Richard Field: Regulators as Source and Perpetuator of Financial Instability

rcwhalen's picture

Below is a comment from my friend Richard Field of TYI, LLC, "a consulting and technology firm focused on the Future of Finance."  Richard is an expert on structured finance and understand the market at the sub-atomic, loan level. He correctly points out that regulators are the problem, not the solution.  Chris

Q: Is it fair to say that financial regulators are both a source and perpetuator of financial instability?


Financial regulators have a unique position.  They are the only financial market participant who can see the current asset and liability level data at any financial institution.

Please reread the preceding sentence as it is the key to understanding why financial regulators are both a source of and perpetuator of financial instability.

No other financial market participant can see current asset and liability level data at a financial institution or in a structured finance security.  All other financial market participants receive periodic consolidated financial statements.  The only exception is management which can see the current asset and liability level data for the financial institution they run and the structured finance securities they service.

Why is the regulators' monopoly on current asset and liability level data important?

Our financial markets are based on the idea of combining the notion of disclosure with caveat emptor [buyer beware].  As the FDR Framework puts its,

    * Governments are responsible for disclosure.  They must ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner;

    * Market participants are responsible for doing their homework [trust, but verify] using the disclosed information.

With its monopoly on information, regulators interfere with the functioning of the financial markets when it comes to financial institutions.  The monopoly prevents market participants from being able to do their homework.

How does this monopoly make regulators a perpetuator of financial instability?

As discussed in the post, Bank Capital and Bank Runs, banks are unstable because depositors and investors have no way of knowing if a bank is solvent or not.  If doubt about a bank's solvency is raised, the best course of action for the depositor and investor is to withdraw their funds as quickly as possible - this is referred to as a run on the bank.

To limit bank runs, the US government adopted deposit insurance.  This eliminated the solvency issue for retail customers [the depositors], but not for wholesale customers [investors, other financial institutions]. 

The Financial Crisis Inquiry Commission documented how wholesale customers withdrew their funds because they could not determine if a bank was solvent or not.  The reason wholesale customers could not determine if a bank was solvent is the financial regulators' monopoly on current asset and liability level data prevented them from having the data needed to do this analysis.

The monopoly effectively perpetuates financial instability.

How does this monopoly make regulators a source of financial instability?

It prevents market participants from doing their homework and properly pricing the risk of financial institutions and structured finance products.  As a result, market participants must rely on the financial regulators to do the analytical work for them and be right in their analysis. If the financial regulators are wrong, the market is over-invested in risky assets.

There is a long history of financial regulators not being right in their analysis and spotting problems before they threaten to become systemic issues.  We had the U.S. Savings & Loan Crisis, the Less Developed Country Debt debacle, Long Term Capital Management meltdown, and of course the sub-prime wipeout. 

Please note, these episodes of financial instability occurred when the monetary authority and supervisory authority were combined (the Fed) or when they were separate (the BoE and FSA).

What is the solution to prevent the financial regulators from being a source and perpetuator of financial instability?

The simple solution proposed under the FDR Framework is to provide all market participants with the current asset and liability level data so they can do their homework. [please see the following article for a discussion on how this could be effectively and efficiently done using the shadow banking system as an example.]

The goal is to get a stable banking system without the economic distortions caused by the regulators' information monopoly.  Markets, and the global banking system is a market, function best when ALL market participants, including regulators, have access to the same useful, relevant information in an appropriate, timely manner.

As has been said previously on this blog, by providing this data to the other market participants, the global regulators get to piggyback off of their analysis.  For example, they can compare their analysis to JP Morgan's.  If the results differ, it would be informative for the regulators to understand why.

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blindman's picture

there is no regulator, blame the regulator !

no one is to blame or responsible for anything.

long live the regulator.  !! 

kill the regulator !!.....

buy !!!!!

sell !!!!!

and don't forget to vote......

for me  !!!


proLiberty's picture


This is the Austrian "information problem" in a slightly different form, that being on a basis of the volume of information and its timeliness.   The central planners who, thanks to Dodd-Frank, can declare a financial institution insolvent without any prior notice to its management or the public, has access to information the market is forbidden to have.  Yet I imagine that should someone leak this same information to some investor, that would be a crime! 

This reminds me of a physician's axiom, "Obstruction begets infection".  In this case, the regulatory bureaucracy obstructs the flow of information, and the result is an infection or dysfunction of the investment environment.


FreedomGuy's picture

Well thought. Well said. Austrians rock.

jimijon's picture

This is why I am working on my thesis of "Socialocracy." In fact this will be a new source for my next article. On my blog at I started my thoughts on a new form of governance only possible because of the Internet. Why shouldn't governance change and old forms get obsoleted? 

Regulation is the prime target of Socialocracy. If the agencies were disbanded and instead the information was public so that all the savants, say those here at ZH and in particular the Tylers, it would be far easier to uncover the regulatory issues. In other words, publish the rules clearly and let the information out. Then let the people find the regulatory issues and send it to the judicial system.

This concept would be a wooden dagger into the dark heart of the currently corrupted regulatory system.'s picture

These "financial services groups" a.k.a. fraudsters have financed the repeal of the regulations safeguarding public and taxpayers. They said they were going to "supervise themselves" and then melted down the economy, got bailed out, collected bonuses and now are hard at obstructing justice. Our very government is complicit, it is evident in the way SEC and Justice Department are p us sy-footing around the fat cats. The very fabric of our governance has been destroyed and more, bigger financial disasters await in the wings, unless we see to it that the justice is served.  "I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country." - Thomas Jefferson once said. How fitting, how prophetic! How alarming that we failed to accomplish that! At we organize a class action against the banks, the ratings agencies and other financial institutions involved in staging the colossal securitization fraud and subsequently crashing the economy and resulting in over $5 Trillion in asset losses in the US alone. We realize that our own government is effectively a captured entity, so no criminal indictments will be forthcoming. But WE THE PEOPLE will hold the fraudsters accountable. United we stand.

Zero Govt's picture


I agree with your friend, Richards, assessment regards Regulators having the only market access to financial information. His solution however that all-comers should have access "under the FDR Framework"(ie. a regulated solution) is not much better however. 

Haven't we already got audited balance sheets that are supposed to inform and make transparent to market participants the financial state of a company! How have balance sheets worked? How have the Auditors done?

You know the answer. Absolute crap. So you want another regulation on top of auditing to do the same job of warning??

The answer to a company that is heading toward bankruptcy is there in no absolute answer or warning system. "Shit Happens" is not just a saying but a philosophical working concept. If a company is bankrupt Directors try to resolve it either honestly through actions (cost savings, margins etc) increasing capital (loans, taking in shareholders etc). If the Directors are frauds or running a ponzi scheme they hide the financial info and there is nothing, except internal company whistleblowers, that can/will flag early impending danger.

Your extra regulation will make no difference whatsoever except just add extra red tape just as the sham of auditing changes anything has also failed in every situation because the info will be hidden from auditors and regulators (as the Big Banks are doing right now).

Our bodies are designed to take damage. The proof is they are set up to repair. The same works in the market, you have to be prepared for mistakes and things to go bad. There is no amount of band aids or cotton wool you can attach to the market system that will forewarn of bankruptcy because the Directors control the companies information flow. 

So if the information is bad, you ain't getting it. The regulator ain't getting it. The auditor ain't getting it. No amount of rules, Regs, by-laws or statutes is going to get it. Got it?

There's nothing you can do to stop shit happening. So forget about another regulation and forget auditing. They are both the same 'early warning' nonsense and have already failed many times over. Enuf already

Kina's picture

Systems are critically dependent on the quality of its policemen. Bent cops remove rule of law and transfer ownership of the system to their corrupting masters.

If the policemen fail the whole system ceases to exist and its new manifestation is as an asset of an elite.

The CFTC is obvious example of an entirely corrupt and captured regulator, where gross and blatant corruptions have occured for years and on a daily basis.


Because the policemen of systems are so critically important the punishment for deliberate failure and corruption should be much higher. Life imprisonment and death sentences should be available for cases where regulatory corruption puts the entire system and thus country at risk.

RockyRacoon's picture

No can do.  If all the info were made public it would show bank-wide insolvency.

Can't have that, now can we?

malek's picture

My thoughts exactly.

Well, we can put this in the basket "future projects", to implement after the currency flush.

disabledvet's picture

it sure seems like Buffet had a pretty good view.  i really believe what happened in 2008 was a textbook "eyes wide shut" moment.  i used to believe in a lot of these conspriracies--but then i saw some extraordinary forms of stupidy which i even was able to get them to document on themselves.  (it was hightly entertaining until...)  i then realized "so much can be xplained by the theory of 'you can't fix stupid.'"  look at fukushima right?

blindman's picture

it should be clear at this point that the "regulators" are appointed

by the regulated to take the heat for their rabid and rampant, melt down style

pace of infinite stealing in broad daylight.  exponential stealing.  we are to

make believe for the sake of this gentleman's musings that there is a

regulatory authority of some kind,  somewhere?  unnamed, un specified.

a generic and disembodied regulator.  the kind madoff bamboozled and payed off?

the kind that goes from goldman sacks to the executive branch, the treasury, the sec.

wasn't joseph kennedy, one huge wall street crook, made the head of the sec...

because he was known to be a wall st. crook. ? 

we have become irresponsible.  no one is at fault for anything they do.

it is always someone else's fault that you got caught stealing money, lying

about a security, commiting fraud, being a merchant of death.  some one else...

a regulator, is to blame.  always, amen.

Bearster's picture

"...when you see that in order to produce, you need to obtain permission from men who produce may know that your society is doomed." -- Ayn Rand, 1957, the Meaning of Money speech in Atlas Shrugged

This describes the regulator perfectly.  Good thing regulation is enforced at gunpoint!

Coldfire's picture

Regulators are the Potemkin villagers of the Ponzi state.

blindman's picture

and if you can just remove all regulations and law

there will be no more transgression or crime.  so simple.

i always thought that it is the security systems at the

banks that are responsible for bank robberies.  if they

would just leave the vault open and grant free access to the public

there would be no robberies.  ( empty vault ? ).

and the best way to rob a bank is to own one.  seems we are

backsliding here.   progress, one step forward, two steps back.

it happens more than we like to admit.

ps. if by regulator they refer to the fed and the money sytem

then i agree ..,

"Is it fair to say that financial regulators are both a source and perpetuator

 of financial instability? Yes."

and would add debt slavery.

ps. financial instability is the essence of our fiat money system.  it is the

engine of systemic tumorous growth.  bubble economics.  don't blame

the regulators for the tumors,  they are just making believe they are

doing a job that the system forbids and would perish if it allowed.  this article

is poop.  even so ,  i mostly enjoy c.whalen otherwise.  perhaps he was

paid to be involved with this mess. 

end the fed.

Hulk's picture

No shit Chris, old news...

tony bonn's picture

this has to be the absolute worst farticle i have read here in months....

the regulators may be a cause for a lot of problems - some of which i can speak from close hand knowledge - but regulators are not the cause of a monopoly on information....

and disseminating more information will not ameliorate the problems this country experiences (although it may not hurt).

this inane interview must have leaked out of fukashima reactor 1....

FreedomGuy's picture

It's not just the information. When you remove risk, e.g. government insured deposits you remove the need to do homework or make good decisions. Any one bank looks as good as another. Weak players stay in the game.

Additionally, it encourages bad behavior because the government removes consequences from bad decisions.

Last, it eliminates innovation because all regulation is based on what used to be in any industry. It is not and cannot be forward thinking. Do you think government regulators knew anything about drilling for 5000 feet underwater before industry tried it? They did not...and still really don't. They will tend to just shut down all things they don't understand because there is no visible risk to that choice.

AnAnonymous's picture

Depiction of the failure of the concept of responsibility.

Shifting down on someone else the bad consequences of an action is old and a entire part of capitalism.

Capitalism includes the optimization of profits.

Profits are revenues minus expenditures. Optimization wants that one strive to increase as much as possible revenues and lowering as much as possible expenditures.

Expenditures often includes the bad consequences of an action.

In this context, weak players appear to be any player who performs less efficiently in optimization of profits.

The system promotes the most proficient at optimizing the profits.

Example with the nuclear power plant:

-less efficient behaviour: fully secured power plant

-more efficient behaviour: insecured power plant

-most efficient behaviour: insecured power plant passing down the costs of an emergency failure onto someone else.

This is what this system comes up. The system retains actors that are able to optimize profits and it works both ways, increasing revenues and decreasing costs.

It has little to do with regulation. It happens on a upper level than regulation.

FreedomGuy's picture

It actually is not any specific part of capitalism. Capitalism is actually nothing more than voluntary exchange with no coercion. By your rationale the cheapest worst products would always win out. Turns out people eventually value shop. Japanese and German cars are not the cheapest but they have a history of reliability and/or performance and people pay more, while similar American cars languished.

Capitalism when practiced has a strong element of liability. Those liabilities are often abrogated by government. If someone purposely built substandard products, including nuclear reactors then there would and should be penalties. However, is centrally managed, not free economies, government can give industries a pass on liability. No one went to jail for fraud or negligence in the financial meltdown we suffered. It started and ended with government policy but there were a lot of falsified loans and selling of products not even understood or rigorously constructed by the financial institutions themselves. No one has been prosecuted and not one wealthy salesman of the products has become destitute...but their customers have. When they failed, government intervened to protect bad behavior. It may be the same with the Japanese reactors.

Long term capitalism depends upon satisfied customers than cannot be coerced or fooled. Governments prefer to do both of those things. It's easier.

blindman's picture

"there is a sucker born every minute."

pt barnum

blindman's picture

@"They will tend to just shut down all things they don't understand because there is no visible risk to that choice."

like nuclear reactors on fault lines? 

FreedomGuy's picture

Actually, the answer to that is "Yes." However, they have to have the power to do it. I don't know Japan but those decisions tend to come directly from the elective body and not the regulators. It is similar here.

jfish's picture

hey, your style tags are really bleeding into the readable text on this post! just an fyi ...

calltoaccount's picture

the regulators should be arrested for willful failure to uphold their oaths. they are supposed to be working for the people but they're not.  they're working for the house.  

LowProfile's picture

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