authority “should be totally funded by those institutions that are regarded as systemically important or too big to fail”

TO BE NOTED: From the FT:

"US poised for finance regulation shake-up

By Tom Braithwaite, Sarah O’Connor and Krishna Guha in Washington

Published: May 17 2009 23:30 | Last updated: May 17 2009 23:30

Congress will next month start the biggest regulatory overhaul of the US financial system in decades, bringing into the open a frantic lobbying effort between banks, regulators and policymakers on what it contains and who pays for it.

The House financial services committee, chaired by Democrat Barney Frank, will hold hearings early in June into reforms outlined by Timothy Geithner, Treasury secretary, say people familiar with the timetable.

But the complexity, coupled with a crowded legislative agenda, means one key pillar – a resolution authority allowing a regulator to seize a failing bank holding company – is not likely to be put in place until year-end.

The cost of the resolution authority and a proposed systemic risk regulator could be borne by both large banks and small, according to people involved, in spite of the entreaties from the hundreds of small US institutions that they should not pay a levy.

Cam Fine, chief executive of the Independent Community Bankers of America, said the authority “should be totally funded by those institutions that are regarded as systemically important or too big to fail”. He said he “felt pretty good about where we stand” and was confident of Mr Geithner’s support.

Other smaller institutions such as hedge funds are also expressing concern that they will suffer from severe “haircuts on contracts” entered into as counterparties with the seized institution, according to one lobbyist.

Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, has been lobbying for early introduction of seizure powers that could be used to take over a large systemically important bank if it was severely weakened by another sudden downturn in the economy.

The FDIC has a long-established system of seizing deposit-taking institutions, running them for a short time before winding them down or selling them, all with the aim of protecting depositors. But the largest banks are organised into bank holding companies, which stand outside current powers.

Mr Geithner has said new powers would allow for an orderly winding up of a systemically important institution, avoiding a repeat of the messy fall-out from Lehman Brothers’ collapse last year or the expensive bail-out of AIG, the insurer.

But several people involved say the way the regulation is interlinked means it would be difficult to fast-track a resolution authority specific to bank holding companies. The current timetable envisages the legislation being voted in the House in the summer and in the Senate late this year.

The eventual legislation is likely to leave open the question of which institutions count as “systemically important” and fall under the new authority’s power. People familiar with the plans say there is reluctance to draw up any fixed list or set of criteria; it would be better, they say, to maintain a certain ambiguity in order to maximise flexibility and induce a sense of caution.

Details of the regulatory overhaul – which also includes increased supervision of the retail market for financial products, standardising rules governing deposit taking institutions and increasing oversight of over-the-counter derivatives – are still being debated."

"almost ludicrous" for an institution other than the central bank to be a systemic risk regulator.

TO BE NOTED: From Bloomberg:

Watch

Princeton's Blinder Interview
May 8 (Bloomberg) -- Alan Blinder, a professor of economics at Princeton University, talks with Bloomberg's Julie Hyman and Kathleen Hays about the outlook for financial market regulation including hedge fund rules. Blinder, former vice chairman of the Federal Reserve, says it would be "almost ludicrous" for an institution other than the central bank to be a systemic risk regulator.

our huge budget deficits, which have greatly added to the costs and the inflation risk of the immense federal expenditures on recovery

TO BE NOTED: From the NY Times:

---

April 14, 2009, 11:01 am

A “Spasmodic, Improvisational Response”: Richard Posner Tackles the New Depression

By Dwyer Gunn

Please welcome to our corps of in-house bloggers Dwyer Gunn, a young writer who has studied economics at Wellesley, worked in finance, and been a research assistant at the Becker Center on Chicago Price Theory.

“The biggest economic crisis since the Great Depression,” as described by Richard Posner, began in December of 2007 amidst plunging housing prices and reached its climax in September of 2008 as Lehman Brothers filed for bankruptcy, Fannie Mae and Freddie Mac were placed into conservatorship, and American International Group (A.I.G.) received a government bailout. Throughout the crisis, people all over the country have struggled to understand the causes of the meltdown and the complicated policies the government is pursuing to restore the economy to health.

In his new book A Failure of Capitalism: The Crisis of 2008 and the Descent into Depression, Richard Posner provides a definitive primer on the subject suitable for experts and amateurs alike. He analyzes the underlying causes of the crisis, the government’s policy responses so far, and offers some thoughts on the future of our financial system. Along the way, Posner also explains why he believes the crisis is indeed a depression, disputes the popular idea that investors and banks who bet on rising housing prices were behaving irrationally, and points out the (small) silver lining to the crisis.

Posner is a judge of the United States Court of Appeals for the Seventh Circuit and a senior lecturer at the University of Chicago Law School. He has written a number of books, blogs regularly with Gary Becker, and will soon blog weekly on the financial crisis at a blog called A Failure of Capitalism at TheAtlantic.com.

We mentioned Posner’s new book earlier, and now he has agreed to answer some of our questions about it and the financial crisis.

What caused the financial crisis? Was it the government’s fault?

The government was the facilitator of the crisis, in the following sense. Banking (broadly defined to include all financial intermediation) is inherently risky because it involves borrowing most of one’s capital and then lending it, and the only way to create a spread that will pay the bank’s expenses and provide a return to its owners is to take more risk lending than borrowing — for example, borrowing short (short-term interest rates are low, because the lender has little risk and great liquidity) and lending long (so the lender has greater risk and less liquidity). The riskiness of banking can be reduced by regulation. But as a result of a deregulation movement that began in the 1970’s, the industry was largely deregulated by 2000. Then the Federal Reserve mistakenly pushed down and kept down interest rates, which led to a housing bubble (because houses are bought with debt) and in turn to risky mortgage lending (because mortgages are long term and there is a nontrivial risk of default); and when the bubble burst, it carried the banking industry down with it. The effect on the nonfinancial economy was magnified by the fact that Americans had little in the way of precautionary savings built up. Their savings were concentrated in risky assets like houses and common stock. When the value of those savings fell steeply, people’s savings were inadequate, so they curtailed their personal consumption expenditures, precipitating a fall in production and sales, a rise in unemployment (which made the still-employed want to save even more of their income, lest they lose their jobs too), and, in short, the downward spiral we’re still in.

The banking collapse occurred last September. The government’s unpreparedness (for which Greenspan and Bernanke, successive chairmen of the Federal Reserve, and academic economists bear a large part of the responsibility because of their failure to spot the housing and credit bubbles and their mistaken belief that a depression, as distinct from a mild recession, could never again happen in the United States) and its resulting spasmodic, improvisational responses allowed the crisis to deepen, precipitating the depression we’re now in. Contributing factors, besides the dearth of “safe” savings, were our huge budget deficits, which have greatly added to the costs and the inflation risk of the immense federal expenditures on recovery. Indeed, it is those costs and that risk that justify calling the present downturn a depression rather than just a recession; for the costs of a depression/recession include not only the loss in output and employment during the depression period, but also include the costs of recovery.

In your book, you dispute the notion that irrational behavior by market participants is to blame for this crisis. Can you explain how rational behavior could result in such a painful outcome?

Business firms attempt to maximize profits within the constraints set by regulation (including the Federal Reserve’s monetary policies, which strongly influence interest rates). We want them to do that, as it is the key to an efficient allocation of resources. Part of maximizing profits, however, is taking a certain risk of bankruptcy; it does not pay for a firm to reduce that cost to zero. Banking occupies a strategic role in the economy because of the importance of credit to economic activity; borrowing to spend increases consumption — it is how we shift consumption from future to present.

Moreover, banking is the main instrument by which the Federal Reserve creates money, and by doing so reduces interest rates (provided inflation is not anticipated; for if it is, long-term interest rates will rise), which in turn spurs economic activity. By buying government bonds, it pours cash into banks, both directly, when it buys the bonds from banks, and indirectly, when it buys the bonds from private owners but the owners deposit the cash they receive from the purchase into their bank accounts.

When banks start to hoard cash because their solvency is impaired, the money they receive from the Federal Reserve’s purchasing activity does not spread into the rest of the economy. That is why a cascade of bank bankruptcies is far more serious than a cascade of, say, airline bankruptcies. But a rational businessman does not, indeed cannot afford to, consider the cost of bankruptcy to the economy as a whole as distinct from the cost to his firm. So the rational banker will take more risk than is optimal from an economy-wide standpoint. That is the logic of profit maximization, as explained long ago by Adam Smith: the businessman cares about his costs and his revenues, but not about the costs and revenues incurred or received elsewhere in the economy. He is not an altruist. The responsibility for preventing the collapse of the banking system is the government’s, and it has been shirked, with extremely serious consequences.

There is some debate among economists about the role securitization played in the recession. Do you think securitization is to blame?

It was a factor, perhaps mainly because it brought a lot of foreign capital into the U.S. housing market. Foreign investors would not want to deal directly with American homebuyers, but they were happy to buy the triple-A-rated tranches (slices) of securitized debt, for that was the equivalent of buying bonds. The flood of foreign capital not only reinforced the Federal Reserve’s unsound policy of depressing interest rates, but also spread the housing bubble and the eventual consequences for bank solvency to the rest of the world. The result was to make the depression worldwide, which, incidentally, reduced American exports, which has contributed to the fall of U.S. output and the rise in unemployment.

What is the Federal Reserve trying to accomplish with its quantitative easing program?

The term refers to buying bonds and other debt instruments other than short-term Treasury bonds.

Generally the Fed influences interest rates by buying and selling short-term Treasury bonds; if it buys, it puts cash into the banks, as I explained earlier, and if it sells, it pulls cash out. In the first case, the supply of money expands, and in the second it contracts. Although the interest rates directly affected are short term, there is an indirect effect, in the same direction, on long-term rates. The reason is that the lower the interest rate at which banks can borrow money, the lower the competitive interest rate at which they lend the money; and this will stimulate borrowing and hence economic activity. But if banks don’t want to lend — because their solvency is impaired and because the risk of lending rises in a depression and the demand to borrow falls — they will sit on any new cash they receive rather than lend it. This is true even if the short-term interest rate falls to zero. The Fed’s hope is that by buying other forms of debt it will encourage lending, not only because it will be pumping more money into the economy, but also because, to the extent that its purchases are of debt that pays higher interest rates than short-term Treasury securities, their incentive to lend will increase because they will want to replace that interest. For example, if the Fed buys credit-card debt that pays 10 percent interest, the lender from whom it has bought that debt may decide to issue additional credit-card credit with the cash it receives in order to preserve its stream of income.

Do you believe the government’s new public-private partnership to purchase toxic assets will be successful in healing the major banks?

It is too early to tell. It depends on how much of that overvalued bank capital is bought, and at what prices. The program is very complex and many of its details have not been worked out. Some buyers will be deterred by fear that receiving federal subsidy (it is essentially a program of subsidizing, albeit indirectly, the purchase of these assets) invites intrusive regulation by the Treasury and denunciation by demagogic legislators. There is also some doubt as to how many banks will want to sell these assets at the prices offered, because the sales prices may reveal how little the assets are worth and therefore how undercapitalized the banks are, which would invite further regulation. Probably, the government can coerce the banks to play ball. But the effect on lending is indirect — having a healthier-looking balance sheet does not compel a bank to lend — and will be small if few private investors can be induced to buy, and the banks to sell, the overvalued bank assets.

Is there any “silver lining” to this crisis?

Yes, the silver lining is primarily the fact that the longer the housing and credit bubbles had been allowed to expand, the worse the consequences of the eventual crash would have been. Had the Federal Reserve raised interest rates sharply in 2004, the housing bubble would have burst before house prices had reached the heights they did — heights from which they fell such a long distance that they caused a catastrophic fall in the value of mortgages, which was the fall that precipitated the banking collapse. In addition, the personal savings rate, and the preference for safe savings over risky assets like stock and housing, will now rise; and while that will retard recovery from the depression, once we do recover, if the greater propensity for saving persists, it will make it easier for the nation to finance the support of the elderly out of private savings without need to keep increasing the amount of the national income that goes to public support of the elderly mainly through the Social Security and Medicare programs.

You’ve titled your book A Failure of Capitalism, and the U.S. and other governments are considering new regulations on banks, hedge funds, and certain financial instruments. What do you think the future looks like for our capitalist financial system?

There will be more regulation of financial institutions, and that is probably a good thing, though most of the goals of tighter regulation could probably be achieved just by more assiduous enforcement of existing regulations; regulatory laxity was a particularly marked characteristic of the Bush administration’s economic philosophy. The United States was capitalistic when banks were tightly regulated, and it will still be capitalistic if they are again tightly regulated. My fear is that the rush to re-regulate will produce more than the usual quota of dumb regulations. Since there is not going to be another housing and credit bubble in the next year, I would urge that the proposal of new regulations be deferred for a year, to provide time for a calm and thorough appraisal of the regulatory options.

Particularly in need of sober second thought is the popular idea of a “systemic” regulator — a regulatory body charged with preventing the financial industry from taking risks that could precipitate another financial crisis similar to the current one. Such a body would be excessively powerful and would be prone to overregulate because its only responsibility would be to prevent a crisis. In contrast, the Federal Reserve has the dual missions of maintaining price stability and employment; having to balance the two goals encourages sensible tradeoffs, although the Federal Reserve’s recent history in making these tradeoffs is not encouraging. But at least it has to worry that if it pushes interest rates too low it will create excessive inflation (in fact its interest-rate policies in the early 2000’s created asset-price inflation rather than the more common CPI or WPI inflation, but that was just as bad or worse), while if it pushes them too high it will create excessive unemployment by curtailing current economic activity too much."

not being able to hedge currency risk through the use of a derivative can leave a company exposed to fluctuations in currency markets

TO BE NOTED: From the WSJ:

"By RENé M. STULZ

The dictionary defines a derivative in the field of chemistry as "a substance that can be made from another substance." Derivatives in finance work on the same principle. But if you read the headlines these days, you might think derivatives were made from arsenic by Wall Street institutions bent on causing financial destruction.

There are two sides to derivatives -- one positive and beneficial, one exploitive and negative. Of the latter, the most visible example today comes to us courtesy of the American International Group (AIG) and reveals what happens when a lightly regulated but highly interconnected financial institution ends up positioned in a way that it cannot survive a housing crash and then such a crash occurs.

The other side of derivatives, however, involves the less-publicized but widespread use of these financial instruments in ways that benefit companies. Derivatives have been immensely valuable tools and will be instrumental in providing the liquidity needed to jump-start the economy. Derivatives are used by a vast number of U.S. companies, both small and large, to manage various risks that arise in connection with their businesses.

From the perspective of Main Street companies, derivatives are not just about high finance, quants and politics, but about investing in America's core industries, jobs and economic recovery. Companies find that over-the-counter derivatives are essential to their day-to-day operations. Derivatives help insulate them from risk, which allows them to borrow capital at better prices than they would otherwise. And derivatives are more useful than ever in these days of unusual volatility in financial markets.

For example, not being able to hedge currency risk through the use of a derivative can leave a company exposed to fluctuations in currency markets. Without derivatives companies could see movements in exchange rates turn a profitable export contract into a money-losing agreement.

In its current annual report, Caterpillar Inc. makes the case for why it relies on derivatives: "Our risk management policy . . . allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate, commodity price and Caterpillar stock price exposures."

For those unfamiliar with market jargon, credit default swaps, which are most often in the news, are simply financial contracts between two parties. If, for example, you own bonds in a company and are worried that the company will default, you can manage your risk and protect your holdings with a credit default swap. Under it, you would make regular payments to maintain the contract. If the company does not default, you're out-of-pocket the payments. But if the company does default, the swap serves as a form of insurance by giving you the right to exchange the questionable bonds for the principal amount, or to be reimbursed in other ways. There's nothing exotic or complex about these contracts. They can be highly valuable for Main Street firms, because they enable them to protect themselves against the failure of large customers.

However, Main Street firms cannot afford derivatives unless there is a competitive market for them with participants willing to take the opposite position. Restricting access to derivative markets, which is being proposed by some in Congress as well as by some regulators, would make the costs of derivatives prohibitively expensive and eliminate liquidity.

That derivatives benefit our financial system and our national economy is well established. Twenty-nine of the 30 companies that make up the Dow Jones Industrial Average use derivatives. According to data from Greenwich Associates, two-thirds of large companies (those that have sales of more than $2 billion) use over-the-counter derivatives and more than half of all mid-size companies (those that have sales between $500 million and $2 billion) are very active in derivatives markets. Derivatives are necessary and helpful tools for companies seeking to manage financial risk.

The most important benefit of derivatives is that they allow businesses to hedge risks that otherwise could not be hedged. This does a number of positive things. It transfers risk, allowing firms to guard against being forced into financial distress. It also frees lenders to offer credit on better terms, giving companies access to funds that they can use to keep their doors open, lights on and, even, invest in new technologies, build new plants, or hire new employees.

It's important for regulators not to overreact by pushing for counterproductive new rules. The regulators, after all, were no better at foreseeing the current crisis than the private sector, proving that regulation has obvious limits and cannot replace efforts by financial institutions to devise risk-management approaches that enable them to cope with crises in the financial markets of the 21st century.

At the same time, some sensible regulations are in order. With the interconnectedness of markets today and the systemic problems facing the world's economies, there is a lot that can be done to limit systemic risks. One beneficial step would be for Congress to adopt some version of a systemic-risk regulator that would place every participant in the financial markets that poses a systemic risk, including derivatives traders, under federal regulatory oversight.

Unbelievably, the arm of AIG that dealt with derivative products was not subject to serious scrutiny by a federal agency with relevant experience. A systemic-risk regulator, or markets-stability regulator, should oversee every kind of financial institution that is found to be systemically important, including banks, broker-dealers, insurance companies, hedge funds, private equity funds and others. That regulator should have the authority to ensure that such financial institutions have sufficient capital to reduce the risks they pose to the financial system, to examine parent companies and subsidiaries, and to bring enforcement actions.

Additionally, a clearinghouse for standardized credit default swaps was launched in March, and other competitor clearinghouses are under construction. Clearinghouses clear and settle trades and limit the risk to the larger financial system if any one dealer, like AIG, fails to meet its obligations. A clearinghouse also allows regulators to monitor the exposure firms have to these products, while simultaneously ensuring that each firm posts the necessary collateral to cover its obligations under its trades.

However, clearinghouses should be reserved for established and standardized derivatives, leaving participants in capital markets free to engage in bilateral contracts for derivatives that fulfill specific needs as well as for new products. Further, use of a clearinghouse should not be compulsory, but capital-requirement regulations should recognize that derivatives positions that are not put through a clearinghouse may pose greater systemic risks than those that are.

The subprime mess triggered one of the most destructive financial crises in decades. It's not surprising, then, that the hunt is on for culprits. But derivatives are not the culprit. They had little to do with the rise and collapse of housing prices. Wider availability of housing derivatives would have actually reduced the impact of the collapse of housing prices if homeowners had been able to hedge against possible decreases in home values.

Our businesses need derivatives. Most of us choose to drive cars even though they sometimes crash. But we also insist that cars are made as safe as it makes economic sense for them to be, and that speed limits and other rules of the road are enforced. The same logic should apply to derivatives.

Mr. Stulz is a professor of finance at the Fisher College of The Ohio State University."

"any fissure in this regulatory structure will lead to a race to the bottom."

TO BE NOTED: From the WaPo:

"Plan to Expand Financial Oversight May Add New Risks

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, April 7, 2009; A17

The Obama administration's plan for a sweeping expansion of financial regulations could have unintended consequences that increase the very hazards that these changes are meant to prevent.

Financial experts say the perception that the government will backstop certain losses will actually encourage some firms to take on even greater risks and grow perilously large. While some financial instruments will come under tighter control, others will remain only loosely regulated, creating what some experts say are new loopholes. Still others say the regulation could drive money into questionable investments, shadowy new markets and lightly regulated corners of the globe.

And a shortage of manpower raises questions about the government's ability to keep up with the vast and complex financial markets.

In congressional testimony last month, Treasury Secretary Timothy F. Geithner laid out the principles of the administration's proposals. He called in part for designating a federal agency that would be responsible for identifying financial companies whose failure could endanger the wider economy and for giving the government greater authority to wind down troubled financial firms. He also proposed new regulations for hedge funds, venture capital funds and private-equity funds, as well as for complex financial instruments known as derivatives.

These plans seek to mitigate some of the dangers exposed by the financial crisis. But while weak regulation is partly responsible for the current turmoil, the unintended consequences of government action over past decades also played a role.

At the top of the Obama administration's agenda is the creation of a regulator that can peer into any corner of the economy to root out threats that could shatter financial markets.

But some experts warn that such a "systemic risk regulator" could unleash new hazards if it can identify certain companies as being too large to fail. This could create an incentive for firms to grow dangerously big so they can win a government guarantee against failure. If a company has the promise of government protection, its creditors might be willing to lend it money at below-market rates because of the reduced probability the company will collapse and they won't get paid back.

The danger of this incentive is twofold. For one, a firm may be willing to take on more unreasonable risks. Second, if a company gets access to unusually cheap financing, its rivals are at a competitive disadvantage.

"If these entities are now perceived to be too big to fail within the protective net, then they get an advantage vis-à-vis other institutions that are not so perceived," said Lawrence White, an economics professor at New York University. "The creditors to these guys become even less inclined to monitoring and more inclined to say, 'Hey, let the government do it.' "

In the view of many financial experts, that is exactly what happened to mortgage-finance companies Fannie Mae and Freddie Mac before the government seized them last year. Congress chartered both companies to provide financing to lenders to make home mortgages. Their debt didn't carry the official backing of the U.S. government, but many creditors assumed the government would step in if the companies faltered.

That meant the interest rates Fannie Mae and Freddie Mac had to pay to borrow were just slightly higher than what the U.S. government had to pay. With access to cheap financing, the firms borrowed hundreds of billions of dollars and bought or guaranteed trillions of dollars in mortgages. Some of these went bad in recent years. Last fall, the companies nearly collapsed as a result, prompting the government takeover.

Geithner's proposals for hedge funds and derivatives also drew concerns from some financial experts. Geithner proposed that hedge funds register with the Securities and Exchange Commission and disclose information about their operations.

But some who closely track the industry warn that may encourage more investors to put their money into hedge funds without actually protecting against fraud and risky investment practices.

"The government is going to be more hands-on, and that's going to imply to people the government is vetting the risks relevant to a hedge fund," said Jason Scharfman, managing director of Corgentum, a firm that evaluates whether hedge funds have proper safe internal procedures. "It exposes investors to a false sense of security that they don't need to perform adequate due diligence on the hedge funds they're investing with."

The SEC and other agencies may not have the manpower to adequately oversee new markets.

In recent months, the SEC has disclosed that the number of agency staffers available to police the market has stagnated even as the size and complexity of the market has grown far greater. For instance, only one in 10 investment advisers -- the designation under which most hedge funds register -- is examined every year by the SEC.

Meanwhile, the special inspector general overseeing the Treasury Department's financial recovery plan has just 30 employees. The inspector general's chief of staff recently said that his operation would need an agency the size of the FBI -- which has nearly 30,000 employees -- "to truly cover this by ourselves."

In his testimony on the future of regulation, Geithner also said that most derivatives should be regulated. Of particular concern are credit-default swaps, which are essentially insurance contracts between two parties to cover losses should a bond default. These swaps were behind the near-collapse of American International Group. And because trillions of dollars of swap agreements were made over recent years, it was difficult for the government to determine the extent to which they posed a threat to the entire financial system when the crisis escalated last fall.

Geithner proposed that swaps be traded through a central clearinghouse, allowing regulators to keep an eye on the derivatives market and give investors more confidence that their partners are legitimate. This would apply to standard swaps -- for instance, one to protect against a General Electric bond going bad.

But others would be exempt. This would include nonstandard swaps, such as one to protect against the default of a multilayered security composed of residential and commercial mortgages.

Several experts cautioned that leaving any room for exemptions could be devastating.

"It could give incentives for parties to issue less standardized or very customized contracts which would not be required to be cleared," said Houman Shadab, senior research fellow at the Mercatus Center at George Mason University.

There could be a rush to use nonstandard swaps if there's an opportunity to get around a clearinghouse, which would impose additional costs.

Michael Greenberg, a University of Maryland law professor and former top official at the Commodity Futures Trading Commission, said "any fissure in this regulatory structure will lead to a race to the bottom."

The Obama administration's initiative also poses a risk that financial firms will move their activities offshore to avoid heightened regulation. Last week big industrial nations met in London to work on international regulatory reform, and some European countries want even tighter regulation than does the United States. But that doesn't solve the problem of lightly regulated island regimes such as the Cayman Islands or Netherlands Antilles, or developing financial centers in Asia and the Middle East.

"More regulation here will undoubtedly lead to more money flowing to places with a less heavy regulatory framework, in an effort to keep costs down," Andrew P. Morriss, a professor who studies regulation at the University of Illinois at Urbana-Champaign, said in an e-mail.

Morriss warned that money currently flowing into the United States from international investors could go elsewhere, such as China, "if we try to make it hard to come here."