thinking strategically about regulations
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MARKET INCENTIVES
THINKING STRATEGICALLY ABOUT REGULATIONS
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PRESUMPTIONS
SUSTAINABLE ECONOMIC GROWTH REQUIRESTECHNOLOGICAL INNOVATION AND LABOR BE APPLIED TO
KEY SECTORS OF THE ECONOMY
TASK OF MARKETS IS TO ALLOCATE CAPITAL TO MOSTPRODUCTIVE PARTS OF THE ECONOMY
MARKET TRANSACTIONS REQUIRE ECONOMICINFORMATION TO ADOPT TECHNOLOGICAL INNOVATIONS& REALLOCATE LABOR TO MORE PRODUCTIVE USES
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PRESUMPTIVE FALLACIES
MARKETS ARE RATIONAL - MARKET TRANSACTIONSARE NOT REGULATED UNLESS THEY MUST BE
CAPITALISM MEANS UNREGULATED MARKETS -INDUSTRIAL INPUTS & OUTPUTS OF ECONOMY ARE NOTREGULATED UNLESS THEY NEED TO BE
NOTE: MARKETS CANNOT ALLOCATE CAPITALEFFICIENTLY IF SYSTEMIC RISKS ARE NOT COSTEDPROPERLY
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REGULATORY CHOICES
THOU SHALT NOT
IF....THEN
OFFSETS PURCHASE THROUGH MARKET MECHANISMS
BEHAVIORAL ECONOMICS
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MINOR PROBLEMS
REGULATIONS ARE ALMOST ALWAYS AFTER-THE-FACT
OFTEN REGULATIONS ARE MUCH TOO LATE - AFTER THEHORSE IS OUT OF THE BARN
REGULATIONS MUST BE FOUGHT FOR AGAINST ANEXPECTATION OF NO REGULATIONS
TYPICALLY, REGULATIONS ENACTED AMELIORATE THESITUATION ONLY FOR AWHILE, AS THEY ARE GAMED
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MAJOR PROBLEM
REGULATIONS OFTEN DO NOT ADDRESS SYSTEMIC RISKIN MARKETS
EXAMPLE: SYSTEMIC RISK IN CDOS (COLLATERALIZEDDEBT OBLIGATIONS) WAS NEITHER COSTED NORREGULATED. RESULT: TAXPAYERS ASKED TO PUT-UPRESERVES OF $17,500 BILLION IN 2008/09
MANY EXAMPLES: ANTHROPOGENIC CARBON EMISSIONSTREATING EARTHS ATMOSPHERE AS FREE COMMONS.RESULT: IF 350 PPM CO2 - $20,000 BILLION COST
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REGULATORY STRATEGY
PRESUMPTION: ALL INDUSTRIAL INPUTS & OUTPUTSMUST BE REGULATED. Q: HOW?
APPLY BEHAVIORAL ECONOMICS WIDELY - AIM FORMARKET INCENTIVES VS. THOU SHALT NOT
TRIAGE: FOCUS ON INPUTS & OUTPUTS OF HIGHESTVALUE FOR ECONOMIC GROWTH
USE ANALYSIS TO SET ECONOMIC COST ADJUSTMENTSURCHARGES FOR KEY INDUSTRIAL INPUTS/OUTPUTS
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BEHAVIORAL ECONOMICS
BUILD ECONOMIC COST OF SYSTEMIC RISK INTO COST OFINDUSTRIAL INPUTS AND OUTPUTS
THIS ENABLES BETTER DATA FOR MARKETTRANSACTIONS - POTENTIAL FOR BETTER CAPITALALLOCATION DECISIONS (ECONOMIC ROIC METRIC)
NOTE: MARKETS WILL ALWAYS DISCOUNT COST OFSYSTEMIC RISKS - REGULATIONS ARE MOST EFFICIENTMEANS TO ADD THIS DATA TO MARKET TRANSACTIONS
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SYSTEMIC RISK EXAMPLES
APPLY A FOSSIL FUEL INPUT FEE TO ALL SOURCES OFCARBON INPUTS
APPLY COST SURCHARGE/METRIC TON FOR ALL CO2EMISSIONS - NO EXCEPTIONS
APPLY WASTE STREAM FEE FOR ALL WASTE STREAMS -SOLID WASTE, LIQUID WASTE, AIR EMISSIONS
APPLY A WATER USE FEE FOR ALL FRESHWATERWITHDRAWALS FROM ALL SOURCES
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ADJUSTMENTS
IMPORTS - WILL NEED TO ADD ECONOMIC COSTADJUSTMENT SURCHARGE TO ALL IMPORTS. THIS FEEWILL BE A FACTOR GREATER THAN 1.00X DOMESTIC FEE
ENFORCEMENT - SURCHARGE IS APPLIED UNIVERSALLY -NO EXCEPTIONS. BURDEN IS ON FIRMS TO PROVEEXCEPTION
CHEATERS: PAY FEES W/ PENALTIES; IF PUBLICCOMPANY, SUSPENSION OF MARKET TRADES FOR ATIME; IF PRIVATE, CANCELLATION OF CORPORATECHARTER
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GAPS & BLACK SWANS
UNLIKELY TO CATCH ALL SYSTEMIC RISK DUE TOEMERGENCE & THE UNCALCUABILITY OF RARE EVENTS
NEED TO ESTABLISH RAPID RESPONSE REGULATORYCAPABILITY - CATCH EMERGING RISK BEFORE ITREACHES A CRITICAL COLLAPSE STAGE. ASSUMPTIONMUST BE PROACTIVE, ESTABLISH NEW REGS IN < 6 MOS
DO THE BEST WE CAN DO TO AVOID THE WORST.IMPORTANT TO SUPPORT CAPITALISM OVERCORPORATISM; AVOID CORPORATE WELFARISM
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CAPITAL MARKETS RESEARCH
LYLE BRECHT
410.963.8680
Expertise: identifying &
developing means for
managing systemic risk fornational security & sustainable
economic growth
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