Rules of the game: book review

In Trading & Exchanges: Market Microstructure for Practitioners, SEC Chief Economist Larry Harris has written a must-read for anyone interested in the good, the bad, and the ugly of securities trading.Securities ; Stock market

Financial regulation : changing the rules of the game

This paper is a brief history of financial regulation. The removal and relaxation of controls on credit and interest rates in the 1980s and the growing emphasis on prudential controls is highlighted. Three criteria for evaluating financial regulation and structure are discussed: (1) stability, (2) efficiency, and (3) fairness. As a result of massive losses suffered by financial institutions, stability is a significant concern. It can be enhanced by increasing capital requirements and strengthening financial supervision. In developing countries there is growing concentration and a spread of universal banking, suggesting economies of both scale and scope. Available evidence suggests that concentrated banking systems tend to have lower margins and operating costs as well as higher profits. However, large banks tend to be inefficient. Their size is the result of controls and restrictions on competition and entry rather than superior efficiency. Protecting users of financial systems from abusive behavior by the financial institutions, creating equality in the competition between banking institutions, and tackling the problems caused by potential conflicts of interest is the"fairness"issue. There are tradeoffs between these three criteria for evaluating financial regulation and structure. The answers must be sought on a country-by-country basis.Environmental Economics&Policies,Insurance&Risk Mitigation,Financial Crisis Management&Restructuring,Banks&Banking Reform,Financial Intermediation

The Rules of the Game and the Morality of Efficient Breach

Moralists have long criticized the theory of efficient breach for its advocacy of promise breaking. But a fully developed theory of efficient breach has an internal morality of its own. It argues that sophisticated parties contract for efficient breach, which in the long run maximizes everyone’s welfare. And the theory marks some breaches—those that are opportunistic, obstructive, or otherwise inefficient—as wrongs that the law should deter, as transgressions that should not be priced but punished. That internal morality, however, does not excuse the theory from moral scrutiny. An extended comparison to Jean Renoir’s 1939 film, La Règle du Jeu (“The Rules of the Game”), illustrates what more sophisticated moral criticisms of the theory might look like. Renoir’s film depicts a society in which marital infidelity is a transgression that is tolerated, but only when done according to society’s rules. Renoir’s attitude toward that society suggests that moral critics of the efficient breach theory should focus not on its celebration of efficient breach, but on the value of the sort of moral community it imagines and on the theory’s effect on parties who are not playing the efficient breach game, whether because they do not understand its rules or because they seek a different type of obligation. The comparison to the film also highlights the theory’s own narrative elements, which both add to its persuasive power and, once identified, mark out its limits