SYLLABUS
REGULATORY POLICY–PPOL 4600
SPRING QUARTER 2012
GRADUATE PROGRAM IN PUBLIC POLICY
THE UNIVERSITY OF DENVER
WEDNESDAY 5 - 7:50 P.M.
STURM HALL 133
Instructor
Robert M. Fusfeld, J.D.
Office
The Institute for Public Policy Studies
Mary Reed Building
2199 S. University Blvd., Suite 107
Denver, Colorado 80208
303.871.4920 (office)
303.800.7579 (voice mail)
303.777.0403 (home – emergency only please)
[email protected]
Office Hours
Tuesday: !
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Thursday: !
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8:30 a.m. - 9:45 a.m.
1:00 p.m. - 2:30 p.m.
8:30 a.m. - 9:45 a.m.
1:00 p.m. - 2:30 p.m.
Course Description
"[A]ny theoretical economic argument that can be stated in a sentence is as
likely to be untrue as true in the real world, no matter how clever or
intuitive it is."1
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James Kwak, coauthor of 13 Bankers.
We will cover a broad range of issues relating to the development and administration of
the modern regulatory state. A focus of the class will be the financial collapse of 2008
and its causes. This will be a vehicle to examine broad fundamental issues pertaining to
regulation of economic activity. In addition we will deal with: 1) the legal and
constitutional basis for federal and state regulation; 2) local and state regulation
including land use and employment; 3) eminent domain and property issues; 4) the
Administrative Procedure Act; 5) the Government in the Sunshine Act; 6) the modern
deregulatory movement and the efficient market theory; 7) regulatory capture and
regulatory culture; and 8) public choice theory.
Students should gain an appreciation of: 1) the powerful effect of conventional wisdom
and ideology on regulatory policy choices; 2) the apparent failure of traditional
economic/regulatory policies and the need for a new synthesis; 3) the history of
financial crises and bubbles and implications for policy; and 4) critical current
regulatory policy debates and their importance.
Background Materials
Students are strongly encouraged to read publications such as the Financial Times, The
Economist; New York Times; and Wall Street Journal to keep up with current
developments.
Also recommended for general background reading on the financial crisis and current
regulatory issues is Simon Johnson's blog www.baselinescenario.com. His posts on
"Financial Crisis for Beginners" and "Integrated slide presentation" are very good basic
introductory material that will be helpful for those who are new to the issues involved
in the financial collapse.
Additional blogs that I find invaluable and that often point to insightful additional
sources include:
NY Times - Economix: http://economix.blogs.nytimes.com/?scp=1spot&sq=economix&st=cse
Economist - Buttonwood: http://www.economist.com/blogs/buttonwood/
Economist - Free Exchange: http://www.economist.com/blogs/freeexchange/
Brad DeLong (warning - often highly tendentious): http://delong.typepad.com/sdj/
Tyler Cowen - Marginal Revolution: http://marginalrevolution.com/
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Required Reading
Note: Items below indicated with * will be posted on blackboard in .pdf format.
Richard Posner, A Failure of Capitalism, The Crisis of '08 And The Descent Into Depression.
Harvard University Press 2009. A prominent federal judge and founder of the "law and
economics" movement analyzes the reasons for the collapse, the economics of financial
disasters, and the failures of modern economic theory and government regulation.
John Cassidy, How Markets Fail–The Logic of Economic Calamities, Farrar, Straus & Giroux
2009. A survey of the history of economics relating to regulation of lending and finance.
Argues that deregulation and the efficient market theory had significant roles in the
financial collapse.
Charles Kindleberger, Manias, Panics, and Crashes - A History of Financial Crisis, (6th ed.),
Palgrave Macmillan 2011. The title says it all.
* U.S. Constitution: Spending Clause, Article 1, clause 1; Commerce Clause, Article 1,
section 8, clause 3; Article II, section 1; Amendment IX; Amendment X; Amendment
XIV, section 1.
* Securities Law excerpts
* Lochner v. New York, 198 U.S. 45 (1905)
* West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937)
* U.S. v. Darby, 312 U.S. 100 (1941)
* Wickard v. Filburn, 317 U.S. 111 (1942)
* Williamson v. Lee Optical, 348 U.S. 483 (1955)
* Gonzales v. Raich, 545 U.S. 1 (2005)
* Kelo v. City of New London, 545 U.S. 469 (2005)
* U.S. v. Comstock (2010)
* A License to Shampoo, Jobs Needing State Approval Rise, Wall Street Journal
2/7/2011
* The Prevelence and Effects of Occupational Licensing, Alan Krueger, Morris Kleiner,
CPES Working Paper No. 174, August 2008.
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Grading
This course will be graded on two critiques of required reading materials, an analytic
policy memorandum and class discussion. See pages 15-16 for details concerning the
written assignments.
Written work will be graded on: 1) quality of argument and reasoning; 2) organization;
3) effective analysis of counter-arguments; 4) quality and use of sources; and 5) writing,
spelling, and grammar. Be prepared to take and defend a firm position in your written
work.
Weighing is as follows:
Critique 1! !
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Critique 2! !
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Policy brief! !
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Class discussion/attendance!
20% (due April 25, 2011)
20% (due May 16, 2011)
40% (due June 1, 2011)
20%
Critiques And Policy Briefs
Critiques and the policy brief are due respectively on: April 25, 2011; May 16, 2011; and
June 1, 2012. Please deliver a hard copy of your essay to the instructor in class on the
due date and also send an additional copy to him by email before class starts. See pp.
11-12 for a details.
HONOR CODE AND ELECTRONIC DEVICES
This course is strictly governed by the DU honor code. Cell phones may not be turned
on or used during class and audio or video recording of classes is prohibited. While
you may use laptops to take notes you are not permitted to be connected to the
internet during class. Anyone who does so will be asked to leave.
ABSENCES
Attendance at all classes is mandatory unless excused in advance by the instructor.
Please notify the instructor promptly by email if they are unable to attend based on
illness or other emergency.
SUGGESTED ADDITIONAL READING
The materials listed below will help you to gain a more complete understanding of the
issues involved in financial market regulation, the instability of financial markets, and
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macro economic policy. Students who want to explore issues relating to financial
regulation are strongly encouraged to read some or all of these materials. Items noted
by * will be posted on the bulletin board.
* Stephen Labaton, Agency's '04 Rule Lets Banks Pile Up New Debt, New York Times,
October 2, 2008.
* Eric Lipton, Deregulator Looks Back Unswayed, New York Times, November 16, 2008.
* Dennis Overbye, They Tried To Outsmart Wall Street, New York Times, March 10, 2009.
* Felix Salmon, Recipe for Disaster: The Formula That Killed Wall Street, Wired Magazine,
March, 2009.
* The Other-Worldly Philosophers, The Economist, July 16, 2009
* Efficiency and Beyond, The Economist, July 16, 2009
* Special Report on Financial Risk, Economist, 2/11/2010.
* Michael Lewis, The Man Who Crashed The World, Vanity Fair, August 2009
* Boston Review, Business as Usual, March 2011.
* Simon Johnson, The Quiet Coup, The Atlantic, May 2009.
* Thomas Hoenig, Financial Reform: Post Crisis?, 2/23/2011 speech.
* Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, January 2011.
What happened in fall 2008 and why.
Hyman Minsky, Stabilizing an Unstable Economy, McGraw-Hill 2008. The definitive
theoretical explanation of why financial crisis are inherent in modern economies. He
predicted it all 25 years ago –– but was ignored. Somewhat dense reading.
Richard Bookstaber, A Demon of Our Own Design - Markets, Hedge Funds, and the Perils of
Financial Innovation, Wiley & Sons 2008. Confessions of a Wall Street risk manager–how
financial innovation, securitization, and hedge strategies made Wall Street
unmanageable.
John Maynard Keynes, The General Theory of Employment, Interest and Money, Martino
Fine Books, 2011. The foundation for all modern macro economics.
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Milton Friedman, A Monetary History of the United States 1867-1960, Princeton University
Press 1971. The foundation for monetarist theory.
John Kenneth Galbraith, The Affluent Society, Mariner Books 1998. An influential
examination of the modern consumer society.
Simon Johnson & James Kwak, 13 Bankers – The Wall Street Takeover and the Next Financial
Meltdown, Pantheon, 2010. Why TBTF threatens future collapses and democratic
institutions.
Charles Mackay, Extraordinary Popular Delusions & the Madness of Crowds, Three Rivers
Press, 1980. A classic 19th Century history of financial panics and bubbles.
Liaquat Ahamed, Lords of Finance - The Bankers Who Broke the World, The Penguin Press,
2009. Pulitzer history for history. How central bankers insisted on sticking with the gold
standard and classical economics and thereby caused the great depression.
John Kenneth Galbraith, Money, Whence it Came, Where it Went, Houghton Mifflin 1975.
What is money and why we care.
John Kenneth Galbraith, The Great Crash 1929, Mariner Books 2009. The best narrative of
the stock market crash of 1929.
Nicholas Dunbar, The Devil's Derivatives, Harvard Business Review Press, 2011. A nontechnical discussion of how financial innovation and the creation of derivatives added
risk to the financial system and led to the financial collapse of 2008.
Gary Gorton, Slapped By The Invisible Hand - The Panic of 2007, Oxford University Press,
2010. A brilliant and readable technical explanation of the mechanics of the financial
collapse. A more technical and detailed companion to Posner with a focus on banking
counterparty issues.
Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall
Street. Harper Business 2009. A comprehensive history of the "efficient market" theory,
and its effect on the deregulatory movement. More comprehensive than Cassidy.
Joe Nocera, A Piece of the Action: How the Middle Class Joined the Money Class, Simon &
Schuster, 1994. The rise of consumer debt, and the financial innovation including credit
cards, mutual funds, money market funds that paved the way for the collapse.
Bruce Bartlett, The New American Economy–The Failure of Reagonomics and A New Way
Forward, Palgrave MacMillan 2009. A History of post–World War II macroeconomic
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failures of both Keynesianism and monetarism from an architect of "supply side
economics" with an emphasis on tax, political, and budgetary issues.
Robert Skidelsky, Keynes, The Return of the Master, Public Affairs 2010. Biography of
Keynes.
John Quiggin, Zombie Economics - How Dead Ideas Still Walk Among Us. Princeton
University Press 2010. An attack on monetarism and defense of Keynes.
Gillian Tett, Fools Gold, Free Press, 2009. A brilliant Financial Times columnist explains
how J.P. Morgan invented credit default swaps - the product that was at the heart of the
financial collapse.
* Fed interview of Gary Gorton, Minneapolis Federal Reserve Board, 11/5/10. If the full
book is too much, here is a 15 page summary of his views.
* Dokko, Doyle, Kiley, et. al., Monetary Policy and the Housing Bubble, Federal Reserve
Board, Finance and Economics Discussion Series Working Paper 2009-49. The Fed
weighs in on causes. Hint - it wasn't Fannie, Freddie, or the CRA.
* Kane, The 2007 Meltdown in Structured Securitization-Searching For Lessons, Not
Scapegoats, World Bank Policy Research Working Paper 4756, October 2008. Broad
discussion of regulatory arbitrage and the importance of securitization. A contrasting
view to Kling.
* Kane, The Importance of Monitoring and Mitigating Safety-Net Consequences of Regulation
Induced Innovation, Networks Financial Institute, Indiana State University, November
2009. One set of ideas on too big to fail.
* Kane, Extracting Nontransparent Safety Net Subsidies By Strategically Expanding and
Contracting A Financial Institution's Accounting Balance Sheet. Journal of Financial
Services Research, December 2009. Do financial institutions expand and become
complex as a deliberate strategy to become too big to fail?
* Kling, Not What They Had In Mind, September 2009. A conservative view of the causes
of the collapse that focuses on policy and regulatory failure.
* Hegland, Why The Financial System Collapsed, National Journal, April 14, 2009. A brief
exploration of causes
* Simon Johnson, Recovery and crisis presentation, Powerpoint on the problem with too
big to fail and bailouts.
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* Liebowitz, ARMs, Not Subprimes, Caused the Mortgage Crisis, The Economists' Voice,
November 2009.
COURSE CALENDAR
1. MARCH 28, 2012 – INTRODUCTION & HOLLYWOOD NIGHT - "INSIDE JOB"
2. APRIL 4, 2012; APRIL 11, 2012 – THE LEGAL FOUNDATION OF THE
REGULATORY STATE
Required Reading (complete By April 4)
* U.S. Constitution: Spending Clause, Article 1, clause 1; Commerce Clause, Article 1,
section 8, clause 3; Article II, section 1; Amendment IX; Amendment X; Amendment
XIV, section 1.
* Lochner v. New York, 198 U.S. 45 (1905)
* West Coast Hotel v. Parrish, 300 U.S. 379 (1937)
* U.S. v. Darby, 312 U.S. 100 (1941)
* Wickard v. Filburn, 317 U.S. 111 (1942)
* Williamson v. Lee Optical, 348 U.S. 483 (1955)
* Gonzalez v. Raich, 545 U.S. 1 (2005)
* US v. Comstock (2010)
Complete By April 11
Cassidy, How Markets Fail
Introduction and Part One: Utopian Economics (pp. 3-110)
Part Two: Reality-Based Economics (pp. 111-220)
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3. APRIL 18, 2012 – HISTORY OF REGULATION AND INTRODUCTION TO KEY
CONCEPTS
Required Reading
Cassidy, How Markets Fail
Part Three and Conclusion, The Great Crunch, pp. 221-346
4. APRIL 25, 2012 – THE FEDERAL STATUTORY FRAMEWORK (THE SEC AS AN
EXAMPLE)
Required Reading
* Securities law excerpts
Posner, A Failure of Capitalism
Preface (pp. vii - xix)
Chapter 1 – The Depression and Its Proximate Causes (pp. 1-40)
Chapter 2 – The Crisis in Banking (pp. 41-74)
Chapter 3 – The Underlying Causes (pp. 75-116)
Chapter 4 – Why a Depression Was Not Anticipated (pp. 117-147)
5. MAY 2, 2012 – STATE AND LOCAL REGULATION
Required Reading
* Kelo v. City of New London, 545 U.S. 469 (2005)
* The Prevelence and Effects of Occupational Licensing, Alan Krueger, Morris Kleiner,
CPES Working Paper No. 174, August 2008.
* A License to Shampoo, Jobs Needing State Approval Rise, Wall Street Journal
2/7/2011
Richard Posner, A Failure of Capitalism
Chapter 5 – The Government Responds (pp. 148-219)
Chapter 6 – A Silver Lining? (pp. 220-233)
Chapter 7 – What We Are Learning About Capitalism and Government (pp. 234-251)
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6. MAY 9, 2012; MAY 16, 2012 – THE RISE OF THE SHADOW BANKING SYSTEM
AND WHY IT MATTERS (REGULATORY DARWINISM IN ACTION)
Required Reading (complete by May 9)
Richard Posner, A Failure of Capitalism
Chapter 8 – The Economics Profession Asleep at the Switch (pp. 252-268)
Chapter 9 – Apportioning Blame (pp. 269-287)
Conclusion (pp. 315-330)
Kindleberger, Manias, Panics, and Crashes
Chapter 1, Financial Crisis: A Hardy Perennial, pp. 1-23
Chapter 2, Anatomy of a Typical Crisis, pp. 24-37
Chapter 3, Speculative Manias, pp. 38-63
7. MAY 23, 2012 – IS INSTABILITY INHERENT IN THE SYSTEM?
Required Reading
Kindleberger, Manias, Panics, and Crashes
Chapter 4, Fueling the Flames: The Expansion of Credit, pp. 64-89
Chapter 5, The Critical Stage, pp. 90-112
Chapter 9, Frauds, Swindles, and the Credit Cycle, pp. 165-202
8. MAY 30, 2012 – TOO BIG TO FAIL AND WHY IT MATTERS ("SEND LAWYERS
GUNS AND MONEY")2
Required Reading
Kindleberger, Manias, Panics, and Crashes
Chapter 10, Policy Responses, pp. 203-224
Chapter 11, The Domestic Lender of Last Resort, pp. 225-242
Chapter 13, The Lessons of History and the Most Tumultuous Decades Ever, pp. 275-293
Critiques/Policy Briefs
All written work should include: 1) a cover page (containing only your name, the date,
word count, and a title in the top 2 inches); and 2) a list of sources. Use 10 or 12 point
2
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Warren Zevon, 1978.
type, double spaced with 1 inch margins and number pages starting at 1 after the cover
page. Footnotes should be used for citations.
Critiques should be a minimum of 1,000 words and a maximum of 1,200 words
exclusive of cover page, and list of sources.
The policy brief should be a minimum of 1,800 words and a maximum of 2,000 words
exclusive of cover page, and list of sources.
Critique. You will do two critiques, each one based on a different book from the
required readings (Posner, Cassidy, Kindleberger) Your critique should either agree or
disagree with one of the main positions taken by the author and discuss the significance
of that position from a current policy perspective, i.e., what can we learn about a current
regulatory policy issue from this work? You should cite some authority to support your
critique. Think of this as a book review in The New York Review of Books, The Atlantic, or
similar publications, that argues that the author is either right or wrong in which you rely
on some evidence as well as logic and analysis to make your point. It is critical that your
critique should analyze the policy implications of the work as it relates to a specific
current policy issue. This is not an essay or a rant, it should be an analysis and
evaluation that references some appropriate amount of outside research.
Policy Brief. Choose a major current public policy controversy relating to a specific
regulatory policy issue of your choosing (It can be on any matter related broadly to
regulatory policy and need not be limited to the specific policy areas focused on in the
readings and lectures).
Using Bardach's methods define a problem and offer a solution. Make sure you discuss
objections to your proposal and explain what standards you will use to judge whether
your solution is effective. It is important that you reach a firm conclusion.
In your policy brief you should be prepared to: precisely define the problem and its
causes; propose a valid analytic framework; perform a persuasive analysis of the
problem; effectively use relevant evidence and documentation; discuss alternative
solutions; discuss costs, benefits and tradeoffs (not a formal cost/benefit analysis);
project outcomes; and deal with political consequences and obstacles.
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