FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Speech of Commissioner Bart Chilton before Americans for Financial Reform, Washington, DC
May 9, 2012
Introduction
Thank you for the introduction. I appreciate the opportunity to be with you today to discuss cost/benefit analysis (CBAs). As we know, this has been the matter of lawsuits and countless meetings in the wake of the passage of the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank. It is an important topic.
Load of Compromisin’
For me, most things that are resolved in this town result from an appropriate equilibrium. The truth or answer isn’t found on the outskirts of issues; they reside on the inside, in the medium. Most things I’ve worked upon or have seen worked upon seem to resolve themselves better when there is cooperation and compromise. That usually means some level of concession from all parties. When something is approved and everyone is grumbling a bit, that typically indicates it is legitimately worthy, in general. At least, that is what I’ve found.
The thing is: in order to reach an agreement, to reach that balance, sometimes it is sort of like that oldRhinestone Cowboy lyric, “There’ll be a load of compromisin’ on the road to my horizon.” For those of you who were too young, or don’t recall the song, made famous by country singer Glen Campbell, it is your loss. It was a huge hit. By the way, I saw a neat tee shirt last weekend. On it was written, “I’m old, but I got to see all the cool bands.” Nevertheless, for most things good to get done in this town, the fact of the matter is that there is a load of compromisin’ on the road to that horizon.
The D.C. Quadrakill
My experience, however, is once upon a time in a faraway land when and where people actually wanted to get some things done. There is a contingent now that simply wishes to take the Nancy Reagan approach to a lot of things and “Just say no.” (By the way, one is getting old when a lot of your references seem like they need references, or foot notes). Not gonna do it on that one. She was a great First Lady. If you don’t know “Just say no,” that’s why we have Google. Nowadays, there are a lot of people who just say “no” to a lot of things. There is no load of compromisin’ going on. There is no compromisin’ period. And, that’s why precious little legislation is coming from the Hill these days and why frustration with Washington is rampant.
I do have a point. We are working toward cost/benefit analysis. Hang on my brothers and sisters. There is a little-articulated Washington play book section. I call it the D.C. Quadrakill. It isn’t an innovative thing, and it is a tried and true strategy, for sure. First, if you don’t like a bill, amendment or provision thereof, you try to defeat it with a vote. Just say, then vote, no (or nay, or whatever). If that fails, go to stage two. You can try to defund it through the appropriations process. If that doesn’t work, there is stage three. This is where you can try to stop it, change it or delay it through the regulatory rulemaking process. If all of those things fail, you can go to DEFCON four: litigation. That’s the D.C. Quadrakill: 1. kill bill; 2. defund it; 3. regulate it; and, 4. litigate it.
There is no shame in availing yourself of this Quadrakill strategy, although not everyone can do the full meal Quadrakill deal. Sure people can lobby their Representatives and Senators regarding voting for, or funding of, some legislation. Maybe they will get some gallery chamber passes, too. Perhaps they will have a quick photo op. That stuff takes place all the time. But the thing is: the other two stages of the Quadrakill—regulate and litigate—those are for serious societies—the class of folks who have some buckaroos. No lobbyist wants a tour of the CFTC or a photo with a Commissioner. It is all work. And as far as litigation, watch out. That’s long, laborious and lavish—only those with the big bucks can do stage four Quadrakill: litigation.
This brings me to my point, and I do have one, despite those that questioned it. The thing is: we are seeing a lot of stage four Quadrakill dialogue and action out there. There is more trash talk and more action regarding litigation related to financial regulation than ever before. Frankly, it has become an unprecedented problem and a dilemma for regulators. Unfortunately, the thing is: that is part of the purpose of those that talk about or live to litigate.
More Perfect Regulation
I think we all need to take a step back and think about Quadrakill stage four a little more. Let’s take a breath and think thoughtfully, and a little more calmly than seems to me to have been done in the last several months. This event is the perfect venue to do just that.
In the preamble to the Constitution of the United States, there is this wonderful aspirational language:
“We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.”
“In order to form a more perfect union.” Those words, “in order to”—they meant that our forefathers were working toward, hoping, aspiring, to form a more perfect union. It wasn’t perfect, and it might not reach perfection, but they were trying to get there. Here’s something to think about: those wonderful “planks” toward making that “more perfect union”—establishing justice, insuring domestic tranquility, promoting the general welfare—each one of those distinct factors didn’t in and of themselves create “The More Perfect Union.” Rather, each facet was a building block that the Founding Fathers intended to use to “get there,” to get to that “More Perfect Union.” In other words, “providing for the common defense,” wasn’t the be all and end all, but instead it was one of the important pieces used to get to the ultimate goal: a more perfect union.
In a similar approach, cost/benefit analyses in regulatory rulemaking are analogous to those discrete building block factors in the Constitution’s preamble. The thing is: a CBA is not the ultimate goal of rulemaking, although if you listen to some you might think it so. A CBA is an important piece of reaching the ultimate goal: a “more perfect regulation.” Like the framers of our Constitution, regulators aspire to reach objectives that protect the common weal. That’s our job. In the recent past, however, our jobs have been made significantly more difficult by a contortion. The thing is: we have seen an obnoxious bastardization of the conduct and use of CBAs in regulatory rulemaking.
This by no means is a new phenomenon. It isn’t a paranormal event. It has cropped up over the years, time and again, as a convenient tool to scuttle regulatory initiatives. Its’ use at this moment in history is, however, particularly rampant and greatly galling, given the focus of the regulations that are being decelerated and the harm that was caused to the public as a result of the economic crisis of 2008.
There are a bevy of bellowers booing about the “costs” of regulation. To those catcalls, I’d simply ask, what were the complete “costs” of the $414 billion taxpayer funded bailout? What are the “costs” of families losing their homes or of folks who can’t get a job? What are the “costs” to our economy of skyrocketing oil and gas prices, fueled by unbridled excessive speculative activity? What could be the added “costs” if regulations that Congress and the President have required are not put in place? My view is that there is not a single benefit to not doing these regulations, but there are unacceptable costs if we don’t go forward. Without these rules and regulations, there will be unacceptable costs to consumers, to businesses, to markets, to our economy and our country.
I wouldn’t go so far as paraphrasing Samuel Johnson and saying that litigation is the last refuge for scoundrels. But, the cost-benefit bellowers are openly trying to impose a discredited economic philosophy (that just happens to serve their financial interests) on regulators by beseeching the courts to adopt their extreme interpretation of our statutory duty to “consider” the costs and benefits of our regulations. This economic philosophy is, in short, that the financial markets work just fine on their own and there’s no need for regulators to ensure a minimum level of safety in these markets or a maximum level of speculation. The market can police itself, thank you very much. They want us to write off the 2008 financial crisis as an aberration and ignore countless reputable scholars who’ve found that the costs of opaque, unregulated derivatives markets are borne by the public. The truth is speculation without limits can fuel bubbles, and left unaccountable, the captains of finance may veer the economy into dangerous waters in search of bigger and riskier profits. In short, these bellowers want us to go beyond a “consideration” of costs and benefits to making their narrow conception of costs (discounting the social costs to the public of deregulation) and benefits (discounting the social benefits of the public of smart regulation), the crucible for judging all financial regulations.
The thing is: CBAs are being used, as I have said before, as a Sword of Damocles over regulatory agencies. We are virtually paralyzed by intimidation—or, indeed, the reality—of lawsuits brought (haphazardly, in my assessment) on the foundations of allegedly poor CBAs. When this occurs, regulators are sort of like those ghost hunters seen on television, looking for the scary litigation risk in every corner or closet. Did you hear what it said? “Wha, wha, wha.” We used an especially sensitive machine and after analysis in the lab, it appears that what the voice said was this: “If you regulate, we will litigate,” or perhaps “Ready for stage four Quadrakill.” Hmm, because I thought it just sounded like “Wha, wha, wha.” The thing is: either way, the rulemaking action slows, or slogs to a stop—and that is the clear-cut intent of some of those who threaten, design, and bring, these lawsuits.
Take this example: our position limits rule took up 81 pages in the Federal Register. Guest how much of the text was cost/benefit analysis? 19 pages. Yup, almost a fourth—and yet we’re still getting sued.
At the same time, American citizens and businesses and our economy endure more than is fair for a gallon of gas and the resultant impact on our Gross Domestic Product. We continue to see devalued homes, and continue to face higher-than-they-could-be unemployment rates. The potential for further damage due to a still yet unimplemented new regulatory regime is out there. How do we measure those harsh “costs?” If those costs are not more scary than the threat of litigation due to cost/benefit analysis, then regulators should seek a new line of work.
So today, I’m suggesting that CBAs be expanded to include not just the quantitative, quantifiable elements of a rule but its qualitative aspects as well. In other words the social costs and benefits need to be taken into account. I by no means want to slow the rulemaking process down in any way but I really believe some of the most important cost-benefit effects of rules go beyond P & L statements, so I’ll ask my colleagues to consider painting a more complete picture of what—without these rules—the societal cost might be. Memories fade with time and we need to be mindful of the costs of not doing these things right in the context of the colossal calamity of late ’08.
The thing is: it’s time to put some sense (and cents) back into CBAs, and to criticisms of rules. By that I mean, I’d like to see reasonable, accurate, and well-supported analyses, and those who criticize our CBAs should berequired to provide, not “masked data,” with no clear or hard figures, but real, verifiable dollars and cents to rebut our analyses. If we are all held to the same reasonable standards, not just trying to create ghastly ghosts in an effort to slow the process down, CBAs might actually be useful as they were intended: as a factor in forming “more perfect regulations.”
Conclusion
Look, I understand that people have to represent themselves and take advantage of the opportunities which exist to make their case, on the Hill, in the agencies, or in court. That doesn’t mean I have to agree with them. It seems to me this has gone too far. They may mean well. I’m just not sure they are well.
The thing is: we had, and have, an economic mess created by lax or non-existent regulations in our financial markets. That isn’t a joke or a scary story for millions of people. It is an unfortunate and seemingly unforgiving reality. We need to do all we can to appropriately implement the Dodd-Frank rules to not only protect consumers, businesses, and markets alike, but to fuel inject the economic engine of our democracy. This new law—and the regulations that go with it if done properly—are the blueprints for how our economy can thrive. If we all work together as honest partners in the rulemaking process, I am confident we not only can, but will move our nation forward.
Thank you.
