Guest Post: Too Big To Understand

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

One thing that has undergone hyperinflation in recent years is the length of financial regulations:

Too Big To Understand

The Dodd-Frank regulatory hyperinflation crowds out those who cannot afford teams of legal counsel, compliance officers, and expansive litigation. Dodd-Frank creates new overheads which are no challenge for large hedge funds and megabanks armed with Fed liquidity, but a massive challenge for startups and smaller players with more limited resources.

As BusinessWeek noted in October:

The law requires Hedge Funds to register with the Securities and Exchange Commission, supply reams of sensitive data on trading positions, carefully screen potential investors, and hire compliance officer after compliance officer.

So, is this expansion in volume likely to improve financial stability? No — the big banks are bigger and more interconnected than ever, which was precisely the problem before 2008, and they are still speculating and arbitraging with very fragile strategies that can incur massive losses as MF Global’s breakdown and more recently the London Whale episode proves.

Andy Haldane laid out the problem perfectly in his recent paper The Dog and the Frisbee:

Catching a frisbee is difficult. Doing so successfully requires the catcher to weigh a complex array of physical and atmospheric factors, among them wind speed and frisbee rotation. Were a physicist to write down frisbee-catching as an optimal control problem, they would need to understand and apply Newton’s Law of Gravity.


Yet despite this complexity, catching a frisbee is remarkably common. Casual empiricism reveals that it is not an activity only undertaken by those with a Doctorate in physics. It is a task that an average dog can master. Indeed some, such as border collies, are better at frisbee-catching than humans.


So what is the secret of the dog’s success? The answer, as in many other areas of complex decision-making, is simple. Or rather, it is to keep it simple. For studies have shown that the
frisbee-catching dog follows the simplest of rules of thumb: run at a speed so that the angle of gaze to the frisbee remains roughly constant. Humans follow an identical rule of thumb.


Catching a crisis, like catching a frisbee, is difficult. Doing so requires the regulator to weigh a complex array of financial and psychological factors, among them innovation and risk appetite. Were an economist to write down crisis-catching as an optimal control problem, they would probably have to ask a physicist for help.


Yet despite this complexity, efforts to catch the crisis frisbee have continued to escalate. Casual empiricism reveals an ever-growing number of regulators, some with a Doctorate in physics. Ever-larger litters have not, however, obviously improved watchdogs’ frisbee-catching abilities. No regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight.


So what is the secret of the watchdogs’ failure? The answer is simple. Or rather, it is complexity.

Big, messy legislation leaves legal loopholes that clever and highly-paid lawyers and (non-) compliance officers can cut through. Bigger and more extensive regulation can make a system less well-regulated. I propose that this is what the big banks will use Dodd-Frank to accomplish.

I predict that the regulatory hyperinflation will make the financial industry and the wider economy much more fragile.

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hedgeless_horseman's picture



"Unfortunately, the locomotive is running in the opposite direction. The size of government is growing larger, not smaller. There are more people working for government than for all manufacturing companies in the private sector. There are more bank regulators than bankers, more farm-bureau workers than farmers, more welfare administrators than recipients. There are more citizens receiving government checks than there are paying income taxes."
-The Creature from Jekyll Island, Page 509.
Silver Bug's picture

Correct the point of making it so long is to deter people from actually reading it. Then they can slip in the nasty stuff. Corruption runs rampant.

XitSam's picture

A small government, with few and easy to understand laws presents no opportunity for corruption.

Cognitive Dissonance's picture

The corruption is in manipulating the (huge volume of) details.

CPL's picture

This is from wikipedia on the origins of the Thaler.  Notice any similarities to the current situation?  


Nearly identical in fact.


"The roots and development of the Thaler-sized silver coin date back to the mid-15th century. As the 15th century drew to a close the state of much of Europe's coinage was quite poor because of repeated debasement induced by the costs of continual warfare, and by the incessant centuries-long loss of silver and gold in indirect one-sided trades importing spicesand porcelain and silk and other fine cloths and exotic goods from India, Indonesia and the Far East. This continual debasement had reached a point that silver content in Groschen-type coins had dropped, in some cases, to less than five percent, making the coins of much less individual value than they had in the beginning."

jamezelle's picture

We had the smallest government the world had ever known. How did that work out for us?

Yen Cross's picture

Your presence is worthy of an up-vote... Ride well Hedgeless_ Horseman/

Jason T's picture

I'm with you Yen, hedgeless and the soup box guy are my 2 favorite ZH'ers.

El Diablo Rojo's picture

With you on the hedge.  He is actually the only one I follow.

Andrew Jackson epitaph's picture

OT but i didn't see that here

Publiée le 28 nov. 2012

On September 7, 2012 the Sanford C. Bernstein & Co. Center for Leadership and Ethics at Columbia Business School filmed an interactive debate entitled "Financial Innovation: A Risky Business?" The event brought together individuals with a breadth of experiences and viewpoints to explore questions around the promise and risks of innovation in financial services and the potential of financial innovations to advance the public good and goals. This project was completed in conjunction with the Fred Friendly Seminars at the Columbia University School of Journalism.

The speakers included David Abrams, Caroline Baum, Ed Conard, Wilson Ervin, Representative Barney Frank, Gary Gensler, Linda Gibbs, Robert Solow, Alicia Glen, Bruce Greenwald, Blythe Masters, Andrew Ross Sorkin, and Peter Stringham

Moderated by Professor Robert Jackson of Columbia Law School, the recipient of the 2012 Willis L.M. Reese Prize for Excellence in Teaching.

This discussion is part of the Individual, Business, and Society curriculum that uses a series of thought-provoking discussions to foster a community dialogue on tradeoffs, choices, and accountability in areas related to values-based leadership, corporate governance, and corporate social responsibility.

semperfi's picture

"When plunder becomes a way of life for a group of men, they create for themselves, in the course of time, a legal system that authorizes it, and a moral code that glorifies it."

-- Frederic Bastiat (political economist, 1850)

LongSoupLine's picture

over 2,000 pages in order to camouflage the fucking criminal intent of the document...wealth transfer to the fucking TBTF's.


Fuck you Congress and all your fucking corporate masters.  Treasonous fucking hot shit and die.

fuu's picture

Please keep in mind it is the people on WIC/EBT/SNAP and SS/MC that are the issue. Banksters, politicians, and corporatists are just misunderstood.

Yen Cross's picture

"Long Soup Line" is the BEST!  I love his "in your face" reality!

fuu's picture

Sadly until Bruce Krasting and Charles Hugh-Smith weigh in on the merits of Long Soup Line I cannot form an opinion.

Yen Cross's picture

Bruce is a nice guy/ he just has to answer to his Minions... (serve his masters)

LongSoupLine's picture

Just call 'em the way I see 'em style is certainly not for everyone, but suspect I reflect the dark inner thoughts of many. Who fucking knows, maybe I'm just some pissed off asshole...being humble allows me to keep my edge, not to mention admit I don't always get it rights in my rants.

fuu's picture

You're cool, it was a dig on Bruce and Charles.

kliguy38's picture

I like the way you are able to summarize a complex issue and the descrive the essence of its purpose....up arrow to you again.

Yen Cross's picture

Good job AZIZ/ ;-) Keep up the good work! only got 20 pips on the risk* sell trade.

Got 60 pips on that eur/aud risk off idea, I mentioned before the Asian open on Sunday/Monday ;-)

williambanzai7's picture

You take a simple sentence like the Volcker Rule and turn it into reams of boilerplate that is at the mercy of back room lobbyist shenanigans.

This is the Harvard-Soviet method.

Yen Cross's picture

I just went into V-fib ----

Madcow's picture

what good are new laws and regulations - when the old laws and regulations weren't being enforced in the first place?


this is like signing up for a new gym membership - when you already belong to 3 gyms but never bother to go 

akak's picture

But it FEELS so good --- and it's for the children!

A Lunatic's picture

They are on the books for selective enforcement in order to punish those who refuse to play by the (unspoken) rules........

Silvertrader's picture

Hyperinflation is coming and that is why i buy goldcoins and trade gold using cfd's

Dr. Engali's picture

The more corrupt the state the more it legislates.

~ Tacitus ~

Madcow's picture

Clearly, "regulations" are no longer here to be used as a shield to protect the innocent - 

"Regulations" are being used as a sword - to make it easier for criminals to rack up massive losses and force those losses onto the backs of taxpayers - 



WallowaMountainMan's picture

only a fool believes that legislation is written by the legislators.