OF THE ECONOMY MARKET TRANSACTIONS REQUIRE ECONOMIC INFORMATION TO ADOPT TECHNOLOGICAL INNOVATIONS & REALLOCATE LABOR TO MORE PRODUCTIVE USES
Friday, October 23, 2009
2
PRESUMPTIVE FALLACIES
MARKETS ARE ‘RATIONAL’ - MARKET TRANSACTIONS ARE NOT REGULATED UNLESS THEY MUST BE CAPITALISM MEANS UNREGULATED MARKETS INDUSTRIAL INPUTS & OUTPUTS OF ECONOMY ARE NOT REGULATED UNLESS THEY NEED TO BE NOTE: MARKETS CANNOT ALLOCATE CAPITAL EFFICIENTLY IF SYSTEMIC RISKS ARE NOT COSTED PROPERLY
Friday, October 23, 2009
3
REGULATORY CHOICES
“THOU SHALT NOT” “IF....THEN” “OFFSETS PURCHASE” THROUGH MARKET MECHANISMS BEHAVIORAL ECONOMICS
Friday, October 23, 2009
4
MINOR PROBLEMS
REGULATIONS ARE ALMOST ALWAYS ‘AFTER-THE-FACT’ OFTEN REGULATIONS ARE MUCH TOO LATE - AFTER THE HORSE IS ‘OUT OF THE BARN’ REGULATIONS MUST BE FOUGHT FOR AGAINST AN EXPECTATION OF ‘NO REGULATIONS’ TYPICALLY, REGULATIONS ENACTED AMELIORATE THE SITUATION ONLY FOR AWHILE, AS THEY ARE ‘GAMED’
Friday, October 23, 2009
5
MAJOR PROBLEM REGULATIONS OFTEN DO NOT ADDRESS SYSTEMIC RISK IN MARKETS EXAMPLE: SYSTEMIC RISK IN CDO’S (COLLATERALIZED DEBT OBLIGATIONS) WAS NEITHER COSTED NOR REGULATED. RESULT: TAXPAYERS ASKED TO PUT-UP RESERVES OF $17,500 BILLION IN 2008/09 MANY EXAMPLES: ANTHROPOGENIC CARBON EMISSIONS TREATING EARTH’S ATMOSPHERE AS FREE COMMONS. RESULT: IF 350 PPM CO2 - $20,000 BILLION COST
Friday, October 23, 2009
6
REGULATORY STRATEGY PRESUMPTION: ALL INDUSTRIAL INPUTS & OUTPUTS MUST BE REGULATED. Q: HOW? APPLY BEHAVIORAL ECONOMICS WIDELY - AIM FOR MARKET INCENTIVES VS. “THOU SHALT NOT” TRIAGE: FOCUS ON INPUTS & OUTPUTS OF HIGHEST VALUE FOR ECONOMIC GROWTH USE ANALYSIS TO SET ECONOMIC COST ADJUSTMENT SURCHARGES FOR KEY INDUSTRIAL INPUTS/OUTPUTS
Friday, October 23, 2009
7
BEHAVIORAL ECONOMICS
BUILD ECONOMIC COST OF SYSTEMIC RISK INTO COST OF INDUSTRIAL INPUTS AND OUTPUTS THIS ENABLES BETTER DATA FOR MARKET TRANSACTIONS - POTENTIAL FOR BETTER CAPITAL ALLOCATION DECISIONS (ECONOMIC ROIC METRIC) NOTE: MARKETS WILL ALWAYS DISCOUNT COST OF SYSTEMIC RISKS - REGULATIONS ARE MOST EFFICIENT MEANS TO ADD THIS DATA TO MARKET TRANSACTIONS
Friday, October 23, 2009
8
SYSTEMIC RISK EXAMPLES APPLY A FOSSIL FUEL INPUT FEE TO ALL SOURCES OF CARBON INPUTS APPLY COST SURCHARGE/METRIC TON FOR ALL CO2 EMISSIONS - NO EXCEPTIONS APPLY WASTE STREAM FEE FOR ALL WASTE STREAMS SOLID WASTE, LIQUID WASTE, AIR EMISSIONS APPLY A WATER USE FEE FOR ALL FRESHWATER WITHDRAWALS FROM ALL SOURCES
Friday, October 23, 2009
9
ADJUSTMENTS IMPORTS - WILL NEED TO ADD ECONOMIC COST ADJUSTMENT SURCHARGE TO ALL IMPORTS. THIS FEE WILL BE A FACTOR GREATER THAN 1.00X DOMESTIC FEE ENFORCEMENT - SURCHARGE IS APPLIED UNIVERSALLY NO EXCEPTIONS. BURDEN IS ON FIRMS TO PROVE EXCEPTION CHEATERS: PAY FEES W/ PENALTIES; IF PUBLIC COMPANY, SUSPENSION OF MARKET TRADES FOR A TIME; IF PRIVATE, CANCELLATION OF CORPORATE CHARTER
Friday, October 23, 2009
10
GAPS & BLACK SWANS UNLIKELY TO CATCH ALL SYSTEMIC RISK DUE TO EMERGENCE & THE UNCALCUABILITY OF RARE EVENTS NEED TO ESTABLISH RAPID RESPONSE REGULATORY CAPABILITY - CATCH EMERGING RISK BEFORE IT REACHES A CRITICAL COLLAPSE STAGE. ASSUMPTION MUST BE PROACTIVE, ESTABLISH NEW REGS IN < 6 MOS DO THE BEST WE CAN DO TO AVOID THE WORST. IMPORTANT TO SUPPORT CAPITALISM OVER CORPORATISM; AVOID CORPORATE WELFARISM
Friday, October 23, 2009
11
CAPITAL MARKETS RESEARCH
LYLE BRECHT 410.963.8680 [email protected] Expertise: identifying & developing means for managing systemic risk for national security & sustainable economic growth
Friday, October 23, 2009
12
Friday, October 23, 2009
1
PRESUMPTIONS
SUSTAINABLE ECONOMIC GROWTH REQUIRES TECHNOLOGICAL INNOVATION AND LABOR BE APPLIED TO KEY SECTORS OF THE ECONOMY TASK OF MARKETS IS TO ALLOCATE CAPITAL TO MOST PRODUCTIVE PARTS OF THE ECONOMY MARKET TRANSACTIONS REQUIRE ECONOMIC INFORMATION TO ADOPT TECHNOLOGICAL INNOVATIONS & REALLOCATE LABOR TO MORE PRODUCTIVE USES
Friday, October 23, 2009
2
PRESUMPTIVE FALLACIES
MARKETS ARE ‘RATIONAL’ - MARKET TRANSACTIONS ARE NOT REGULATED UNLESS THEY MUST BE CAPITALISM MEANS UNREGULATED MARKETS INDUSTRIAL INPUTS & OUTPUTS OF ECONOMY ARE NOT REGULATED UNLESS THEY NEED TO BE NOTE: MARKETS CANNOT ALLOCATE CAPITAL EFFICIENTLY IF SYSTEMIC RISKS ARE NOT COSTED PROPERLY
Friday, October 23, 2009
3
REGULATORY CHOICES
“THOU SHALT NOT” “IF....THEN” “OFFSETS PURCHASE” THROUGH MARKET MECHANISMS BEHAVIORAL ECONOMICS
Friday, October 23, 2009
4
MINOR PROBLEMS
REGULATIONS ARE ALMOST ALWAYS ‘AFTER-THE-FACT’ OFTEN REGULATIONS ARE MUCH TOO LATE - AFTER THE HORSE IS ‘OUT OF THE BARN’ REGULATIONS MUST BE FOUGHT FOR AGAINST AN EXPECTATION OF ‘NO REGULATIONS’ TYPICALLY, REGULATIONS ENACTED AMELIORATE THE SITUATION ONLY FOR AWHILE, AS THEY ARE ‘GAMED’
Friday, October 23, 2009
5
MAJOR PROBLEM REGULATIONS OFTEN DO NOT ADDRESS SYSTEMIC RISK IN MARKETS EXAMPLE: SYSTEMIC RISK IN CDO’S (COLLATERALIZED DEBT OBLIGATIONS) WAS NEITHER COSTED NOR REGULATED. RESULT: TAXPAYERS ASKED TO PUT-UP RESERVES OF $17,500 BILLION IN 2008/09 MANY EXAMPLES: ANTHROPOGENIC CARBON EMISSIONS TREATING EARTH’S ATMOSPHERE AS FREE COMMONS. RESULT: IF 350 PPM CO2 - $20,000 BILLION COST
Friday, October 23, 2009
6
REGULATORY STRATEGY PRESUMPTION: ALL INDUSTRIAL INPUTS & OUTPUTS MUST BE REGULATED. Q: HOW? APPLY BEHAVIORAL ECONOMICS WIDELY - AIM FOR MARKET INCENTIVES VS. “THOU SHALT NOT” TRIAGE: FOCUS ON INPUTS & OUTPUTS OF HIGHEST VALUE FOR ECONOMIC GROWTH USE ANALYSIS TO SET ECONOMIC COST ADJUSTMENT SURCHARGES FOR KEY INDUSTRIAL INPUTS/OUTPUTS
Friday, October 23, 2009
7
BEHAVIORAL ECONOMICS
BUILD ECONOMIC COST OF SYSTEMIC RISK INTO COST OF INDUSTRIAL INPUTS AND OUTPUTS THIS ENABLES BETTER DATA FOR MARKET TRANSACTIONS - POTENTIAL FOR BETTER CAPITAL ALLOCATION DECISIONS (ECONOMIC ROIC METRIC) NOTE: MARKETS WILL ALWAYS DISCOUNT COST OF SYSTEMIC RISKS - REGULATIONS ARE MOST EFFICIENT MEANS TO ADD THIS DATA TO MARKET TRANSACTIONS
Friday, October 23, 2009
8
SYSTEMIC RISK EXAMPLES APPLY A FOSSIL FUEL INPUT FEE TO ALL SOURCES OF CARBON INPUTS APPLY COST SURCHARGE/METRIC TON FOR ALL CO2 EMISSIONS - NO EXCEPTIONS APPLY WASTE STREAM FEE FOR ALL WASTE STREAMS SOLID WASTE, LIQUID WASTE, AIR EMISSIONS APPLY A WATER USE FEE FOR ALL FRESHWATER WITHDRAWALS FROM ALL SOURCES
Friday, October 23, 2009
9
ADJUSTMENTS IMPORTS - WILL NEED TO ADD ECONOMIC COST ADJUSTMENT SURCHARGE TO ALL IMPORTS. THIS FEE WILL BE A FACTOR GREATER THAN 1.00X DOMESTIC FEE ENFORCEMENT - SURCHARGE IS APPLIED UNIVERSALLY NO EXCEPTIONS. BURDEN IS ON FIRMS TO PROVE EXCEPTION CHEATERS: PAY FEES W/ PENALTIES; IF PUBLIC COMPANY, SUSPENSION OF MARKET TRADES FOR A TIME; IF PRIVATE, CANCELLATION OF CORPORATE CHARTER
Friday, October 23, 2009
10
GAPS & BLACK SWANS UNLIKELY TO CATCH ALL SYSTEMIC RISK DUE TO EMERGENCE & THE UNCALCUABILITY OF RARE EVENTS NEED TO ESTABLISH RAPID RESPONSE REGULATORY CAPABILITY - CATCH EMERGING RISK BEFORE IT REACHES A CRITICAL COLLAPSE STAGE. ASSUMPTION MUST BE PROACTIVE, ESTABLISH NEW REGS IN < 6 MOS DO THE BEST WE CAN DO TO AVOID THE WORST. IMPORTANT TO SUPPORT CAPITALISM OVER CORPORATISM; AVOID CORPORATE WELFARISM
Friday, October 23, 2009
11
CAPITAL MARKETS RESEARCH
LYLE BRECHT 410.963.8680 [email protected] Expertise: identifying & developing means for managing systemic risk for national security & sustainable economic growth
Friday, October 23, 2009
12
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