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Thanks, Russ [Wermers] for that sort introduction.  Good morning.  I wish to start by thanking S.P. Kothari, the fantastic workers of the Division of Financial and Threat Evaluation, Lehigh College’s Middle for Monetary Providers, the College of Maryland’s Middle for Monetary Coverage, and the CFA Institute for all of their exhausting work in making this Seventh Annual Convention on Monetary Market Regulation so successful.  The subjects for dialogue are fascinating, and I recognize lecturers who undertake work that sheds mild on the problems that we take into consideration from a regulatory perspective.  Earlier than I start, I need to give my traditional disclaimer: the views I might be expressing in the present day are my very own, and don’t essentially characterize the views of the Fee or my fellow Commissioners.

At any time when I discuss to economists, since I can’t awe you with a elaborate equation, I’ve to start out with a nasty joke.  It’s a knock-knock joke, which is very exhausting to drag off when making an attempt to bodily distance.  “Knock, knock.”  “Who’s there?”  “Economist.”  “Economist who?” “I kin’ o’ missed you too!”  It’s a actually unhealthy joke, however I actually do miss having you all right here on the SEC in individual and hope that can quickly be a risk. 

I’ve simply began studying economist Dr. Thomas Sowell’s 2010 guide, Intellectuals and Society, which explores, amongst different issues, the affect that intellectuals have had all through historical past on coverage makers and the general public at massive.  Though I’m not very far into the guide, I do know that the affect has not all the time been optimistic.  In truth, typically it has been lethal.  All of us would do properly to ponder that message:  you, as intellectuals engaged in analysis right here on the Fee or in one in every of our nation’s universities, and I, as a shopper of the merchandise of your mind.    

On the threat of sounding like Peter Parker’s uncle, along with your nice energy comes nice accountability, and I might add that with nice accountability comes an excellent larger want for humility.  It’s a wholesome factor for an knowledgeable to acknowledge her limitations and to be snug with the truth that every of us really performs a really small half in any profitable endeavor and with the truth that everybody else additionally has one thing to contribute.  Freedom to suppose and act for oneself and to cooperate with others permits every individual to play her particular person small position.  As Dr. Sowell places it so properly in his guide:

[I]f nobody has even one p.c of all of the information in a society…then it’s essential that the opposite 99 p.c of information, scattered in small and individually unimpressive quantities among the many inhabitants at massive, be allowed the liberty for use in figuring out mutual lodging among the many folks themselves.[1]

Satirically, as our world grows ever extra difficult, such that the position of any single individual shrinks even additional into the background, the temptation to empower a tiny group of individuals to make choices on everybody else’s behalf has grown.  How can this be?  The reply is straightforward: unprecedented entry to data–data coupled with a staggering technological means to retailer, mine, and manipulate data to an extent inconceivable just a few years in the past.  Knowledge is the Siren’s track of intellectuals and regulators.  Thought employees’ imaginations go into overdrive conjuring up the chances of what large quantities of knowledge can empower them to do.  Mountains of knowledge can present the mental what occurred up to now, educate her classes from these previous occasions, and seemingly make it attainable for her to foretell and direct what’s going to occur sooner or later.  Intoxicating!

Gathering knowledge isn’t, nonetheless, a impartial act, nor are its makes use of and the motivations underlying these makes use of static and glued.  In different phrases, how a corporation initially meant or justified its knowledge assortment efforts is a flawed predictor of how that data in the end might be used.  As soon as people have a cause to gather knowledge, it’s naïve to imagine that they won’t discover further and modern makes use of for it.  As priorities and values shift, data gathered for one goal, in itself maybe unobjectionable and uncontroversial, may be exploited in methods by no means contemplated.  Troublingly, this may be achieved with out the considerate evaluation that ought to precede any mandated data assortment.

Let me provide an instance—this one from a bit exterior monetary regulation.  This data gathering effort veered dramatically from its meant goal.  Official England within the late 1520s and into the 1530s was preoccupied with what got here to be referred to as the “King’s Nice Matter,” which boiled all the way down to how might King Henry VIII legally justify eliminating his first spouse so he might marry his girlfriend.[2]  As a part of this effort, Henry commissioned John Leland, thought by many to be England’s biggest antiquarian, to look the dominion’s monasteries for historic manuscripts containing precedents that will legitimize his annulment from his first spouse, Catherine of Aragon, and his marriage to his second spouse, Anne Boleyn. 

Leland performed his seek for uncommon books with tireless diligence, and his findings have been meticulously memorialized and maintained in Oxford College’s Bodleian Library, the place they’re housed to this present day.  In case you are a sucker for royal romance or good library collections, to date so good.  What Leland couldn’t have recognized, nonetheless, was that Henry’s final break with Rome and his dissolution of England’s monasteries would breathe, if not new life, then a minimum of new goal into the information he had labored so exhausting to build up.  A lot to Leland’s horror, the information he had gathered so diligently to additional the king’s love life have been now a useful useful resource for these whose goal was nothing lower than the destruction and plunder of the collections he had recognized.  Because of Leland’s work, entire collections have been lowered to ash.  Some speculate that Leland’s personal psychological breakdown was partly attributable to his unintended position within the destruction of a lot he had held sacred and treasured.  A cautionary story, certainly.

As I’ve made clear elsewhere,[3] I oppose the Fee’s Consolidated Audit Path initiative, or CAT.  For many who are unfamiliar with this program, which was prompted by the 2010 “Flash Crash,” when the CAT is absolutely applied, the self-regulatory organizations, which embody securities exchanges and the Monetary Business Regulatory Authority, will acquire and retailer each fairness and possibility commerce and quote, from each account at each dealer, by each investor.  As even individuals who assist the CAT acknowledge, that’s numerous knowledge.

Now a lot of you is likely to be considering that the CAT, although unquestionably formidable, is an comprehensible response to such a major market occasion.  In spite of everything, the Fee is charged with, amongst different issues, sustaining orderly markets, and understanding of the causes of market disruptions, such because the “Flash Crash,” matches inside that ambit.  Admirable intentions and earnest efforts to guard the CAT knowledge will not be sufficient, nonetheless, to outweigh the CAT’s prices.    

Whatever the preliminary (or a minimum of said) rationale underlying mandated data collections just like the CAT, I’m all the time involved concerning the follow-on exploitation of knowledge that may happen to the detriment of particular person liberty.  Because the CAT takes concrete form, I observe with alarm, although not shock, the rising emphasis that’s being positioned on the database’s final utility as an enforcement device.  Workers on the Fee and on the exchanges will wade by way of the information pool to troll for securities violations.  Seeing that Structure Day coincided with the beginning of this convention, I can’t assist however ask as soon as once more how the CAT, which is able to observe unsuspected and unsuspecting People’ each transfer within the hopes of catching them in some wrongdoing, is per the ideas undergirding the Structure.

Others don’t share my considerations concerning the implications of mass knowledge assortment for liberty and privateness, however fairly have a look at all of this data in more and more exploitable databases as a supply of hope for a brighter future.  The sheer quantity of knowledge accessible permits, in line with some folks, profitable central financial planning, one thing that has by no means labored up to now.  Take Jack Ma, the founding father of Alibaba Group, who reportedly mentioned:

Over the previous 100 years, we have now all the time felt that the market financial system is superb, however for my part, within the subsequent three a long time might be a major change, the deliberate financial system will turn out to be more and more massive.  As a result of we have now entry to every kind of knowledge, we could possibly discover the invisible hand of the market.[4]

Mr. Ma isn’t the one one to consider that huge knowledge housed in databases, accessible solely to a small group of regulators, is the fashionable alternative for the invisible hand, which is the shared property of the plenty. 

The seek for the invisible hand is a futile one given that Dr. Sowell articulated.  Sure, we are able to acquire numerous knowledge about what folks do, however knowledge, experience, and information nonetheless stays dispersed all through the inhabitants.  Intellectuals and their regulatory pupils can’t successfully plan an financial system or perhaps a subset of it, not even with databases bursting with ever-increasing quantities of knowledge and the help of the very best AI available on the market.

The dynamism and modern forces that characterize the free market can’t be replicated by an algorithm.  As well as, and with out even addressing the ethical questions related to the creation of a system so huge and dehumanizing, the very premise underlying central planning is flawed: it’s a backward wanting endeavor, monitoring and cataloguing what was.  And as everyone knows, previous efficiency doesn’t essentially predict future outcomes.

Regulation includes a component of central planning; it displaces the power of people to take actions, together with voluntarily transacting with each other.  Not solely does this have an effect on the freedom of the affected people by displacing their free alternative, however it prevents them from contributing their information, experience, and expertise to society.  Each the dignity of the person and the functioning of society are impaired when decision-making is centralized, even when the decision-makers are very good and well-informed.

Regulation is important.  I feel we are able to all agree with that.  However much less could be very rather more in terms of the federal government deciding how free residents could make investments their cash, plan for his or her and their households’ futures, and enter into contracts with different free residents.  The regulator, and the mental who informs her, all the time ought to take into account the price of regulation, not solely when it comes to {dollars} and burden hours, however when it comes to freedom denied.

My skepticism doesn’t, nonetheless, forestall me from understanding how those that lengthy for the just-so precision of the central planner have come to put their religion within the transformative energy they see ready to be tapped in these unprecedented repositories of knowledge.  I don’t belief them with that form of energy…however then I don’t belief anybody else, together with myself, with it both.  A regulator wants her knowledge, however she doesn’t want limitless knowledge.

The individuals who spend their working lives on the Fee are a uniquely gifted group of individuals.  They care intensely about their work and concerning the folks they serve; they’re naturally keen to guard American traders from fraud and that dedication is borne out of their work.  As an establishment, nonetheless, I feel that we’re often responsible of making an attempt to guard grown women and men from making choices that we view as unwise.  Once we do this, we overreach and we exceed our mandate. 

All that could be a very great distance of asking these of you right here in the present day to suppose past the fascinating technical discussions that every paper provokes.  Keep in mind that you, since you are intellectuals, play an necessary position in setting the tone for accountable use of knowledge, a recognition of its limits and risks, and a respect for the knowledge of the people who find themselves not within the room.


[1] Thomas Sowell, Intellectuals and Society (Perseus Books Group: Primary Books, 2010), 16.


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