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Norbert Michel: Good morning. Thank you for joining us. It was a bit unusually hectic to get here, so it’s an earnest thank you today. Welcome to Cato, and welcome to our fourth annual CMFA conference. I’m Norbert Michel. I’m the director of our Center for Monetary and Financial Alternatives. Our theme today is Money, Markets, and the American Experiment: 250 Years of Opportunity.

If you’re a financial historian—and let’s face it, you’re probably not—you would know that one of the unique things about America is that from the very, very beginning of the nation, we had a very robust banking and capital markets system. And that was unique to America. And in a very short period of time, it grew to rival, if not surpass, the financial markets of every nation that existed at the time. And they just grew with the country. It was synonymous with the growth of America.

In 1998, Nobel Prize–winning economist Merton Miller, who’s a hero among financial people, argued that whether financial markets contribute to economic growth is, and I quote, “a proposition almost too obvious for serious discussion.” But here we are, still debating it. And one of the reasons that we’re still debating it, as he recognized in that same speech, is that when things go wrong, especially when we have a financial crisis, financial markets get blamed for all of society’s ills. And that happens historically even when there’s not a financial crisis. They pick up the blame for just about everything, and it’s been happening now for decades. Even recent decades. I didn’t do my initial reminder. If everybody could please check their cell phones to make sure that they’re on silent.

So that phenomenon of blaming financial markets for pretty much everything predates the current populist movement, and it goes back literally thousands and thousands of years. Part of the reason is that financial markets let people take risks, and sometimes those risks don’t work out so well. But the flip side of the risk is opportunities. And unfortunately, you can’t really separate the two. So if you want to have the opportunities, you’re going to take the risks, and financial markets help that process along. That’s kind of where our theme comes from today. It also comes from a lot of the work that we’ve done here at Cato, and my colleague Anne Rulon, who came up with the idea to focus specifically on this and tie the theme to the 250th anniversary. Anne has helped us, incidentally, put together all four of our CMFA conferences, but this is her last one. So if you do get to see her today, please tell her goodbye for us all. We’re going to miss her. Her family is doubling, literally. And if you run into her, you’ll see what I’m talking about.

So compared to previous conferences, today’s will be a little bit compressed. It’ll be a little bit different for a couple of reasons. But we’re going to do our first panel moderated by me. Then we’ll take a quick break, and then our second panel will be moderated by Emily Russell from Barron’s. Then we’ll have lunch. And then our last panel will be moderated by Jeb Hensarling, House Financial Services chair. And then closing remarks again by me. So there’s a lot of me. I’m sorry.

And we’re going to get going now with our first panel, which is down a person, not because of traffic, but because of an unexpected illness. So instead of three people, we’re going to have me and two other folks on our panel. Our first panel is Hamilton versus Jefferson: The Founding Debate That Is Still Shaping American Markets. So please help me welcome our panelists to the stage.

Veronique de Rugy: Where do you want us?

Norbert Michel: Either one. And as you’ve probably figured out, we are missing Judge Glock, but we do have Veronique de Rugy and Charlie Calomiris. And Veronique is the George Gibbs Chair in Political Economy and Senior Research Fellow at Mercatus—and that’s, of course, at George Mason. And Charlie is the director of research and senior fellow at Manhattan, and—

Charles Calomiris: Oh, no, no.

Norbert Michel: I’m sorry. Was—

Charles Calomiris: Was.

Norbert Michel: Was. And is now—you can describe this better than I.

Charles Calomiris: Yes. So I’m a senior scholar at something called the Andersen Institute for Finance and Economics.

Norbert Michel: Sorry.

Charles Calomiris: Oh, no, no, no. That’s okay. They’re paying me, so I’ve got to tell them. And it’s a good story, but we’ll get to that.

Norbert Michel: And we would have had Judge Glock, who is at the Manhattan Institute, which is my mistake again, but Judge is still loved, though not with us today.

Okay. So to get things going, in 2024, we at Cato released a book titled Financing Opportunity, and it was co-written by myself and Jennifer Schulp, who is now at the SEC in Paul Atkins’ office. And it was largely in defense of Merton Miller’s idea, the one that I just opened with. If you think about whether financial markets help the economy grow and the country grow, it should be so obvious that we shouldn’t even have to have this debate. But we needed to defend the idea because there was a debate, and the debate was picking up steam. More than that, the idea was very much under attack by a lot of the populists, and that by itself wasn’t new, but the direction that it was coming from was rather new for us. It was coming from the right, the populists on the right. Folks who would otherwise be very pro–free market were not just cool on financial markets, but were attacking financial markets. But other than being attacked from the right flank, nothing about those critiques was really new. It was the same old stuff that you had heard, being recycled for hundreds of years, and thousands of years with a longer pause. It’s all kind of rooted in the idea that financial markets just help speculators or middlemen, or they don’t really finance enough real activity. They just move things around. It’s just churn and wasteful. And there are just so many examples of that in history that it’s really hard to know exactly where to start.

So we thought, when we were doing the book, why not start with Broadway? And for those of you who are fans of musicals—I’m not—you’ll know what I’m talking about. It was the 2015 musical Hamilton, and apparently I’m one of maybe five people on the planet that has not seen the whole thing.

Charles Calomiris: Wow.

Norbert Michel: But I have seen clips.

Charles Calomiris: I’ve seen it twice.

Norbert Michel: Twice, okay. I can’t sit through it. I’ve tried to sit through it three or four times, and I just can’t. So it’s a me problem. But it’s the perfect starting point for us in this debate today. There’s an early scene in the musical that depicts the debate between Hamilton and Jefferson, with Hamilton on the side that viewed financial markets as beneficial and sort of the key to unlocking America’s potential, and Jefferson on the other side, the agrarian side, sort of viewing financial markets rather skeptically. So I’ll read this passage really fast here, and then we’ll go to you guys for comments. And this is in the book, which, by the way, is available outside. Really great deal. And I’m not getting royalties for that. There’s a lot of interesting history in the book if you’re interested in that. So the quote, and this is Jefferson talking: “In Virginia, we plant seeds in the ground. We create. You just wanna move money around. This financial plan is an outrageous demand, and it’s too many damn pages for any man to understand. Stand with me in the land of the free and pray to God we never see a Hamilton candidacy.” You have to imagine somebody rapping that. I’m not going to do it.

So, was Jefferson right to distrust markets like this? What do you guys—or do you want to, Charlie, do you want to start?

Charles Calomiris: Well, I would like to talk about that, uh—

Norbert Michel: Or you can pivot immediately. At some point it’s okay.

Charles Calomiris: Yeah. Okay. So I actually have some prepared remarks, but trying to exactly deal with this—

Norbert Michel: Okay.

Charles Calomiris: But it’s such a lengthy response, so I’ll give you a short response. I think that what I’m going to argue, when you ask me to give some extended remarks, is that Jefferson and Hamilton both made important contributions to finance thinking. So, for example, in addition to Jefferson being the architect of land reforms for unsettled land in 1784, which then became really the thought process that governed Madison and Monroe’s influence, especially on the Northwest Ordinances. So yes, he was very much about decentralization, but the depiction of Hamilton as a big-government guy is wrong. Hamilton was a limited-government guy, but he was in favor of certain things that centralization of governance could achieve that decentralization of governance couldn’t. And the way I’m going to argue, when I get a few more minutes, is that—I’ll do it whenever you tell me. Let’s do it. But the short answer is that it’s sort of like on your table, the table of the free society needs salt and pepper. Some of the principles that guide preference for decentralization, call that salt, and some of the preferences that guide the necessity of centralization are pepper. Depending on what meal you’re having, you might use a little bit of one rather than the other, and I think that’s how I think about Jefferson and Hamilton.

I would say, and Veronique and I were talking about this earlier, I started off in my career really making fun of Jefferson. I’ll just say that. I wrote an encyclopedia biography of Hamilton. I’ve been a lifelong acolyte of Hamilton. I’ve seen Hamilton twice. The first time I was there, several of us who are Hamilton scholars were really moved to tears, because it’s a very accurate play in many ways—

Norbert Michel: It bothers me that I can’t watch it. I’ve tried. I just—everybody likes it.

Charles Calomiris: So, but I have, and I know Veronique will talk about this too, I’ve actually come to a different view, which is, yes, Jefferson was definitely eccentric, but for many of today’s issues, and I’ll talk about that whenever you like, this notion that we need decentralization of authority is more appropriate, whereas at the founding of the Republic, for certain things—

Veronique de Rugy: Maybe not. Yeah. Okay. Well, what’s interesting, and this is what we were talking about before, is that I came from the opposite side. For most of my career, without knowing a ton—it was a very superficial understanding of this whole thing—I was like, “Jefferson, yeah. Hamilton, ugh.” Because I thought he was a big-government guy. I also thought, you know, central bank, blah. And over time, actually looking at what they believed—it started with the musical. My daughters loved the musical, so I felt I had to listen to the musical, and then I read the book, and I was kind of like, “Huh.” It presented a very different and much more subtle image of Hamilton. And I have realized that we needed both. Jefferson was definitely right on some things, like concentration of power and decentralization. At the same time, Hamilton was also right on very essential things that Jefferson, unfortunately, was not correct about. And it would actually be great to have a mix of the two, as opposed to just one is great and the other one is discarded. It’s kinda grayish. But to answer your question, Hamilton was right on financial markets, and Jefferson had a very narrow, and wrong, I think, understanding of value as based only on agriculture.

Charles Calomiris: Mm-hmm, mm-hmm.

Veronique de Rugy: And in his own version, Hamilton also suffered from the same problem. While he was able to see what was wrong about Jefferson’s thinking that all value will come from agriculture, and hence despising resources shifting to manufacturing, and he was able to make a real good case, he had the reverse problem, which is that he thought that every resource heading to manufacturing was a good thing. And I’ve been wondering, were they here today, whether Hamilton, because of his almost worshiping of manufacturing, would have basically turned into Jefferson when resources started shifting to services.

Charles Calomiris: They had their own blind spots, for sure.

Norbert Michel: Let’s do this, since—first of all, this is Cato, so we can do whatever we want. And we’re down a person. Let me just remind the audience that everybody online can submit questions through our webpage, Facebook, or YouTube. And you can follow us on X using the hashtag CatoEcon. So we’ll do that, and then let’s just go ahead. Charlie, why don’t you—

Charles Calomiris: Oh, I appreciate—

Norbert Michel: Why don’t you do your remarks, and then we’ll re-panel.

Charles Calomiris: Great. Thank you very much. It’s really an honor to be with both of you on this panel and to be at Cato. And I can’t resist saying how important the Cato Institute is now, ten times as much as it was a decade ago, and how much I respect the institute and its mission, and I’m glad to be a part of it now.

Norbert Michel: Thank you.

Charles Calomiris: Thank you.

So, talking about these two people, the first thing I would say, in my opinion, is that I regard them both as geniuses, and both as people who had a very deep understanding of history, who really studied history very closely. I could give you many references to important books, written hundreds of years before their time, that they both were very familiar with.

Veronique de Rugy: By the way, I just happened to be at a reception last night at the Library of Congress and toured through the Jefferson Library. And it was very moving, actually. If 5 percent of Americans have read 10 percent of what’s in the Jefferson Library, we would be a different country.

Charles Calomiris: Okay, so—10 percent is a lot.

Veronique de Rugy: I know, but I’m saying, if only 5 percent—10 percent of what’s there. In other words, if our elite were even 10 percent knowledgeable about things from hundreds of years ago. But we’re not.

Charles Calomiris: Okay, so anyway, they were both also practical scientific thinkers. I mean, Jefferson wrote about botany, about biology. He was a very broad scientific thinker, as was Hamilton. They wrote about financial issues and made key contributions on finance. And I would say that both were institutional builders. They really both thought about how they were building institutions that would fit a free society, keep it free, and preserve it as a society. And that they had in common.

Jefferson, of course, the Ordinance of 1784, which then set up this idea of self-governing districts with a path to statehood, with decentralized structures of governance within those districts, and operating even initially as districts fairly independently from Congress. That was a really interesting view, and it was the view that came to dominate. Another thing to mention is that although in that 1784 proposal he didn’t get the abolition of slavery and involuntary servitude in the new territory, that did happen in the 1785 and 1787 ordinances, where Madison and Monroe, you might say his acolytes, played an important role. And by the way, that takes us to another theme that I’d be happy to pick up on, which is that Jefferson was very much opposed to slavery as an institution. You can read about that both in that 1784 ordinance and in many other places, like his Notes on the State of Virginia, where he gets into it in some great detail.

What’s his contribution to finance? Decimalization, guys. In 1776, Jefferson proposed decimalization of currency as a practical convenience, and that became embodied in the 1785 act, and then later in the 1792 Coinage Act. So that’s a pretty big contribution, and it reflects a practical scientific understanding of how transactions occur. He was a big advocate of hard money. By the way, you should really see the shadow of Jefferson very much in the Jacksonian movement, both in terms of the advocacy of decentralized governance in banking. Remember, Jackson was not against banking. He was just against centralized control of banking, just as Jefferson was, and he was a big hard-money advocate. Jefferson opposed the National Bank. He called it, as you probably know, “more dangerous than a standing army and a blot on the Constitution.” He argued also that each generation should pay its own debts rather than, quote, “swindling futurity on a large scale,” end quote, by accumulating government debt. Now, that might be a very useful perspective today. I’ll contrast that with Hamilton, but then come back to it. He advocated low taxes and limited government so that, quote, “labor might be lightly burdened.” And of course, there are many things, including, as I said, the Jacksonian movement, that then took those ideas a lot farther.

Hamilton, the debt workout after the Revolution. By the way, it’s not widely known, but that was a debt default. Hamilton engineered a partial debt default. We did not repay all of our debts. We restructured them. If we were a developing country today, we would call that a debt restructuring and default. He was a practical person. He made the default as low as it could be. He also discriminated, so on the currency outstanding, it was a 99 percent default. On the bonds, it was, you know, 5, 10, 15 percent, depending on the bond. And he also, of course, figured out how to get the states to assume a proportional burden, in some sense, of the existing debt for the Revolution. And that was done famously with Jefferson at the famous Maiden Lane meeting—and that’s why we’re sitting here in Washington, DC, because of that meeting—where Jefferson agreed to support the Hamilton plan for assumption of debt, which was not favoring Virginians, because they had paid their own debts during the actual war, and now they didn’t want to have to pay a proportion of the debts. It was a free-rider problem, right? And they were correct in arguing that the other states were burdening them more. And so Hamilton did a deal. So they were both practical men. They made a deal that got us our capital and got us to be a union with common debt because of a common war.

What are some of Hamilton’s big achievements in finance? Here’s the one that you haven’t thought of. He made the Department of the Treasury an extra-constitutional leader in government financial policy. The Treasury Department guides financial policy for Congress, and still does, and did from Hamilton. In addition to, of course, establishing rules for funding debt, for making sure the debt would be repaid from tariff revenues, for establishing the Bank of the United States after he had already established the Bank of New York seven years before. His Report on Manufactures was of great futuristic vision, as Veronique already referenced. He’s sometimes, and lately, being invoked by the Trump administration as a defender of tariffs. That is a gross mischaracterization. He mainly embraced tariffs from a revenue perspective, to help get the government on footing. But he did also recognize that it could be helpful to protect the infant industry, sort of argument. By the way, economic research has proven that that was true: that economic isolation of New England and the Middle Atlantic states during the French Revolution and the War of 1812, that whole period, actually helped manufacturing, especially textile manufacturing, get a footing that really did help it. So the notion that giving them a little slack for a little bit of time could help them develop, as a development argument, it was right.

So Hamilton, though, was a classical liberal. What’s the story about how Hamilton came to be different from Jefferson? And this, I think, is really essential. Hamilton was Colonel Hamilton. Jefferson was Governor Jefferson during the Revolution. Jefferson never shot anyone or shot at anyone. He was never in battle. Hamilton was in battle. He was aide-de-camp, of course, to Washington at Valley Forge, but he also led his own, I think it was a regiment, at Yorktown. You may remember that Hamilton also went with Washington to put down the Whiskey Rebellion. They were both on horseback together again. This was a man of military action. Now, when he was in the field fighting, he also wrote some things called The Continentalist. And in Continentalist number three, he writes something really revealing: “Remote as we are from Europe, in a little time we should fancy ourselves out of reach of attempts from abroad.” He means attempts of invasion. “And in full liberty, at our leisure and convenience, they will try our strength at home. This might not happen at once, but if the federal government should lose its authority, it would certainly follow.” Hamilton, from the very beginning, his main concern about strengthening the national government was national security. By the way, he founded the Coast Guard.

Now, with Jefferson, here’s the personal detail I want you to think about: he wasn’t around for the Constitution debate. He was away in France.

Veronique de Rugy: Mm-hmm.

Charles Calomiris: So this whole balancing of the need to create institutions to protect a new nation, a new democracy, was just something Jefferson never had to defend in a real debate about creating a nation-state. He never had to defend his, to some extent I would say, utopian ideas about the ideal, idyllic, decentralized society. And I think if he had, he might have changed some of those views and found more common ground.

Norbert Michel: I also want to emphasize that Ben Franklin plays a role in Hamilton’s evolution. Back in the early 18th century, before Hamilton was born, Franklin was writing about banking, and he was writing about it from a development standpoint, just as you’re saying, right? A Modest Inquiry into the Nature and Necessity of a Paper Currency—that’s by Ben Franklin, when he was in his twenties, in the 1730s, I think it was. The notion that banking was important, as you’ve just said, Miller understood. Franklin was, in some ways, the author of that.

Charles Calomiris: And of course, that was all going around at the time. John Law wrote a famous paper in 1705 when he was in Scotland. He was the guy who created the Mississippi Bubble in France. But before he did that, he wrote a paper about land banks, again, as developmental tools. And by the way, most historians would say Scottish banking was key to Scottish economic development in the first half of the 18th century. So I’m just trying to say that this is not so much a struggle between two viewpoints as, I think, an emerging consensus that really goes back to Franklin and Robert Morris and, of course, Hamilton.

Hamilton, yes, saw that national debt, quote, “if not excessive, will be to us a national blessing. It will be a powerful cement of our union.” That was that assumption point I made before. “It will also create a necessity for keeping up taxation to a degree which, without being oppressive, will be a spur to industry.” That was interesting. So he saw national debt, markets of sovereign debt, as a positive influence on the development of capital markets generally. And by the way, that’s been proven in economic research since. And also, of course, banking. And he saw two aspects to banking: both the development aspect, but then also its usefulness to the state for managing its finances.

Let me remind all of you that when the charter of the First Bank of the United States expired in 1811, unfortunately, then we had the War of 1812. And our outstanding debt fell about half in value during the War of 1812, and we had to do some emergency issuances that were very unpleasant. And the reason why we rechartered the Bank of the United States in 1816 was that we learned during the War of 1812 how right Hamilton was that you needed to have that. And of course, that was based on his knowledge about the Bank of England and its role. The Bank of England, from its beginning in 1684 until 1815, had as its primary mission in the whole period funding the war against France. That was it. It was not a commercial bank, really. It didn’t do anything during that period but fund the war against France. And Hamilton was acutely aware of that.

Okay. I also just want to say a word before I end about Jefferson. Despite his eccentricities, Jefferson was not the person portrayed in the musical Hamilton. That’s the one aspect of Hamilton, the musical, that I think is inaccurate and almost nasty. So people like to portray Hamilton as the great anti-slavery person, which he was. And of course, his wife founded an anti-slavery foundation and ran it after his death. Jefferson also shared that view. Also, the notion that Jefferson was having affairs with Sally Hemings is false. That is well known by scholars to be false. It may be that his brother did, but he did not. And this is something that, even when you go to Jefferson’s home at Monticello or whatever, the guides will use, because it creates a salacious aspect, but there is absolutely lots of evidence against it. I just want to say, I think that we’ve said a lot about the musical. We should point out that that’s not fair and it’s not correct.

But I will blame Jefferson for unit banking. And unit banking was a big problem in the US, as I’ve argued at length. By the way, my book, Fragile by Design, is not available outside for free. But I strongly recommend that you buy it, with Steve Haber.

Norbert Michel: That is a very good book as well.

Charles Calomiris: Thank you. And what we show in that book, and of course many other scholars have shown, is that unit banking created two big problems for American financial development. One was excessive fragility. We had, between let’s say 1820 and 1913, I think 18 major financial crises when Canada had zero. To give you a little bit of a comparison, Canada had a nationwide branch banking system, and it designed that system based on the thinking of Alexander Hamilton. We, after departing from Hamilton’s thinking, went down the Jacksonian path, which was really the Jeffersonian path in many ways, of decentralized unit banking, and that created a great deal of banking fragility, an undiversified, fragmented banking system.

It also made us backward for funding industry during the Second Industrial Revolution. Not the First Industrial Revolution, but the Second Industrial Revolution. There was a size mismatch between firms that had very large minimum efficient scale and very small banks. And banks just couldn’t do industrial finance, and so banks switched to doing almost exclusively commercial finance, helping goods move around, not funding actual enterprises getting started. American capital markets, however, developed to some extent in response to that. But I want to emphasize, not right away, because a fragmented banking system also makes it very hard to set up equity markets, because equity markets eventually depended in the US on things called roadshows. In Germany in the late 19th century, they didn’t use roadshows. The banking system basically helped to organize the capital market. The US was actually behind Germany in capital market development, let’s say circa 1890. But eventually, the problems in the banking system did help to spur US capital markets too. So I would say this was really a big problem. A big negative for Jefferson was the unit banking system legacy, both from a fragility and a development perspective. I know I’ve gone on at length, but I just wanted to share with you those thoughts.

Again, the point being, they are the salt and pepper on the table of a free society. And right now, I would say, on two big topics, I’m much more thinking that Jefferson’s viewpoint is necessary to take into account. One, big banks. Norbert started by pointing out populist sentiments about finance, but, you know, what do those really reflect? Those reflect a question of legitimacy. The financial crisis of 2008 and then the other smaller financial crisis of 2023 really reflected what I would call a corrupt financial system, not a free-market financial system.

Norbert Michel: Right.

Charles Calomiris: One that lacks legitimacy, and Americans are opposed to it. And so free markets have somehow been stapled to what I would call a corrupt system, and it’s precisely the Jeffersonian principles of decentralized power that need to be brought to bear. You ask me, we need to break up the big banks. And I think that’s a very important topic for us.

Now, on the fiscal side, of course, Jefferson’s concerns about making future generations have to pay for your costs—that is so relevant right now. Why aren’t young people out in the streets with pitchforks and torches? I don’t know. Maybe they’re too busy looking at their AI. But I think they need to wake up, and we, as older people, are long past the point where we should’ve been making some sacrifices and thinking about future generations. So that’s the sense in which, depending on what meal you’re served, you need more salt or more pepper. I think right now we need a little more salt than we used to. Thank you.

Norbert Michel: Thank you, Charlie.

Veronique de Rugy: I want to pick up on something you said that I think is actually quite important. There is a caricature of Hamilton that is circulating these days among the right, about how he was a protectionist, to justify the tariff regime that is put in place right now, and I think it is a caricature. And one of the things that’s really interesting is that, yes, there were areas where he favored tariffs as protectionism.

Charles Calomiris: Yeah.

Veronique de Rugy: For the most part, he saw tariffs as a source of revenue, revenue to back the debt. And in fact, he preferred subsidies—not that it’s any better—because he had this, I think, wrong notion that centralization and elites could actually direct resources better than the market could. This is where Jefferson was right, in understanding the invisible hand of the market, in a way that I think Hamilton didn’t see. But the thing that’s interesting about Hamilton, and where you see the caricature of him, the way he’s presented as just a full-on protectionist who would’ve supported what we have now, is precisely what you said about his understanding of the need for revenue. Because revenue came from tariffs and excise taxes, he understood that you could not be a protectionist and have tariffs that would prevent imports from coming, and hence deprive you of the revenue. So I think there are just a lot of places where you see that the way Hamilton is used now as a protectionist, pro-tariff figure is wrong.

And the other thing that I have learned to recognize about Hamilton that I did not appreciate before—and I often think about, were I there at the time back then, I would not have liked it, by the way. I’m a modern girl. I may have adjusted because I had no choice, but anyway. That said, I always wonder which side I would have been on, and I think that, with my libertarian predisposition, I would have been on the side of Jefferson, and I fear I would have been wrong, because I may not have actually appreciated what Hamilton was trying to do. And Hamilton saw—correct me if I’m wrong, because I definitely don’t know this at the level that you do—the failure of the Continental dollar as the product of a lack of backing for American debt. He understood that the debt was basically the way to actually underpin the financial system, which he recognized was important. I don’t know that he foresaw what the American financial market was going to be, but there is no doubt that his understanding was that the credibility of the debt, and the ability to use the debt as a safe asset, relied on having tax revenue—

Charles Calomiris: Mm-hmm.

Veronique de Rugy: Not necessarily tax revenue today, but at least the credibility, to back it up. And on the Jefferson side, I would’ve probably been behind him, thinking there are no enumerated powers for chartering this bank. It is going to lead to corruption, which I think he was not wrong about. I would’ve probably been on that side and maybe totally not been able to see what Hamilton was able to do. But the assumption of the debt, while creating the source of revenue—and by the way, it was very clear that it was assumption of the debt, a one-off. It was not like we’re always going to bail out the states. I think they came through to show that, because in the 18-something, when some states were failing, they did not bail them out, which did not set a precedent of “you’re going to bail them out.” And that was super important. But setting the revenue and the assumption of the debt ended up—and this very explicit commitment that in America we pay back our debt, at least most of it—I think was essential. Because I am very frustrated these days by the taking for granted of this notion of American Treasuries as a safe asset, which underpins our financial system in a remarkable way, without thinking about what that means. And I think this is where Jefferson was right: to take this for granted, and not see that centralization and the bad incentives within government are actually very destructive, and that pushing policies that disturb this notion of a safe asset is the problem that we have today.

And the whole debate, if you remember a few years ago, that we didn’t have to worry about an increase in the debt because as long as interest rates were lower than growth—I mean, there were a lot of caveats in that literature that, of course, people who wanted to use this to increase the debt ignored, which, for instance, is that you increase the debt once and then you have to have a primary surplus forever after that. They ignored that it didn’t apply to the US, because of the size of our primary deficits. There is never actually a thinking about how raising the debt so much would actually change r, the interest rates, right? It’s almost like a Lucas critique of the r minus g. And I think with the safe asset, it’s the same thing. We take the safe-asset notion of Treasuries for granted—

Charles Calomiris: And that undermines the safety.

Veronique de Rugy: Yes, and it undermines the safety. And it is true, right? In a way, we’re keeping our safe asset because we’re not the ugliest in the not-safe-asset beauty pageant that we see around the world. But I think it is essential to always remember that we have this for a reason, and jeopardizing it—there are underlying reasons that—

Charles Calomiris: Mm-hmm.

Veronique de Rugy: And I think Hamilton understood this in a way that Jefferson probably didn’t appreciate. Again, I don’t know if Hamilton could foresee what that system that he put in place would produce—

Charles Calomiris: Yeah.

Veronique de Rugy: And I will say—I think you and I talked about it when you asked me to be on this panel, and I was like, “Why?”—it is true that I have come to realize that, apart from the founding documents, which I think are just unbelievable, but also the culture, the American culture that actually reveres those documents. We respect them because we understand them. We have a culture that reveres these documents—well, hopefully enough. But the financial markets are what make America just unbelievably exceptional, and I did not quite understand this for a long time. I appreciated financial markets, but I didn’t realize just how fabulous our financial markets have been and are compared to any other financial markets—

Charles Calomiris: Ever.

Veronique de Rugy: But anyway, I don’t know that he could foresee this, because ultimately it’s the innovation and the creativity and the willingness to risk things.

Charles Calomiris: But he understood the price system. He understood where the financial markets and interest rates fell into this. And interestingly enough, for all those protectionists and new right, or however you want to call them, who claim him, they want to take the protectionist tariff side of things without taking his actual liking of financial markets.

Veronique de Rugy: And it’s wrong. And I’ll just add, I don’t know that any of them could’ve really foreseen just how powerful those markets were going to become, you know?

Charles Calomiris: Yeah. Well, I think you’re touching on this point that I also think we should talk about, which is: what did they foresee, and to what extent did they foresee what ended up evolving? Remember, this republic is a miracle, and the founders weren’t really so sure it was going to last one or two generations, much less 250 years. So I think we should be pretty impressed by that.

Well, let’s talk about some things they didn’t foresee. So one thing, if you read today The Federalist Papers, I want to make two points about what they didn’t foresee. First, after reading The Federalist Papers, go and read what is now called the Anti-Federalist Papers, which I think Mike McConnell had a hand in drafting, putting together a bunch of papers. And you read them, and they’re all the things that people are saying could go wrong as a result of federalism as envisioned in The Federalist Papers. A lot of what’s in there came true.

Veronique de Rugy: Yeah. Mm-hmm.

Charles Calomiris: Right? But Hamilton and Madison and Jay had good arguments for why, at least for the foreseeable future, those things wouldn’t come true, and I think they were right. But then, on the other hand, they did eventually. So I think that’s really interesting.

The other thing that everybody missed in The Federalist Papers was something that became the main theme of governance problems in America in the early 19th century, in the early republic, and that was corruption in state legislatures through special chartering, which Hamilton had been a part of. But they didn’t see how corrupting it was going to be. Those state defaults you’re talking about in the 1840s, those were the result of canal projects, or turnpikes and other things, but it was mainly the canal projects, where states were getting special privileges. And it was the Jacksonian movement, really, that succeeded in the 1840s and 1850s, throughout the whole country, in establishing general chartering laws and abolishing special chartering and special privileges of corporations through the state legislatures. So I think we have to give Jefferson some credit—

Veronique de Rugy: Oh, yeah.

Charles Calomiris: Right, for that movement, for having anticipated some things. And even the things they didn’t anticipate, it was their ideology, as expressed ultimately in the Jacksonian movement, that fixed a major problem of centralized corruption in the state legislatures.

Then the final thing I just want to say about all of this is, remember that Hamilton supported Jefferson for president. Now, why did he do that? Because the alternative was Trump. I’m sorry, Burr.

Veronique de Rugy: Yeah. It is a great example of politics and how they have not changed at all. And in the musical—

Charles Calomiris: Yeah.

Veronique de Rugy: I mean, it does say, he said, “I would prefer—Jefferson at least has some beliefs,” right?

Charles Calomiris: Mm-hmm. Yeah. Or principles or beliefs.

Veronique de Rugy: And Burr has none.

Norbert Michel: We’re going to open it up for questions.

Veronique de Rugy: One of the things that is so interesting to me about the debate—“the debate”—is that there’s a lot of subtlety, and it’s not as clear of a debate as you might think. There are points that they are very different on, but the general idea, they kind of both had.

Charles Calomiris: Yeah.

Veronique de Rugy: If I may say something else, again, Hamilton wasn’t a hardcore protectionist like he’s painted to be. But I think it’s kind of interesting that Jefferson—was he pro-tariffs? I mean—

Charles Calomiris: I don’t recall. No, but I would be shocked if he was.

Veronique de Rugy: Yeah. No, but it’s so interesting at the same time that he was so anti—he didn’t understand that we weren’t depleting the nation by paying interest to foreigners—

Charles Calomiris: Right.

Veronique de Rugy: —when he actually believed so much in the invisible hand. And I think it’s interesting because this is an argument that protectionists are using now, against imports, that we’re sending our money abroad.

Charles Calomiris: Yes, and that’s actually bad economics.

Veronique de Rugy: Exactly.

Charles Calomiris: So there’s something called the Lerner symmetry theorem. It’s a theorem. It’s not an opinion. And the theorem says that tariffs are a tax on exports, period.

Veronique de Rugy: Yeah, yeah.

Charles Calomiris: Which is why agricultural interests have always, in US history, opposed tariffs. So I think it’s interesting. And there is historical evidence about both of these guys recognizing that selling debt to foreigners and paying that back isn’t sucking money out of the country, or something like that. But I think it’s kind of interesting, and if the protectionists would actually bother to go and read some economics, and—

Veronique de Rugy: Ah. And the debates, you know. Amen.

Norbert Michel: So we do have folks around with microphones. Please wait for those guys to come to you and speak clearly into the microphone. And please, I would implore you to ask your question in the form of a question. It’s okay. We already have several questions online that are not questions. So.

Audience Member: Thank you. Professor Calomiris, great to see you here today. I particularly liked your vignette about Hamilton’s focus on national security. But then you go to great pains, both panelists, to add nuance to his view on tariffs and protectionism, limiting it to infant industries. But isn’t it fair to say that a lot of what President Trump has done has also focused on reclaiming industries that have been offshored to China, that are specifically done for national security purposes, and to provide an incentive to replace and rebuild those industries onshore? And it also shows an understanding that if we don’t have military supremacy, to some extent, in the world, it really questions whether or not we can maintain the primacy of the US dollar and everything that goes with it.

Norbert Michel: Do you want to go first?

Charles Calomiris: I have things to say, but I’m guessing you do too.

Veronique de Rugy: Yeah. No, I mean, I think there’s no subtlety in what the president has done. I think that national security has been an abused label. It is always an abused label, but it’s just been particularly abused. A lot of the tariffs have been put on things that have no national security implications whatsoever. I also think that in the second term—while I think in the first term you can kind of argue that there was a commitment, and I didn’t agree with how it was pursued—to target China this time around makes kind of no sense whatsoever, in targeting our opponent. But also, I’d like to point out that on its own terms, it has actually failed to achieve the goal of really restoring. To the extent that we have a manufacturing boom in the US, it is for investments that have relied on being exempted from tariffs. So it’s hard for me to look at the Trump administration’s tariff policy as subtle, national security–inducing, or—we’ll see, right? I may turn out to be wrong. But it’s hard to see it actually achieving any of the objectives that they wanted, in part because it seems to be confused. It seems to want to use tariffs as a source of revenue, second, as a source of protectionism, and, third, as leverage. And you can’t do all three with one. But I don’t know.

Charles Calomiris: I want to be brief too. I agree with everything you said. I don’t think it’s a legitimate use of national security. There is a legitimate national security argument.

Veronique de Rugy: Yeah.

Charles Calomiris: He hasn’t used it properly, and you can’t defend his tariffs that way. I will just reference Don Boudreaux and Phil Gramm. Read their op-eds in The Wall Street Journal, and read their new book on the myths of American history, which is really an excellent book, and they spend some time especially talking about this view that tariffs are responsible for a hollowing out of manufacturing, which they show is not true.

But I do want to respond more positively. We need to worry about China. We need to respond to unfair trade practices by China. It was a mistake to admit China into the WTO. China has abused that and done everything that’s contrary to the WTO as an organization and created havoc. Europe is right now in great turmoil trying to figure out how to respond. We also—and the biggest risk we face is that we try to imitate China, and that’s what the Trump administration is doing with industrial policy, government ownership of firms, corrupt dealings of the administration with firms, independent of that, and trying to argue that we need an industrial policy run by the executive to basically try to out-Chinese the Chinese government. That is not what we need to do. We need to embrace our institutions of a free society and to counter the Chinese threats. You don’t defeat communism or socialism by becoming communism.

Veronique de Rugy: Yeah. Exactly. By the way, the last third of Hamilton’s Report on Manufactures was actually not great. I think we can say this: he did really believe, and this is where Jefferson was right, that the central government could direct things better than the market, and he liked subsidies, and he just didn’t see the knowledge problem.

Charles Calomiris: There’s a lot in there, though, that I think you could take.

Veronique de Rugy: Oh, yeah, yeah. I said that, to make whichever point you wanted as well.

Charles Calomiris: I want to quote a famous political scientist and economist, Charles Lindblom, who was also my professor back in the 1970s, and he said that a successful market society is like your hand. The government plays the role of the thumb, the market plays the role of the fingers. Thumbs are good for pushing things. Fingers are good for fine-tuning things. And I think that Hamilton was thinking about development and about infant industry arguments, but I very much agree with your judgment on it.

Norbert Michel: Do we have another question? If not, I’ll go—anybody else? We’ll go back here. Is that Larry? I can’t tell. It is. Hi, Larry.

Larry (Audience Member): Hi. Hamilton favored the infant industry argument. I think of that as a protectionist argument. So I wonder what the bar is when you say Hamilton was not a protectionist. Is the criterion that the tariff rate he favored was to the left of the peak of the Laffer curve?

Charles Calomiris: No, no, I didn’t say that. I said that he was not the protectionist being portrayed.

Veronique de Rugy: The caricature.

Charles Calomiris: The caricature of it. I grant you that he did agree with the infant industry argument, and I would say, by the way, that argument was proven to be valid in the case of the United States, coming from the isolation during the Napoleonic Wars. It did spur industry, and we didn’t need any further spurs. So I’m not trying to defend everything that Hamilton said as sacrosanct, but I’m just saying don’t believe any of the current sort of Trump administration caricature. You may not like the infant industry argument. You may say, “It’s hard to run a government that way because it’ll be abused as an argument.” I agree with that, too. We might be better off without it. Maybe that’s right, too. But it’s also true that he wasn’t what is being portrayed.

Norbert Michel: Yeah. Okay. I have five non-questions and two questions online, so I’m going to reward the person who actually asked a question. I find this one interesting, and then we’ll stop. We’ll be out of time. “How can one maintain decentralized governance in institutions when more and more economic activity involves national and international financial markets?” I kinda know what I think, but do you want me to read that again?

Charles Calomiris: No. I think that the answer to our national threat right now, which is from China, a global threat to our nation, is not central planning. It is releasing and empowering individuals, and that’s always been our answer.

Veronique de Rugy: Yes. Yes. Yes. The international market or the national market, all that—I understand what that means, but the nation itself is not doing anything. The people in the nation are doing things, and people are trading with people, and we lose track of that very easily and devolve into this—

Charles Calomiris: It’s the same on trade.

Veronique de Rugy: Yes, exactly. When I hear “America versus Canada,” nations are not trading with one another. It’s individuals who are trading with one another.

Charles Calomiris: Exactly.

Veronique de Rugy: Right. And, Larry, he was a protectionist, but again, he certainly can’t be used to defend the current regime the way it is. And if they want to claim him, they should also understand that his appreciation of financial markets doesn’t seem to be one that some of these guys appreciate today. And so maybe they should look more at that.

Charles Calomiris: I’m going to go out on a limb and say, and I don’t have a crystal ball, and there’s no séance involved, Hamilton would never have supported the Trump administration.

Norbert Michel: And we’re not political here at Cato, so that’s—but I’m with Charlie’s opinion, and that’s that. Thank you all very much. We will take a short break, and we will be back for our next panel at 11:15. Thank you, guys.

Veronique de Rugy: Thank you.

Charles Calomiris: Thanks very much. It’s such a pleasure.

Veronique de Rugy: It was wonderful.

This transcript was generated using AI automation and may contain minor formatting or transcription errors. Please refer to the original audio to verify specific quotes or context.

Emily Russell: Hi, everyone. It’s great to be here. I’m Emily Russell. I’m the policy editor at Barron’s. I’m happy to be joined here today by some great guests. We’re going to discuss the regulatory state in a few different key areas, from banking to crypto to public markets. Just a few notes. We’re going to be doing a discussion amongst the four of us for about 30 to 45 minutes, and then we’ll open up the floor to a Q&A. If you’re watching virtually, you can submit questions via Cato’s homepage, Facebook, or YouTube, or on X using the hashtag #CatoEcon. We will also be accepting questions in person, of course.

So here to discuss some of the regulatory changes that we’ve seen over the past 20 or so months of the Trump administration, we have Summer Mersinger, who is the CEO of the Blockchain Association, a leading nonprofit advocacy group for the crypto industry. She previously served as a commissioner of the Commodity Futures Trading Commission from 2022 to 2025, and she’s worked for more than two decades in DC, both at the CFTC and on Capitol Hill. She was chief of staff for Senator John Thune.

Next to Summer, we have Jill Castilla, who is the chairman, president, and CEO of Citizens Bank of Edmond, which is a 125-year-old community bank in Oklahoma. She is also the founder of ROGER, a digital-first military bank, and she spent nearly a decade with the Federal Reserve Bank of Kansas City. She represented the Tenth District on the Federal Advisory Council, where she advised the Fed on the commercial banking industry. American Banker has recognized Jill as among the most powerful women in banking for 12 consecutive years.

We also have David Burton, who is a lawyer and senior research fellow in economic policy at the DC think tank Advancing American Freedom. He focuses on securities regulation, tax policies, and regulatory and administrative law issues. He’s also worked as a researcher at the Heritage Foundation and has served as general counsel at the National Small Business Association. That was a mouthful.

Okay, so we’ll just dive right in. Summer, I want to start with you. You’ve been on both the regulatory side and, now, the industry side, representing crypto firms. Can you give some insight into how those two sides are interacting right now? Has the relationship changed over the past year or so? And give us some insight into what you see those relationships developing into.

Summer Mersinger: Yeah. It definitely has changed. With the change of administration came more of an open-door policy with the regulators. I will say, when I was at the CFTC, I felt like we were pretty good about always welcoming all stakeholders in to talk with them, learn about their businesses, and help them find a way to comply with our rules. It was probably less so at the SEC. Both agencies have created these task forces: the Innovation Task Force at the CFTC—

Emily Russell: Mm-hmm.

Summer Mersinger: —and the Crypto Task Force at the SEC. And it really is staff who just want to hear about these businesses, want to hear what’s happening in crypto, and learn more about the process and the technology behind it. So it really has been an opportunity to educate the regulators that I didn’t feel was there when I was at the CFTC. I was always kind of—I wanted to see more. And so yeah, it’s been a great relationship between the two agencies, and it feels like a partnership, not an adversarial kind of relationship the way it did a few years ago.

Emily Russell: Sure. Jill, there’s a similar, maybe, shift in relationships happening in the banking industry. The Trump administration and Fed Governor Michelle Bowman are very much working to change some regulations. Can you talk about what you’re seeing, and if the community banking sector, from your point of view, is experiencing any of those changes yet?

Jill Castilla: It’s been so incredible to have a vice chair for supervision that’s actually been a community banker. I mean, Miki Bowman, vice chair for supervision, sat in a community bank—has this amazing little family bank in Council Grove, Kansas, that is just central to the economy of that community. And so she understands the importance of being able to match regulation with risk, oversight with risk, action towards risk, rather than having this really burdensome environment that’s stifled innovation. It’s kept smaller banks from being competitive. It’s restricted the formation—

Emily Russell: Mm-hmm.

Jill Castilla: —of new community banks. We’ve seen lots of changes. Even just her direction to supervisors has really shifted again to more of a material risk, rather than just nitpicking a policy, rather than thinking about, “Is this going to be the demise of an institution if we don’t take action?” Not rewarding supervisors for the number of MRAs and MRIs that they cite—

Emily Russell: Mm-hmm.

Jill Castilla: —but rather if they’re able to identify opportunities. We had an examination just a few months ago, and the tone was completely different. It was about really understanding our business model, guiding us through potential risks that we might not be seeing, giving us kudos whenever we are able to identify risk, and it was much more collaborative. And so I think that will help us be sustainable for the next 125 years.

I think the other thing is being able to put capital to action. A lot of focus has been upon capital reform for the nation’s largest institutions. But for the smallest, we are able to opt into a community bank leverage ratio. They were able to move that down to 8 percent, so we’re able to deploy more capital out to the community in a safe and sound manner. And so that allows community banks to be much more competitive with larger institutions and other competitive actors in our economy, and be able to sustain and accelerate economic growth in our communities.

Emily Russell: Yeah. I want to talk a bit about—you used the word risk, and you mentioned they’ve reduced the leverage ratio to, I think it was 9 percent. It’s 8 percent now, is that right?

Jill Castilla: That’s correct.

Emily Russell: Oftentimes it feels like when we talk about systemic risk in the banking industry, we are thinking about JPMorgan or Bank of America. But in fact, there are many community banks, and they might be smaller, but they’re not insignificant in any way. How should regulators be approaching the idea of systemic risk among the community banks, especially as they’ve changed the definition of community banks from, what is it, $10 billion to $30 billion in assets, is that right?

Jill Castilla: Yes. And the technical definition of community banks has been by asset size. I define it by: can you call the CEO? Can you get a meeting with the CEO?

Emily Russell: Right.

Jill Castilla: Then congratulations, you’re banking at a community bank. So I think it’s a complex kind of question. Increasing the threshold, I think, was important, because there are larger banks that act as community banks.

Emily Russell: Yeah.

Jill Castilla: They are really integral to the community banks, the banks that they serve. Systemic importance nationally—my little bank, if I fell, doesn’t matter at a system level. I’m not wanting to be rescued by anybody, and certainly no one’s going to come to the rescue. But to my community, even though there are 80 community banks in my town, and we’re the oldest bank in Oklahoma County that’s still operating, started before statehood—when I came to it, it was a troubled institution in 2009. And the calls I would get would be not like, “Are my deposits covered by insurance?”—although some of the questions were about that. It was more of, “We can’t lose Citizens Bank of Edmond, because it’s important to this community. It’s systemically important to Edmond, Oklahoma.”

Emily Russell: Right.

Jill Castilla: And when you think about more isolated communities where that might be the only financial institution in town, the only place you can go to get a small business loan, that’s going to take that risk because they’ve known your family, or they know the work that you did in high school—

Emily Russell: Yeah.

Jill Castilla: —or the troubles that you worked through, the more character-based lending, those are very important to ensure that we have economic prosperity in all corners and nooks and crannies of our country.

Emily Russell: Yeah, absolutely. So you’re saying the community will be impacted.

Jill Castilla: Yeah, the community—and that’s the big risk, is systemically important—

Emily Russell: Yeah.

Jill Castilla: —to that community. But when you think about it, like, if 3,000 community banks are under a billion dollars like mine, if those go away, that does have an impact overall to our economy. If we have everything and it’s only online, and we’re not having coaching of a small business for years until maybe they’re bankable, we lose the opportunity to have economic prosperity for generational kinds of changes in wealth that you would miss out on if those community banks weren’t there.

Emily Russell: Sure. And just talking about everyday Americans, like those in Edmond—David, I’m curious, you have written in the past about how regulations affect everyday Americans. When we’re talking about all of these lofty ideas, or policies in Washington, and how they impact the lives of everyday Americans, can you make that link for us between those regulations and affordability right now?

David Burton: Well, a whole host of federal agencies, including the Securities and Exchange Commission, the three banking agencies, FinCEN, and FINRA, which is technically not a federal agency but has been delegated regulatory authority by Congress, have for decades now been steadily ramping up the complexity and cost of regulation. And it’s having very pronounced negative effects. It means it’s more costly to provide financial services. It means it’s more costly to raise capital. You have to spend boatloads of money on lawyers. It has resulted in us losing about a third of our broker-dealers over the past 20 years. It now means that we have very concentrated investment banking and banking. The largest 10 banks account for about half of the deposits in this country. The small broker-dealers that service entrepreneurs seeking to raise small amounts of capital, by which I mean $5, $10, $20 million—

Emily Russell: Mm-hmm.

David Burton: —now no longer exist. And Morgan Stanley doesn’t care about a guy raising $5 million. And that means we have less competition in the marketplace in almost every industry.

And I think FinCEN is underrated in terms of its negative impact. AML/CFT compliance imposes huge costs on community banks, and the cost of compliance does not increase linearly with size. So it has a disproportionate negative impact on small banks—

Emily Russell: Right.

David Burton: —on credit unions, on small broker-dealers. And FinCEN, every three years, makes it worse. And they’ve been doing that now for 40 years. So the combined effect of these ever-increasing regulatory burdens is showing up in industry concentration, less competition, higher prices, less access to capital throughout the economy.

Emily Russell: And what are some of the more encouraging changes that you’ve seen in the past 20 months that you would point to?

David Burton: Well, I think one of the great, shall we say, misrepresentations is that the Trump administration is hugely deregulatory. It’s not. They were moving very slowly. And the first Trump administration was a little bit better, but literally 67 percent of their major rules occurred in year four, most of those in quarter four, and the Biden administration stopped it. If you really look at the facts, the Trump administration has stopped doing dumb things. In the first Trump administration, they didn’t roll back that much of the Obama-era regulation, let alone earlier rules. A little bit, especially in the energy and environmental area. But if you look at the SEC rulemaking so far, it’s been very limited. And FinCEN has only done one useful thing: they put the kibosh on the beneficial ownership reporting. That was it. Basically, they haven’t done anything else. FINRA hasn’t done anything constructive. Of course, FINRA is an unaccountable black box. So yeah, they’ve stopped, shall we say, making the problem worse—

Emily Russell: Mm-hmm.

David Burton: —but they haven’t done much to make it better. I hold out hope that the SEC will soon start doing important things. The three Republican commissioners there are quite good, but they haven’t actually delivered yet.

Just real quick, on the SEC’s proposal to reduce earnings reporting from quarterly to twice a year, I have mixed feelings about that. Markets function better when there’s good and timely information.

Emily Russell: Mm-hmm.

David Burton: My guess is most companies will continue to report quarterly anyway. But of all the problems we have with the administrative state and financial regulation, that would be very near the bottom of my list, and it’s not clear to me why they chose to prioritize that. Although it’s certainly gotten lots of attention from the media.

Emily Russell: Speaking of the difficulty of changing policies and regulations in Washington—Summer, I want to talk about the CLARITY Act, which, what was it, last week, stalled in the Senate. The SEC is now releasing its own rules in lieu of congressional action to regulate cryptocurrency. Can you talk a bit about what is happening from the CFTC and the SEC on this, and what the Blockchain Association’s feelings are about the direction that we’re going, which is not legislative action but instead administrative action?

Summer Mersinger: Yeah. You know, it was a week ago.

Emily Russell: Yeah.

Summer Mersinger: Feelings-wise, I describe it as a really bad breakup.

Emily Russell: Oh.

Summer Mersinger: You know, we were all really sad, and now people are mad, and—you know, we probably—

Emily Russell: Going through the stages of grief.

Summer Mersinger: Going through the stages of grief. But I do think there’s recognition that there is a lot that the administrative agencies can do. Again, we’ve already seen action from the SEC, with both their crypto regulation but also the innovation exemption.

Emily Russell: Mm-hmm.

Summer Mersinger: And the CFTC has sent a rule to the OMB that will probably be the smart market—

Emily Russell: Um, yeah.

Summer Mersinger: —regulatory framework. So that’s good to see that moving forward. I think what’s going to be difficult is, honestly, the question of durability. I think Hester Peirce said—

Emily Russell: Peirce.

Summer Mersinger: Peirce said, “If you do good things, they stick around,” and I hope that’s right. But I do think there’s going to be a number of legal actions that will probably take place—

Emily Russell: Mm-hmm.

Summer Mersinger: —around some of these. We’re already hearing people talk about it.

Emily Russell: Yeah.

Summer Mersinger: And at the end of the day, you want some certainty for markets, and it’s tough when you are using the regulatory agency to try to build that without statutory backup. It’s not as clear-cut. But I do think Chair Atkins and Chair Selig are doing a great job, and I think we’re going to see a lot of really good policy come out of the two agencies.

Emily Russell: And I’m curious, to give a sense of how much time and energy went into this push legislatively—when did you guys start working on the CLARITY Act?

Summer Mersinger: Well, for me personally, I go back to 2019. I started working on it at the CFTC—

Emily Russell: Oh.

Summer Mersinger: —for former Chairman Heath Tarbert, and I remember the first time we were up on Capitol Hill talking about this, and nobody understood what we were talking about. I don’t even know if we understood—

Emily Russell: It can be a bit tricky.

Summer Mersinger: —what we were talking about.

Emily Russell: Yeah. Yeah.

Summer Mersinger: And so that’s when I started. And I worked very carefully with both the House and the Senate when I was a commissioner as well. I often would go up and do informational discussions with members of Congress—

Emily Russell: Sure.

Summer Mersinger: —trying to explain at least the regulatory side and where there were gaps. And then once I started at the Blockchain Association in June of 2025, right after that, GENIUS was passed, and then the House passed their version of CLARITY—

Emily Russell: Right.

Summer Mersinger: —and then it was all in on the Senate. So it’s consumed a lot of my time at the Blockchain Association.

Emily Russell: I’m sure. I’m sure.

Summer Mersinger: And I feel like it’s consumed a lot of my life, actually. But this is legislation. I kind of always say, it’s hard to do. Once upon a time when I was doing private lobbying, I worked with the songwriters, and after streaming started—

Emily Russell: Mm-hmm.

Summer Mersinger: —there was the question of how do you pay songwriters with streaming music? It took, like, 10 years to get legislation passed to change how they were paid. And so I always kind of use that as our comparison: yes, this didn’t happen, but sometimes these things really do take a long time. And you never know what’s going to throw things off when you are dealing with Capitol Hill. So I’m trying to keep everyone encouraged that this isn’t the end. We—

Emily Russell: You’re playing the long game.

Summer Mersinger: We’re playing the long game. Exactly.

Emily Russell: Sure. Jill, I’m curious if there’s any piece of legislation that would change regulations for community banks that you are particularly excited about. I know that there is the Main Street Capital Access Act that I think has stalled in the Senate. Correct me if I’m wrong. But what is your version of the CLARITY Act?

Jill Castilla: Well, and we’re highly engaged in the CLARITY Act, and we need a market structure bill. I mean, the community banks are innovative. We want to be part of—the blockchain is such a great opportunity for—

Emily Russell: Sure.

Jill Castilla: —small businesses to be able to move money around without having to be charged. Really, fees are very competitive.

Emily Russell: Mm-hmm.

Jill Castilla: There’s not another competitor in the market, so the speed and the cost. Also, our accessibility to the Fed, even from a banking standpoint—we have to go on old rails to do that, which, as we have a 24/7 kind of payments environment, really hampers community banks, because we don’t have that access to liquidity—

Emily Russell: Right.

Jill Castilla: —to be able to support that type of movement, where the economy is going. But there are so many different opportunities. We’ve really seen great movement in the House through Chairman Hill’s leadership and Majority Leader Wa—Walters. Her team—they have really moved legislation through the House, so we’re seeing a lot of great support there to help community banks. Not really—we don’t need subsidies. I mean, I’m like, “Bring on the competition.” I’m not scared. I compete with JPMorgan Chase every day. There’s no fear, and I think that’s true of 3,000 banks like mine. But it’s this weight of regulation, the disparity in the amount of risk that we have at my institution and the level of oversight and reporting that we have to do. That imbalance seems to be getting better.

New bank formation is also something where we’ve seen the innovation sector really be able to benefit from the administration opening up bank charters or trust charters, to be able to facilitate innovation and be able to provide access to the banking environment. But we haven’t seen as many traditional community bank charters, and we have so many millions—I think the last number I saw was 68 million Americans that don’t have a bank in their local community.

Emily Russell: Wow.

Jill Castilla: And so maybe we should be seeing formation of community banks coming back into our localities. So how do we facilitate that? And a lot of the help in getting the acceleration of capital to smaller institutions is in some of these bills.

Emily Russell: Mm-hmm.

Jill Castilla: But I think there’s still work to be done, and I appreciate that everyone—we’re like the original decentralized finance. There’s so much alignment between the crypto community and the community banking community. Our independence, our kind of “leave me alone, I can serve my community, just let me do my thing, and hold me accountable if I do it wrong.” And I think that we need to find more alignment there so that innovation can really happen at the grassroots—

Emily Russell: Sure.

Jill Castilla: —and that we’re not just centered right here in DC as to where action can be taken.

Emily Russell: Yeah. And part of the conversation around making sure that community banks can thrive, or smaller banks can thrive, is mergers and acquisitions, which, my understanding is, Bowman is wanting to make that process easier and faster. Can you speak a little bit about that shift?

Jill Castilla: Yeah. We’ve seen—it’s a lot of uncertainty for investors when you have large banks especially that are merging, and the questions go on for a year and a half or two years—

Emily Russell: Sure.

Jill Castilla: —before a merger can happen. There’s a lot of risk there from a cyber standpoint. You’re losing employees. It’s not good for anyone for that to take a long time. And so she’s really accelerated that process already—

Emily Russell: Mm-hmm.

Jill Castilla: —and has made a commitment to stick with a certain timeframe. I think mergers and acquisitions are important for survivability, but again, independent community banks don’t necessarily need to merge and acquire in order to be sustainable and thrive. And so it’s about making sure we have conditions in place where we have strong competition, where we don’t have to have centralized financial systems, where we can have the strength of the American economy being thousands of community banks dispersed upon our land, and we’re able to retain the ability to keep that going. So: new charters, the ability to be a small bank and stay independent and not—

Emily Russell: Sure.

Jill Castilla: —have to acquire or merge, and then the ability, if you are wanting to scale and merge. A lot of scaling and merging is because once you meet a certain threshold, now you have to run to the next one, because the burden of the regulatory environment becomes so steep that you cannot be economically viable unless you scale rapidly.

Emily Russell: Right.

Jill Castilla: So that really encourages the M&A activity.

Emily Russell: Right. I want to shift a little bit. David, I want to ask you about another change the Trump administration is pushing for, which concerns—sorry—private markets. The Trump administration has encouraged 401(k) accounts to be open to alternative private investments, private equity. And the idea is so that more of the American public can benefit from these investment opportunities. The flip side of that argument is that these are riskier, they’re less liquid. How do you think about that change? Is that something that you were cheerleading for, or how are you feeling about that?

David Burton: I think it’s constructive. I mean, most pension funds invest some of their money in private equity. Until recently, private equity had notably higher returns. That’s going to vary over the years, depending. There is another misrepresentation running around there, that public companies are safe and private companies are risky. This isn’t true. Penny stocks are about the most risky investment you can make, and they’re public companies, right? Private companies can be risky or safe, depending on what kind of company it is, just like public companies. The biggest difference really is that private equity investments are not liquid. There’s not an active secondary market in private securities, and that’s something the SEC should fix. And we’ve been talking to them about it for 20 years; they never do it. They have similar problems with Regulation A securities and crowdfunding securities. But the bottom line is that it’s really a liquidity question, and in a retirement account—

Emily Russell: Mm-hmm.

David Burton: —you shouldn’t be thinking about having to sell it in six months. So I don’t think—

Emily Russell: One would hope. Yeah.

David Burton: That criticism is particularly applicable, and the relative risk question is a question of what kind of company you’re investing in, not whether it’s public or private.

Emily Russell: Jill, you just got me thinking, David, about the state of public markets, and something we think about at Barron’s is what sort of risk of a severe downturn in the markets we might be seeing soon or in the future. Are you concerned at all, Jill, about the impact on your bank and community banks, and even larger banks, if there were to be a big downturn in the equity markets?

Jill Castilla: I mean, we’re always having to monitor what happens in an up and down environment, and how do we shield ourselves from those losses, and do we have adequate capital? Do we have adequate liquidity in those circumstances? And so you forgo your profitability to mitigate those risks. And so that’s something we’re always managing. In our market, we’re starting to see a softening in appraisals. And so now we’ve already shocked our portfolios before as to, if we see a degradation in values, are we exposed? And then we shock that again. As rates go up, how does that impact our borrowers? So we’re always looking at different ways.

But I think it also is not just the economy that can cause a change. We have IRAs in our bank. All the broker-dealers that we serve, they all have IRA sources. Trump accounts, which I think is a great idea—

Emily Russell: Mm-hmm.

Jill Castilla: —is such a great opportunity for young people, for families to save for young people. But to have that centralized all of a sudden into a Goldman Sachs–type environment or Robinhood—

Emily Russell: Right.

Jill Castilla: —we have to think about the impact of that to our bank from a liquidity standpoint, and that first banking relationship not being with your local bank, but being with Goldman Sachs. And so it’s why we’re always trying to look around the corner on the CLARITY Act. It’s really not today, but what if a Walmart stablecoin happens and they’re paying substantial rewards, and what does that do to a local economy if they’re competing and not providing loans, but taking deposits out of the community? So we’re always having to look around the corner, whether it’s an economic downturn or if it’s just a change in the financial system.

Emily Russell: Sure. Looking forward, as we wrap up this discussion and open up to the Q&A, Summer, what are you most encouraged by on the regulatory front? You’ve had a small setback with the CLARITY Act, but what are you looking forward to?

Summer Mersinger: Yeah, I mean, I think what was encouraging is how quickly they were able to act, um—

Emily Russell: The SEC. Yeah.

Summer Mersinger: Yeah. Both the SEC and the CFTC—

Emily Russell: Yeah.

Summer Mersinger: —putting forward a rule to OMB. It just shows that they’re thinking ahead, and that’s very unusual for regulators. They’re usually about five steps back.

Emily Russell: Mm-hmm.

Summer Mersinger: The fact that they’re looking ahead, they are kind of waiting to see the environment and reacting accordingly, I think is really promising. So I’m excited about what the two agencies are able to come up with. I was telling someone the other day, I might be the only person that’s really excited to read this new CFTC rule. So I’ve been waiting for it to get published. But yeah, there’s a lot of interesting stuff that I think they can do using their existing authorities, and the fact that they are moving so quickly is really encouraging. It was two days after—

Emily Russell: Yeah. Yeah. The SEC—

Summer Mersinger: Yes, came out with their proposed rules.

Emily Russell: Very impressive speed. Same question for you, Jill. What are you encouraged by on the regulatory front moving forward?

Jill Castilla: Yeah, I’m really excited. I know we had this report come out about Silicon Valley Bank, kind of a debrief of what happened there.

Emily Russell: Yeah.

Jill Castilla: It’s so interesting to read that first rendition of it, because it talks about how, if it’s just the regulator throwing balls at you and never really thinking about what the real risk is—

Emily Russell: Mm-hmm.

Jill Castilla: —then you’re just not addressing the real issues with an organization, and it can cause a lot of harm, and it also causes a lot of burden to everybody that’s doing the right thing. And so I’m really looking forward to seeing the matchup between Vice Chair for Supervision Bowman’s talking about material risk, which obviously she had an insight into the breakdown in SVB, but now we have, like, collateral to be able to show—

Emily Russell: Mm-hmm.

Jill Castilla: —this is what the breakdown cost us. Whenever we have too much regulation, whenever we are overly nitpicky and not really thinking about material risk, it can have this horrible impact, not only to an organization, but to something that happened broadly that caused a bailout to occur that damaged all institutions in the United States.

Emily Russell: Sure.

Jill Castilla: So I’m excited to see that full report come out, because I think it will further accelerate some deregulatory actions and also help us identify what really matters and focus only on what matters. Match regulation and supervision with risk—

Emily Russell: Mm-hmm.

Jill Castilla: —not just have throwing water on everything.

Emily Russell: Do you know when that report comes out?

Jill Castilla: Well, we just got—I don’t know the timing. Do you know?

Emily Russell: Don’t know. That’s what I’m saying. I’m curious—

Jill Castilla: Yeah. We got the first—

Emily Russell: ’Cause I would also like to know. Like a preview of it.

Jill Castilla: Okay. But it’s open and available, and it’s a very interesting read, seeing the breakdown. It’s nothing really new.

Emily Russell: Uh-huh.

Jill Castilla: But it happened a while ago, so everyone’s wondering, “Well, why is it coming out now?” But the way we’ve talked about it in the media, or just publicly, has changed as to why that organization failed, whenever it really wasn’t a breakdown and, like, a social media scurry on Twitter that caused it. It was a breakdown of an organization that didn’t have effective oversight.

Emily Russell: Mm-hmm.

Jill Castilla: And it had plenty of hands on everything, but the effective things weren’t done. And so I think it’s really timely, especially without the ability to have a community banker in the chair to help influence where regulation occurs, to be able to really do the right things.

Emily Russell: Sure. David, same question for you. What are you looking forward to on the regulatory front that you think is a move in the right direction, that might be coming or is in formation right now?

David Burton: That’s a hard question, because I don’t think you’ll see Congress do anything constructive for quite some time. But in the various agencies, I think you’ll probably see not a whole lot going on, which is better than, you know, a new 300- to 500-page regulation every couple of days—

Emily Russell: Right.

David Burton: —which is what the Biden administration was for a while. But I do hold out significant hope that the Securities and Exchange Commission will start proposing rules that are very positive, and that’s largely because I know and think highly of the three commissioners, and I have to think that they’re doing the hard work of crafting rules that make significant changes and will withstand judicial review. One of the problems with the Trump administration, especially early on, was that they would not comply with the rules governing rulemaking, and they’d lose in court, and by the time the litigation was finished, the first Trump administration was almost over. And so there’s the need for a certain sophistication with respect to how you promulgate rules if they’re going to survive judicial review. And I think the folks that are currently running the Securities and Exchange Commission understand that, and that’s one of the reasons why there hasn’t been a flurry of positive rules yet. But I think there will be.

Emily Russell: Sure. So we’re going to open it up now to the audience. If you have a question, just raise your hand. We’ll come around with mics. Just please state your name and affiliation and speak clearly into the mic so that everyone watching at home and in the room can hear, and just ensure that your questions are in fact stated in the form of a question. Okay. I will be monitoring for online questions, but if anyone in the room has one, we can get started. Over here.

Steven Keith: Thank you. My name is Steven Keith. I’m a retired foreign service officer, and when I was still serving in the foreign service, I was paid to do economic work, so I guess I can claim to be a retired economist. My question is particularly directed at David Burton, although others are welcome to comment on it. You spoke about the various things in terms of regulation and its impact. Correlation and causation are two different things. I don’t necessarily disagree with anything that you said, but you didn’t, at least as far as I could tell, support any of it. Are there any economic studies proving the damage that you assert?

David Burton: Yeah. There’s lots of them. And in the banking area, there’s a tremendous amount of work done by Norbert Michel, who runs the financial center here, and also Charles Calomiris, who you heard from earlier. I unfortunately was stuck in the massive traffic jam that is Washington right now and wasn’t able to attend the first panel. But there’s a tremendous amount of work in the banking area that shows that, in fact, these regulations are increasing financial risks, not reducing them, and having all kinds of other adverse effects. In the securities area, when I was at the Heritage Foundation, I wrote many long papers citing the literature, which I’d be happy to send to you, showing the adverse effect on the number of public companies, on broker-dealers, on entrepreneurial capital formation. These effects are real, they’re large, and they’re well documented. So if you want to chitchat after the panel, I’ll get your email address and send you the papers.

Emily Russell: Great.

Jill Castilla: And you can see it happen practically, just because we’ve seen movement of financial markets outside the financial system. So private credit moved outside the financial system, and like 50 percent, I think, of all the credit is outside of banking now because we’ve had such a harsh regulatory environment.

Steven Keith: Thank you.

Emily Russell: We have one other question in the back.

Mark (Audience Member): Hi. Thank you. My name is Mark, and I have a question around cryptocurrency and whether—it seems to be a lot of aversion to paying interest, if you want to call it that, or other forms of benefits on people that hold crypto, presumably because it would be a risk to the banking system. Deposits would flow out and flow into crypto, and therefore the banks become unstable. Any thoughts on that and where that may go going forward? Do you support that or oppose that?

Summer Mersinger: Yeah, I think—I assume this is the yield debate that we talked a little bit about earlier. But the way I look at it, I actually grew up in a tiny town with two banks. That’s pretty much our Main Street: two banks and a bar.

Emily Russell: That’s a lot of—there you go.

Summer Mersinger: A lot of main streets in America. And I look at it a little bit differently. My dad’s a farmer. He farms, he banks with our community bank. He’s always banked with our community bank. They have his operation loans, his car loans. His ties to that bank are never going to go away. His deposits will always remain there, because they have to, because of all these other products that he’s using. And so for the deposit flight, I wonder if this is really going to happen. Stablecoins are a payment system, and so the reward you’re seeing paid on stablecoins is more to get adoption up, so that US stablecoins will be the dominant stablecoin globally. And that’s really important for a lot of national security reasons. So we’ve got to have some sort of payment program to get people to start using stablecoins more regularly. But do that in a way—I agree, you don’t want to see community banks fail. Again, that was Main Street. If those two banks go down, there’s not much left of my hometown.

So I think what they did at the end of CLARITY, they added kind of a stop switch, or a fail switch, that the Secretary of the Treasury could say, “Okay, wait. I’m seeing deposit flight. We’re going to put a stop here. I’m going to use my regulatory authorities to make sure that we don’t have massive deposit flight.” So I think that was a good move, as far as making sure we don’t get into a situation, if that is in fact the case, where you start to see deposits moving, to have somebody like the Secretary of the Treasury overseeing it. But yeah, I’ve always kind of looked at it a little bit differently: the community bank consumer is maybe not the same person that’s moving on to stablecoins. And again, the stablecoin is a payment. It’s not a tool that you hold for interest. So that’s the way I see it. But I think we probably have a slightly different view of it, but not a huge difference.

Jill Castilla: I think there’s a lot of overlap there.

Summer Mersinger: Yeah.

Jill Castilla: I fully support this mechanism of stablecoin. And I even think that deposits in general, in aggregate, may not change within the system. But it is undeniable that if you’re in a small town and there’s a Walmart that has contracted—they’ve already announced they’re doing this—a stablecoin partnership that’s white-labeled with Walmart, and they’re paying interest now, those deposits are going to go to the biggest banks in the nation, and that liquidity is going to leave that community. Even if the community bank matches or even exceeds, you just can’t—it’s a massive Goliath with these little Davids around there. That liquidity goes out. I don’t know how many economists are in the room, but I think it’s pretty undeniable that the engine of economic growth is that dollar getting lent out and deployed in that community, which causes economic mobility in the community and economic growth. And if it gets put into New York City or somewhere else in the world, that is being siphoned out of that community.

I think other parts of the world that have had stablecoins have required there to be a reserve of liquidity in domestic banks. And I think that if community banks had been at the table—literally, I don’t think we were at the table at all, other than through an association representative—to be able to say, how do we create a solution to what this potentially could be the impact, then I think we’d be at a different place with CLARITY than we are today. Because I think there’s a drive to, like, we want competition, we want accessibility to really fast rails. We’re not averse to competing, but let us be at the table so you understand what happens to our local economy, so we can come up with a practical solution that’s great for everybody.

Emily Russell: Thanks. We have an interesting question from a virtual attendee, who asks, “What are the panel’s thoughts on whether the relatively elevated ages of members of the Senate and House banking committees are behind some of the hesitancy to deal with crypto and other reforms of banking regulations?” It’s a very polite way of phrasing that.

David Burton: I don’t think it has to do with the age of the members of the committee. I mean, the agencies haven’t done a very good job. I’ve followed the SEC a lot closer than the CFTC, and my impression is the CFTC has done at least some constructive things in the area. But the Securities and Exchange Commission has been on the verge of putting out regulations on crypto or digital assets for nearly 20 years, and it’s always going to be next year, for 20 years. And the staff of the SEC is younger than the House Financial Services Committee and the Senate Banking Committee. It’s required. They haven’t done any better, and they don’t have the same political problems either. They don’t have to put together a coalition. They’re just confused.

I mean, the bottom line is, under Gary Gensler, the SEC launched literally hundreds of lawsuits against digital asset companies on an utterly misguided interpretation of what is and is not a security under the Howey test. And they put out a nine-page guide to digital assets that a first-year law student might have been able to put out, and it wasn’t very impressive. And on the central question of what is a common enterprise in the Howey test—are you selling a share in a business, or are you loaning money to a business, a common enterprise?—now you have exactly one sentence. I mean, they’re simply not serious, and I’m sure a lot of people here understand. Hester’s been trying to fix it, but she’s been unable to. And maybe we’ll get it fixed, but it’s not an age thing from the committees. It’s a general lack of understanding in the Washington policy community about how you should regulate digital assets.

Summer Mersinger: I’ll just pick up on that.

Emily Russell: Yeah.

Summer Mersinger: One thing that I think is an unfortunate rule is that the agencies, Congress, they can’t own digital assets. As a commissioner, I couldn’t own digital assets. So I couldn’t be in the market, understanding the market. I had to take information from the stakeholders coming in. And I use the example: the first time I saw crypto trade, because I had asked someone, “Can you just show me on the computer what this trade is? What is happening?” It was Sam Bankman-Fried showing me on FTX.

Emily Russell: Ugh, wow.

Summer Mersinger: So that’s not who I should have been learning from at the time. But I think that’s a mistake. I really do think it would be good to allow—obviously, you want to be mindful of STOCK Act concerns and those things, but just letting even a de minimis amount of activity for government employees or regulators, to understand the market—

Emily Russell: Some exposure would be very helpful.

Jill Castilla: And our bank, it’s interesting, because we were one of the first that allowed our customers to have access to crypto exchanges. Many of them were moving to us whenever larger banks were shutting down their accounts, or they weren’t able to utilize their cards to be able to do those exchanges. And they were older customers.

Emily Russell: Really?

Jill Castilla: So, I mean, this isn’t just a young man’s game. I don’t know what the statistics are, but my customers across demographics are utilizing digital assets.

Emily Russell: Very interesting. In the room, we have a question. I don’t know who has the microphone. Yeah. Okay. Great.

Bill Hagen: Hi, my name’s Bill Hagen. I’m not affiliated with anybody at the moment. I just have a question for Mr. Burton. You said a lot of small broker-dealers were going away. I’m just curious, do you think part of that problem is that more and more registered reps are becoming registered investment advisors, or joining bigger and bigger registered investment advisors to get under that regulatory umbrella and into that nature of business? And also, do you think the SEC is any more capable of regulating the registered investment advisors to prevent any more Bernie Madoffs?

David Burton: In terms of the decline in small broker-dealers, I think the two primary culprits are FINRA and FinCEN. And FinCEN, it’s the anti-money laundering and countering the financing of terrorism rules, which get more burdensome every three or four years just because they can. And there’s been almost no serious cost-benefit analysis about what aspect of that regulatory regime works and what doesn’t. In fact, Norbert Michel and I wrote a paper about, I don’t know, seven or eight years ago that was the first quantitative estimate of the cost of the AML/CFT regime that anyone had done, because nobody cared. But if you talk to small broker-dealers, the AML compliance is a big problem. And if you talk to community banks, it’s a big problem.

FINRA is, for those of you who don’t know, the primary regulator of broker-dealers, not the Securities and Exchange Commission. And the regulatory authority has been delegated to FINRA, which has a budget nearly the size of the SEC and a payroll nearly the size of the SEC, but it’s a 501(c)(3) Delaware not-for-profit corporation controlled by a self-replicating board. It’s not really an SRO, and it’s a black box, and none of the protections that are normally associated with government regarding due process, transparency, the regulatory process exist for FINRA. And I used to get hysterical phone calls from small broker-dealers about how FINRA is crushing them. And they were so afraid of FINRA that they were unwilling to go up and talk to Congress, because they were afraid that FINRA would retaliate against them and shut them down, which they can do. And nobody’s that afraid of the Securities and Exchange Commission. Nobody’s that afraid of the IRS. But they’re that afraid of FINRA, and that’s a serious problem. And so I think those two—one’s a quasi-governmental agency and one’s a part of Treasury—but they basically operate free of any meaningful oversight by Congress, and we need to change that.

Emily Russell: I’ll ask one more question from the virtual attendees. Someone asks: other than putting a policy into law, what are some other factors that make deregulation or pro-competitive policies more durable?

Summer Mersinger: Well, I think what Commissioner Peirce said the other day is, good policy. That’s what makes it durable. Do good things. Just using crypto as an example, with some of the regulatory efforts that we’re looking at, that’s going to put some consumer protections in place that don’t exist. So going back to FTX: segregation of funds. They weren’t registered as anything. They had a money transmitter license, but there was no requirement that they segregate customer funds.

Emily Russell: Mm-hmm.

Summer Mersinger: If you put that in a rule, I don’t see a world where somebody says, “We’re going to roll that back.”

Emily Russell: Mm-hmm.

Summer Mersinger: So if you’re doing the right thing, I think that helps with durability. So where we can use the regulators to put in some good customer protections, I really do think that adds to the durability of the rule, because nobody wants to unwind protections.

Emily Russell: Sure. Jill, do you have anything?

Jill Castilla: Yeah, I think durability, the unwinding, is what we’re most concerned about: whether we’re going to come back in and things are going to be reenacted that have been practicalized under these last two years. And so with that, I think it’s just really important to have engagement from industry so that we have accountability, and ask the questions and go to our delegation, so that in future regimes, if they’re testifying, we’re having really good questions being asked. That’s worked really well with us in previous circumstances. So at least you get it on record: this is why they’re saying that this is being undone, or that something’s being put more into place, which is what we’re probably most fearful of. The durability of the unwinding is really what we’re hoping is occurring.

Emily Russell: Awesome. Okay. We are almost out of time, so I want to thank our panelists and let everyone in the audience know that we are going to do a one-hour break for lunch. You can join us back at 1:15 for the next panel, which is “The American Financial Experiment at 250: What Comes Next,” moderated by Jeb—I’m going to butcher this—Hensarling, who is the economics fellow at Cato. For those joining us in person, lunch will be served here upstairs on the second floor, in the George Yeager Conference Center. So thank you all for joining us in the room and online, and to our panelists for joining. Thank you.

Summer Mersinger, Jill Castilla and David Burton: Thank you.

This transcript was generated using AI automation and may contain minor formatting or transcription errors. Please refer to the original audio to verify specific quotes or context.

Jeb Hensarling: Welcome, everybody, and welcome to those online. My name is Jeb Hensarling. I’m an economics fellow here at the Cato Institute. Welcome to the third panel of the day, America’s 250-year financial experiment. This panel is What Comes Next? I don’t know, which is why we have an excellent group of panelists here to answer that question for us. So allow me to introduce them, please.

First, Brian Quintenz, whose name, as a Texan, I keep wanting to pronounce with a Spanish accent, which I can’t. He serves on the board at Kalshi. He previously was a commissioner of the CFTC and has served, I believe, as head of the crypto regulatory portion of the investment firm Andreessen Horowitz. Is that correct?

Brian Quintenz: Crypto policy.

Jeb Hensarling: Crypto policy. Okay. Yeah. Next, Jeff Dinwoodie, who is an attorney at Cravath, Swaine & Moore. He previously served as chief counsel to the Securities and Exchange Commission chair and as head of the Office of Financial Institutions at Treasury. Then finally, we have Geoff Anderson, who is head of policy for Klarna and spent 25 years at the State Department. And given that the firm is a Swedish firm, I sense somewhere you did some time in Sweden. I’m just going out on a limb and guessing that.

Geoff Anderson: I did.

Jeb Hensarling: So, gentlemen, thank you very much for agreeing to be here, and I look forward to having you answer the question.

You know, 250 years, a birthday is always a good time to kind of reflect upon your life. It’s a good time for America to continue to reflect upon our collective life. As I look back, it’s necessary in order to figure out, okay, how did we get to where we are? Well, where are we today in the world of finance? Right now, 46 percent of all global trade is conducted in dollars. 44 percent of the global equity market is in the US. 38 percent of the global fixed income by market cap is in the US. We continue to be the world’s reserve currency. We have a panoply of financing options for investors and entrepreneurs, be it our public markets, private equity, private credit, venture capital, and the list goes on. We also, for an administration that is currently fixated on trade, have financial services as the only service sector of our economy where we run a trade surplus. 89 percent of global currency exchange is denominated in dollars. And we have a $130 trillion US capital market system, the envy of the world. Gentlemen, I sense it didn’t happen by accident. So let’s look backwards before we look forward. How did we get here, and what are the lessons we should learn going forward? Brian, you’re up.

Brian Quintenz: Okay. Well, first of all, thank you to Cato for hosting today’s event focused on what I believe is a critical national strategic asset of the United States, which is America’s financial markets. Mr. Chairman, thank you for hosting and moderating. My experience is with the derivatives markets. Is my mic not working? All right, thank you. This thing’s not been working. Can you hear me? Okay, there we go. Great.

My experience is with the derivatives markets, and I believe that they are just as much a national strategic asset as America’s capital markets are. But they’re also things with which I think most people are unfamiliar. And so, how did we get to have such robust, liquid, useful risk management markets in this country? And that’s really what derivatives markets are. They’re for risk management purposes and price discovery purposes. They’re not for capital formation. They’re not necessarily for wealth creation. Those aren’t their core purposes. And they evolved organically. They evolved because of risk management needs. First, mostly from the agricultural community in the Midwest, centered in Chicago. The derivatives markets moved into financial risk with things like Treasury futures, interest rate futures, and then further into stock indices, futures contracts and derivatives. And now we have derivatives products across a wide variety of rates, indices, and even events, which is kind of where Kalshi comes into play, and we can talk about that in a little bit.

But one of the things that I think has been critical in the regulatory aspect of promoting derivatives markets is two things. The first is that the law that governs the derivatives markets, the Commodity Exchange Act, is a principles-based framework, so it doesn’t call for specific one-size-fits-all rules that can be applied to everyone. It allows registrants and exchanges and participants to tailor rules to their own markets as they see fit to accomplish certain outcomes, and I think that’s been critical in the innovation that we’ve seen in derivatives markets and their responsiveness to the needs of risk management. And secondly, a framework called self-certification that takes the onus of approving new things off of a regulator’s plate. And if you think about just a person, or a regulator in general, there’s really no incentive to approve new things, right? They only get the blame if something goes wrong. They get none of the benefit if things go right. So the incentives are misaligned. Hopefully, they always act within the law, but the incentives are misaligned. So what the Commodity Exchange Act did was it said, “Exchanges and registrants, you can do what you think meets the letter of the law, and we’ll put the commission, the CFTC that oversees the Commodity Exchange Act, in the position of disapproving that.” And that reversal, I think, has also created a massive amount of innovation in the risk management markets that have become the envy of the world.

Jeb Hensarling: Well, I guess we have Jeff one and Jeff two, so Jeff one, we’ll go to you next. How did we get here?

Jeff Dinwoodie: No, and I echo the comments. Thanks to Cato for having us, and thank you, Mr. Chairman, for moderating. It’s great to be here. I’ll take a step back, and I know we’ll talk about regulation and the law in a moment. But taking a step back, as I see it, the big picture is that in this country we’ve had, since its founding, a recognition of dynamism, of entrepreneurialism. And I think, broadly speaking, and we’ll talk about it when we look into the future, there’s been a recognition that that sets up our economy, sets up national security. It’s really the foundation for our country. And I think, looking back, there’s been a recognition of that on the economy and on financial services as effectively a jewel of our country. Other countries are very focused on whatever they think their jewel is, whether it be an agricultural product or what have you, and they protect it. I think over the years there’s been a focus on protecting, and on thinking through how to have a thoughtful business environment where entrepreneurs can take risks. We need regulation, thoughtful regulation. And I think it’s been the pairing of those—the culture of risk-taking, of innovation, paired with a recognition and the calibration of the law and regulation, property rights, rule of law—that has set us up for success in this country. And again, we’ll talk about it as we look into the future, the risks around that national jewel of our financial markets.

Jeb Hensarling: Jeff.

Geoff Anderson: Well, thank you, Cato, and thank you, Mr. Chairman, today. I think it’s very much our own story about why we’re here in the United States. Klarna’s been around 21 years or so. It’s a global digital bank and flexible payments provider. Started in Sweden. Something like 85 percent of Swedes use Klarna, and similar stories in the UK and so on. So about 10, 15 years ago, we were looking to expand, and the United States was that ideal market. Much of what you said, those deep capital markets, that spirit of entrepreneurship, which, from my own life in the State Department traveling around the world, is our golden jewel in the United States. And really a regulatory system also that promotes innovation. So we’ve been here in the US, and it’s now our fastest-growing market.

Jeb Hensarling: So again, to continue to look a little bit more backwards before we look forwards, and indeed it’s hard to have capitalism without capital, and nobody has produced a greater infrastructure for capital formation than the US. But when we talk about innovation, and there have been many innovations, seemingly it’s still running up against, on many occasions, the barrier of government regulations. I mean, for example, you had to wait until, I think, the early ’90s before we legalized interstate banking. Interest on demand deposits—we used to have Regulation Q, and so citizens could not receive interest on their demand deposits. I think that dates back maybe to the late ’70s; I don’t quite recall. You couldn’t have a bank holding company that could combine investment banking with retail banking with insurance until Gramm-Leach-Bliley. Crowdfunding only arose with JOBS Act 1.0. So why is it, through our history, that there still seems to be this friction against financial innovation that is ultimately adopted in the market and benefits both the investor and the capital raiser? Jeff, we’ll go to you first.

Geoff Anderson: Oh my goodness. That’s a good question. I mean, I think there’s sometimes this reaction—and I’m kind of going from my world—for new products to be put into old frameworks. And I think there are a lot of reasons for that. I think one is just getting people around the table: getting consumer interests around the table, the innovators around the table, the regulators around the table, to have this discussion on what is the product, what is the proper framework for this product, and how do we go forward? I mean, in our world, it’s the Truth in Lending Act, which has been around for about 50 years and has really governed open-ended credit for the last 50 years and provided some really important protections for consumers. That framework doesn’t fit closed-ended credit. So there have been a lot of attempts to put buy now, pay later and installment lending in that type of framework, instead of sitting down at the table and going through this process of tailor-made regulation.

Jeb Hensarling: So as a follow-up, since your company was founded in Sweden, how is that system different from the US? Is there some takeaway?

Geoff Anderson: I think in the UK and in Europe over the past several years, on this topic of buy now, pay later, these closed-ended, no-interest, low-interest loans, they’ve sat down at the table and started this process of saying, “We’ve got to have something separate, because what we have right now doesn’t work.” The UK, for example, went through a years-long process to do this and just enacted buy now, pay later–specific regulations back in July. They took in the interests of industry, they took in the interests of consumer groups and consumers, and came up with a framework that is unique to the conditions of buy now, pay later.

Jeb Hensarling: So your company has been a disruptor. Your company has certainly been a disruptor. I assume, Jeff, that your law firm represents either fintech companies or other companies that are disruptive in the market. So as I look at, for example—let’s start with you, Brian, and Kalshi. You’re not, in many respects, trying to produce a new product; you’re really trying to produce a new market that hasn’t previously existed. Is that a fair assessment?

Brian Quintenz: I mean, I think, to some degree. I mean, prediction markets and event contracts have existed in a pseudo-regulated way for a couple of decades, but certainly not in as robust a way as they exist now, because of, I think, more recent legal clarity.

Jeb Hensarling: So I guess the question is, as you have these evolving innovations that regulators have not seen before, there seems to be a predisposition to fit you into the earlier infrastructure and essentially to fine you into submission. F‑I-N‑E, not F‑I-N‑D. So surely there is some better system, because, again, when I look at our capital markets, it has depended upon new financial innovation. So I don’t know what your various general counsels and your communications departments will let you say, but any insights in your own company and product evolution, and what would be important for US policymakers and regulators to know as we start looking at the next 250. You’re living it. This isn’t the past. Your companies are living it right today. So whatever you feel at liberty to say—I’m sure nobody will be taking notes—

Brian Quintenz: Well, no.

Jeb Hensarling: So feel free to say anything you want.

Brian Quintenz: Yeah. I could answer that question for 60 minutes.

Jeb Hensarling: We don’t have 60.

Brian Quintenz: Not the news program, just in terms of the timeframe. I’ll try to be brief. I think the first thing is that the founders of Kalshi sensed a tremendous opportunity for risk management by offering direct, more simple, transparent, market-based products for event risk. That could be events and risks that anyone faces, or a lot of people face. And one of the founding stories and anecdotes around that was that one of the founders was at Goldman and was asked by clients, “How do we hedge the risk of Brexit?” And they had to come up with very complicated derivative products in order to allow companies to hedge that risk. The second question was, “How do we hedge the risk of the 2016 election and Donald Trump becoming the president?” Which a lot of people had no sense as to how to value or how to risk-assess. And Tarek Mansour, the co-founder of Kalshi, said, “Why do we have to go through this complicated process to develop very opaque products to hedge a risk of a direct event and its outcome, when we could actually just list that event itself on a marketplace, have transparent trading and pricing, and a simple risk management tool?” And fortunately, the Commodity Exchange Act allows for that.

The Commodity Exchange Act is very broad in terms of how it views a commodity upon which a derivative can be based. It includes events. It overtly includes events. A lot of people think of—and we can have the conversation around speculating versus trading versus gambling and how people think about that—but a lot of people think about gambling as risking money on the outcome of an event. That is directly included in the Commodity Exchange Act as a legitimate derivative product. So that’s one thing that I think, first of all, challenges that preconceived notion. I think it also challenges regulators’ preconceived notions as to what some of these products are or why they should exist. And the Commodity Exchange Act says that any event that has any financial, commercial, or economic consequence meets the underlying purpose of the CEA, because it would allow someone somewhere to hedge risk or gain price information around that risk. And the breadth of the statute is why I believe we have now very robust, liquid, transparent, and simple and effective risk management products for events that are in the marketplace.

Jeb Hensarling: Jeff Dinwoodie.

Jeff Dinwoodie: So, if it’s okay, I’ll address it directly. Just to drop back to your—it was the perfect place to start, looking back into the past. That informs the future and sets the context. One thing I will say, and you were describing some of the changes that occurred in the ’80s and 1990s: I think it’s just a critical thing when we think about policy. It’s very easy to constantly get caught up in what’s the hot new thing, what’s in the headlines. But I think it’s essential for regulators in particular to regularly look back and say, “In addition to what we know we need to get done for new emerging products, let’s look back at what is applying now, what are the legacy rules, and be thoughtful as to whether those risks still exist. Do those need to be modified?” So it’s the less sexy portion of regulation, but it’s just essential. And I will say SEC Chairman Atkins has been laser-focused on that, with things like revisiting the decades-old transfer agent rule and taking a fresh look at market structure. Regulation is hard work. It’s looking forward and it’s looking back and making changes.

And I think, just on your question as to how we look forward, as we have new products—like anything in life, when you’re faced with uncertain times, with change, with confusion, you always go back to first principles, and I think that’s what regulators should do as a general matter. Think about what the principles are here. What are the risks that we are thinking about, whether there are information asymmetries, whether we think there are competitive issues, whatever the risks are. Regulation is hard work, and it is not blindly following old paradigms. It’s stepping back and thinking about what the current risks are, and then how the regulation addresses those, and being laser-focused on that, and not in the world of “because this is how it used to apply.” So, unfortunately, regulation and policymaking is just hard work.

Jeb Hensarling: So, Jeff, are you buy now, pay later? Are you a credit card? Are you somewhere in between? Where do you sit today?

Geoff Anderson: That’s a good question. I mean, our philosophy—there are two things here. People should be able to spend their money how they want, where they want, and when they want. And the other thing here, too, is that we’ve been living in a system for the last—I think we all grew up in this—where credit cards were kind of the only game in town. And when you’re looking today at credit cards, I think the average credit card balance is something like $6,500, and people are paying 25, 28 percent interest, on average. At Klarna, we look at it differently. There have to be different models out there for this. People need credit, and what are ways to provide affordable credit that help people manage their finances? And that’s where I think buy now, pay later comes into play, in helping people manage their finances and avoid that sort of spiral of debt. On the regulatory side, again, the regulations that exist are for open-ended credit cards, and they’re not tailored for this relatively new—although it’s been around about 20 years now—financial product.

Jeb Hensarling: So we know that there are a lot of headlines. I guess it was a couple of weeks ago, CLARITY, with all caps, failed on a Senate cloture vote. And as was already mentioned, a few days ago Chairman Atkins announced, for lack of a better term, kind of a regulatory sandbox for tokenized assets, which I believe creates a five-year moratorium on certain enforcement. But I’d like to talk about the topic of so-called regulatory sandboxes. I know that Miki Bowman at the Fed has been a huge proponent in banking, and Hester Peirce at the SEC. Already, we have jurisdictions, though, for example, I think the UK has their digital securities sandbox, which is well established. Abu Dhabi has their regulatory lab. We seem to be a little bit behind the curve. So, a couple of questions. Number one, what type of regulatory sandbox should we have beyond what Chairman Atkins just announced? And what would a successful one look like? Brian?

Brian Quintenz: Yeah, why don’t I start with that?

Jeb Hensarling: You’ve got a little experience there.

Brian Quintenz: Well, yeah. And when I was at the CFTC, there was a debate, an internal debate, about whether or not the CFTC itself should do something like that. And we tried to, in some capacity, but I think the takeaway was that it wasn’t a simple decision. It certainly had some positives, because it would allow people and businesses that are doing new things that could touch the law or could touch regulation, but in a different way that created different risks or solved certain risks, to have more freedom with how they operated, which would then educate the regulators around exactly what Jeff said: the application of old rules to new technology or new systems. The downside, which I don’t think gets as much consideration, is that when you have a sandbox, you have a limited number of participants. There’s always a question as to whether or not you are therefore disadvantaging people that can’t participate in the sandbox, that there’s an implication that people in the sandbox are getting a stamp of approval and therefore get a competitive advantage. And there’s also the question of can you ever get out of the sandbox? Because you don’t want to be just trapped in the sandbox forever. And what does that actually mean? What if the rules don’t change over a certain period of time?

So I think, number one, any sandbox has to be very thoughtfully designed around those kinds of ideas, knowing that it has to be limited in participation, and knowing that it can’t necessarily do a stamp of approval or competitive disadvantage. But secondly, there needs to be a result from the regulator as a result of this. It can’t just be an educational system. It can’t just be doing it for the headlines or doing it to talk about at conferences. It really needs to affect regulation in a positive way, so that other people that can’t participate in the sandbox can do the same things, and so that it informs new rules going forward.

Jeb Hensarling: First, Jeff.

Jeff Dinwoodie: So, in regards to, as you mentioned, the recently launched innovation exemption—my interpretation as to the context around that, and I think this is consistent with some of the statements that the commissioner’s made, and I’ll add some of my own gloss—is that I think they found themselves in a bit of a holding pattern as they looked at whether legislation was going to pass. The prior administration dug a deep hole in terms of where we collectively stood. I think they were looking and saying, “Okay, we’ll do this innovation exemption.” Everyone in this room, everyone watching knows rulemaking is the best way to create policy at a regulator, as opposed to an exemption. I think that they effectively said, “This is a bridge. We’re in a hole here, and we need a bridge to avoid a situation where other jurisdictions, as we’ve talked about, start running away with things, or there is activity occurring which people are working around and in the gaps.” So, to put something clear in place to allow this marketplace, this new area of innovation, to start building, and do so in a thoughtful, responsible manner. And so, getting back to some of the points Brian made around sandboxes, I personally think that sandboxes, or an exemption, can be useful, but they need to be done in tailored and, I think, special circumstances, and I think this is one that the SEC used.

Jeb Hensarling: Jeff, any comment?

Geoff Anderson: Just, you know, getting back to what Brian said at the beginning, that they’re not just a forum for a talk shop where nothing actually comes out of it. I mean, I think as our technologies are advancing and as people’s habits are changing, we really need to see those put into practice.

Jeb Hensarling: So in mentioning the CLARITY Act, which, in all probability, since it failed on the Senate cloture vote, is probably dead for this Congress—I know from experience not much happens in lame-duck sessions, or not much good happens in lame-duck sessions. So how much clarity, lowercase, can you get with the failure of CLARITY, uppercase? I’m not really speaking about tokenized assets and that infrastructure. What I’m really speaking of is whatever is done at the SEC and the CFTC, that potentially could have about a two-year half-life until the next administration. I mean, for example, the CFPB under Kathy Kraninger, they had their particular regulatory sandbox. As soon as the Biden administration came in, it was rolled back. As soon as Trump 2.0 came in, it came back. So how can you really have a robust fintech industry and financial innovation when you have kind of windshield-wiper regulation? How solid of a foundation is there for the rule of law, as opposed to the discretion of regulators? I guess another way of putting it is, how depressed are you that there’s no clarity in CLARITY, Brian?

Brian Quintenz: Well, I’m an optimist, but I’m very depressed about that.

Jeb Hensarling: He’s a depressed optimist.

Brian Quintenz: Yeah. I think it would have been absolutely transformational for the United States. It would have unleashed a massive amount of robust innovation that solved a lot of processes that created risk for consumers and added a lot of value to things to which they could contribute, using this phenomenal new technology. And it gave very clear guidance and put very strong guardrails on how those products could be developed and by what methods, with what kinds of systems that prevent an individual from controlling them and doing something nefarious with them, that would add that value. So I think that’s a revolutionary concept when it comes to different economies and sectors of the economy and different value propositions and regulations. I cannot understate how much of a disadvantage the United States might be at now that CLARITY has failed for the time being.

That being said, there is work that the agencies can do, and I’d give two competing examples here. From the windshield-wiper example you were talking about, Jeb: when I was at the CFTC, a lot of our work went into recalibrating and right-sizing the rules that came out of Dodd-Frank. When I came in, I felt like a lot of those rules were written poorly. They were written quickly. They were targeted at activities as opposed to risk, and we had to go in and rewrite a lot of those rules, and some of them were very large rule sets, very complicated, around cross-border derivatives transactions and capital sufficiency and things like that. Because we did those very, very thoughtfully and thoroughly, in a way that suited risk and suited the markets, they have not been revisited since in the last administration, and no one’s even talking about revisiting them now. That’s a positive example.

I think the negative example is if you do something in an environment like this that might be more controversial, where there could be lawsuits, where there could possibly be injunctions, in a way that may not let the market flourish as much as it can, either under CLARITY or with more durable rules. The only way I think those kinds of activities and propositions by the regulator can survive is if they unleash enough innovation in a safe way that it is very hard for a court to say, “I’m going to eliminate all that, because I’m not sure it actually met the letter of the law.”

Jeb Hensarling: Either Jeff?

Jeff Dinwoodie: I’ll make two really quick points. Number one, I agree it’s a shame what happened with CLARITY. To keep things simple: there are now people across the country—forget about us in Washington, DC—people across the country who are now engaging in activities in a big market, and there’s not a regulatory paradigm over it. And they’re at risk of being defrauded, et cetera, which the CLARITY Act would have imposed a framework on. It might not have been perfect, but I think, with the philosophy of don’t let the perfect be the enemy of the good, that’s a significant loss. And I think similarly, most people in the country would say this is a big enough issue, and we all know the regulators will now do the best that they can. They’re highly talented, skilled. But this is clearly an area where I think everyone would agree that our elected representatives should act, as opposed to having the unelected regulators act. And one of the results could be that talent and capital are going to go offshore to places like Singapore, the UK, Switzerland, that already have this type of framework in place.

Geoff Anderson: Yeah, I, you know—

Jeb Hensarling: Maybe even Sweden.

Geoff Anderson: Yeah, maybe even Sweden. Yeah. I mean, I won’t talk about the capital-letter CLARITY, but the small-letter clarity that you said about this regulatory whiplash that’s happening. It creates the biggest risk for a business, which is uncertainty. And in our business, we’re pushing for federal frameworks and so on, but in the meantime, states are doing their own thing and creating de facto potentially national standards for buy now, pay later, for example. And that lack of small-letter clarity is really difficult.

Jeb Hensarling: Well, I think slowly but surely we’re putting our finger on the public policy foundations necessary going forward. So certainly what I’m hearing is the rule of law, clarity of law, incenting innovation, how important that is. Let me talk about the cost of regulation. You brought up Dodd-Frank. I remember vividly when Dodd-Frank was passed, a Texas congressman warned that if Dodd-Frank passed, the big banks would become bigger and the small banks would become fewer. I remember that vividly, because I was the congressman who said it. And it turns out that that proved to be prescient, because now the largest banks, I think, have roughly 30 percent more of the financial assets. We’ve gone from launching roughly 150 new banks a year to about five a year post–Dodd-Frank. And I think I have these numbers roughly right. For a small bank, say capitalized at $100 million or less, about 8.9 percent of non-interest income is devoted to compliance. For, say, a super-regional bank, it’s about 2.9. Okay? So speak to, as we look to the financial future, and many of you have obviously been with the regulators in the past, how should we be thinking about the cost of implementing all of these regs and what impact it will have? How do you do that kind of cost-benefit analysis, or how should it be done? We’ll follow the usual order.

Brian Quintenz: Yeah. It’s a really interesting question. And, unfortunately, maybe there is one, but I don’t feel as though, if there is one, it’s well known, or that there is a good feedback mechanism or a good lever to pull to force old regulations to be reviewed, to force a cost-benefit analysis of what has been done, as opposed to what might be being proposed, to be revisited. And I think there are some interesting things that could be discussed there, either through Congress and legislation, or by the agencies themselves, where maybe a couple of years after a rule has come into existence, you survey businesses and see what the actual cost of compliance is. You evaluate how well you’re using the data that is being created as a regulator, or how much that’s actually contributing to the regulatory safety in the environment, so that you can provide the regulator feedback and provide the incentive to actually change things. One of the unfortunate aspects of regulation is that there is never really, at least that I have seen, a backward-looking review process on the cost of compliance, as opposed to only thinking, “Well, if we only had this one more tool, it might save us some headaches in the future,” which is very speculative, but does impose even more real-world costs on businesses. It would be interesting to think about creating some kind of forced or automatic or maybe even voluntary feedback mechanism around a survey of cost that would trigger a review of certain rules in certain situations.

Jeff Dinwoodie: Look, I completely agree with that. My take is that cost-benefit is essential. When you read some of them—and I think the regulators have gotten a little better about this—some of them are just laughable in terms of the estimates that are given, which are completely unrealistic and just show a lack of understanding as to what compliance entails and the resources. I actually think this goes to a core principle. When you were teeing up the last set of questions about the inconsistency in regulation, I think we’re in this bad pattern in our country right now. I think most people should agree that around the economy, financial regulation shouldn’t swing from left to right with different administrations. And I think, as a result of that swinging that we’re experiencing, a lot of projects at the agencies are being dropped—

Brian Quintenz: Or started again.

Jeff Dinwoodie: —and things like that. It’s creating inefficiencies. I think things like that cut into the resources to do, along the lines of what Brian said, where you’re regularly looking backwards in addition to looking forward at the cutting-edge, ripped-from-the-headlines issues. You’re regularly doing retrospective reviews. All of this comes down to resources within the agencies, and I think a lot of resources and bandwidth are continually being lost that way, with the windshield-wiper back and forth, as you were saying.

Brian Quintenz: Speaking of a sandbox, here would be a really interesting sandbox. To your point about the estimates of cost-benefit in rule proposals or final rules and how ridiculous they are: sometimes agencies will say, “Well, this is going to take one person about 50 hours to comply.” Three years later, there are hundreds of people working for four months on an outcome. Why don’t we do a sandbox where we take one person and put them in a room for 40 hours and see how much of the rule they can actually get done by themselves? And if they can’t do it, what would that mean to the regulatory satisfaction of the marketplace? And does that mean that that’s all that a company should have to do? Because that’s what the cost was estimated to be.

Jeff Dinwoodie: I completely agree. I’ve thought before, somewhat tongue in cheek, to say to a regulator, when they’re coming in doing an examination, “This is what your estimate was, so is this the type of compliance program you expect, then?”

Brian Quintenz: Yeah. Because that’s what your justification on the estimate was.

Jeb Hensarling: Jeff, anything?

Geoff Anderson: Yeah, no. I think, for us in our world, it comes from philosophy, and it’s that regulation should be outcomes-based. What problem is it trying to address? What is it trying to fix? And then also proportionate. I can give you a specific example. A lot of regulation in buy now, pay later focuses on ability to repay. And some of the proposals have the same structures in place to assess ability to repay for a $100 loan as they do for a $20,000 loan. And never mind that 99 percent of our loans are repaid. Nobody pays attention to that. It’s those types of disproportionate regulations.

Jeb Hensarling: So I’m going to have one more question for the panel, and then it’s going to be your turn in the auditorium and online as well. And online you can submit questions via Cato’s webpage, Facebook, and YouTube, or on X using the hashtag #CatoEcon. So, gentlemen, we spent a little time looking at the foundations of our success in the past, talking about some real-world examples as fintech and financial innovation unfold today. Starting to talk a bit about the principles that are necessary for what the financial infrastructure looks like in the future. So what does it look like, and what would you have regulators and legislators think about as we look at potentially our markets moving to tokenized financial assets, AI, utopian, dystopian? What does the future look like? How should policymakers think about it? We’ll reverse order this time.

Geoff Anderson: Oh, goodness. Oh, thanks. So the pressure’s on.

Jeb Hensarling: The pressure’s on you, Jeff, too.

Geoff Anderson: Yeah. No, I mean, I keep going into my own world, but something like 10 out of 10 Americans have some sort of financial technology app on their phone. And what are they using it for? They’re using it to buy things. They’re using it for banking. They’re using it as a financial management tool. More and more those are coming together, and we have to have the structures in place to allow for that to happen, to give the consumer the tools that they need. And there’s a lot of promise out there for ways that can lower the cost for businesses and for consumers, and we’re really excited about that. Just so regulation keeps pace with that.

Jeb Hensarling: Jeff?

Jeff Dinwoodie: So, look, I think it all comes down to—when it comes to regulation keeping up—the old cliché, personnel is policy. And I think a real focus is that we’ve got to continue to have talented people coming into the government to fill these seats and agencies at all different levels. I think there’s an issue in this country where we’re not getting all of the talent across the country because we have so many people in Washington, DC. So there needs to be, I think, a concerted effort across the government to harvest our entire pool of talent across the country, and be thoughtful as to recruiting or having people who live in other parts of the country. Because I think at base, the future’s uncertain. We can always go back to first principles, but we have to have thoughtful, experienced people who bring a diversity of views, who’ve served in the business world, and have them helping to make and shape these decisions. And I think that’s a core element that will ensure continued success going forward.

Jeb Hensarling: Brian?

Brian Quintenz: I have two combined thoughts. One is that risk-taking is what I think has made the United States the envy of the world. Individuals becoming entrepreneurs with good ideas, even if they fail, they have tried, and a lot of times they’ll fail and try again and succeed. And in my mind, there is a misplaced focus on risk as only being downside. Risk also creates opportunity. Risk management, which kind of comes back to the derivatives markets—but I think risk management in general needs to be much more embraced by individuals, as well as individual accountability for their own actions. I think marketplaces have good and responsible regulatory obligations to run open and transparent venues, but we can’t look at markets as only providing downside risk. The only way to eliminate downside risk in markets is to eliminate markets, and if that’s what people are proposing, I would say that they’re in the wrong country. So if we want to have markets, we want to have opportunity. In my mind, the key is to run open and transparent marketplaces and embrace individual accountability, individual responsibility, and ensure that the American dream is promoting that mindset.

Jeb Hensarling: Are you running for something? I’ll vote for you. Well said. Well said. Okay, now it’s time for Q&A. We will go to our audience first. We have some lights on here. It’s hard for me to see. I think we have some people running around with microphones. I’m not seeing any hands at the moment. Oh, the lady over here.

Audience Member: Thank you. I really enjoyed your discussion about innovation in financial markets. I wonder if any of you would like to comment on what major concern is bubbling up, not in connection with your particular areas, that’s going on in financial markets. A couple that I see in reading are private credit, and the fact that private credit is now acquiring life insurance companies. That’s one. Another would be the prevalence of passive markets, i.e., through indexing, which is getting to the point where it might be out of control. Just suggestions, if any of you have any thoughts on what’s concerning you outside your area of expertise.

Jeff Dinwoodie: So, look, when I was at the SEC, I was the agency’s deputy representative to the FSOC, which is the Financial Stability Oversight Council. And look, the two examples you just mentioned, I think it’s certainly the case that the regulators and the policymakers should be laser-focused on understanding those and keeping up with them, and I think that’s part of the mission. Those two examples don’t give me, at the moment, a lot of consternation. A bigger one that I see that gives me consternation—I say it all the time—I think the biggest risk is actions of the government. I think it’s things like government debt, poor regulation, some of these drastic policy changes. And so I think the big picture is that the biggest risk I’m seeing right now is a government that’s not working properly or that is getting outside of its lane in certain areas.

Brian Quintenz: I would just echo that. The first thought I had was the amount of sovereign debt that exists in the world relative to the GDP of individual countries or global GDP. If the market loses confidence in any country’s or all countries’ ability to repay that debt, we are in a tough spot. I’m hopeful that risk management products through the derivatives markets provide some opportunity for hedging that risk, but the risk exists. It can’t just go away. It has to be transferred somewhere. And it feels as though—Jeb is probably as qualified to talk about this as anybody—we are on a one-way incline in terms of debt to GDP, not only here in the United States, but everywhere around the world.

Jeb Hensarling: I think I saw a question over here, perhaps. Up there, maybe.

Audience Member: So, maybe on a similar line of thought, I’m very curious about your perspectives on what risk is getting too much attention, and also, on the flip side, what isn’t getting enough attention?

Jeb Hensarling: Who wants to take that first?

Brian Quintenz: I guess the first reaction I have is, it’s hard to say some risk is getting too much attention, because I think risks are always good to discuss and to debate. I think there has been an overreaction, in my mind, to AI and the AI risk. AI is a tool. There’s a great saying, “Steel is steel.” You can use it for a lot of different things, but it is itself. And AI is a tool, and you can use it for a lot of different things. And I think it comes back to individual accountability and responsibility, and if you choose to use it for something bad, you’re going to be held accountable for how you use it, because you, the person, are choosing to use it that way. And the thing that I think is actually more dangerous, in my mind at least—and this may not prove out to be true, and it’s kind of a high-stakes conversation—is trying to incorporate value judgments into AI to dictate outcomes that a certain segment of society wants and the other does not. I think that’s almost as dangerous, if not more dangerous, and I would rather have open, transparent systems that people can use and then be held accountable if they use them poorly.

Jeb Hensarling: Any other comments? If not, I’ll go to a question. We’ll break it up here. We have a question online. A speaker in a previous panel stated their belief that the big banks should be broken up, and prior CFPB leadership discussed, quote-unquote, “too big to manage” in their guidance. Do you see a future where the largest financial services organizations are broken up? The question doesn’t say should they be; the question is, might they be? Jeff, you’re shaking your head no.

Geoff Anderson: No. I don’t think they’ll be broken up. I think it ultimately comes down to: are they able to best address and be flexible enough to continue to innovate and continue to provide customers with what they need? And there needs to be a marketplace where there are new entrants who are able to provide those services and new products and innovate. And I’m not convinced that the best innovation always happens at the biggest players. So whatever ecosystem allows the others to come in is what I’m hopeful for.

Jeb Hensarling: Anybody want to add, or should we go to another question? Okay. We’ll go back to—yes, I think the gentleman over here has his hand up.

Audience Member: Thank you. I have a quick question on the regulation around Kalshi, Polymarket, and some of those. I’m a big supporter of them and what they do: price discovery, information, all that. But there have been some egregious examples of people placing bets on some of these binary events. What should be regulated there? How should it be regulated? And similarly, there’s a proliferation of single-stock ETFs, double-leveraged. They don’t do a lot for risk management per se. I guess there’s speculation, which you could argue is a part of a complete market, too. What are your thoughts on where the boundaries are? Because that’s what regulation’s usually about: less an absolute, but a more relative place of where do we put the guardrails.

Brian Quintenz: Yeah. So I think the first thing is there is a difference between what I would say are highly regulated derivatives venues, which these are. These are derivatives exchanges. A prediction market is a colloquial term, but they are fully regulated designated contract markets by the Commodity Futures Trading Commission, right? So they have to abide by the full slate of all of the rules of every other contract market, like the Chicago Mercantile Exchange or the Intercontinental Exchange. Well, there are some marketplaces and businesses that claim to operate offshore, that may or may not be accessing US customers, which would be illegal, and not abiding by any country’s rules, which I think is dangerous. So how that gets resolved, I think, is an open question.

But to your more direct question, around referencing individual participants, possible insider information, insider trading: the first thing is it’s important to understand what insider trading is. It’s using information to benefit yourself when you have a duty of care around that information to someone else, to your employer, to a business, to the government, or something else. It’s not necessarily having information that no one else does, because that’s representative of fundamental research and makes markets more efficient, as it has for decades and centuries. There are people in the event contract marketplace that have special information about how contracts, how events may resolve, that might have influence over an event resolving. To the best that we can, Kalshi is screening people according to that threat and preemptively precluding them from trading, which is more than any other exchange in the world does. In fact, it is illegal for a CEO to trade during a blackout period around their stock earnings. As far as I know, the New York Stock Exchange does not block CEOs from actually trading. They just rely on the fact that they probably shouldn’t do it, and if they do it, they’re going to get caught.

I think there always has to be room for after-the-fact enforcement. We can’t operate in what I like to call a Minority Report society, where we try to prevent everyone from doing anything bad. But to the extent that we know and that we have lists, and we compare these against, for instance, FEC filings, to understand who’s working for campaigns, so that they can’t place any kind of trades on election markets in which they’d be involved. We screen out the president, cabinet members, judges, members of Congress, financial regulators from trading in markets. So I think there’s a lot happening there, but it doesn’t mean that a good person might not make a mistake, or a bad person’s not going to continue to try to do something bad. The point I see there is that they’re being caught, they’re being held accountable, and they’re being referred to the regulator, if not the DOJ.

Jeb Hensarling: Any other questions here? I’ll tell you what, I want to go back—we’re running out of time here, so I do want to pose one last question to our panelists. You’ve touched upon parts of it, but I want to know, looking at the next 250 years, to the extent we’ll find out how much clarity there is in your crystal ball: what are your fears, what are your hopes, and what are your predictions? Do not end on your fears. You must end on your hopes. Some of your fears may have already been spoken about. So we’ll go to the far—Jeff two first.

Geoff Anderson: I’ll start with a fear. The fear is the continued—at the political level, this lack of ability to get around the table and work with industry, with consumers, with different political parties, or whoever the case may be, to come up with durable solutions that protect consumers but are also really promoting innovation. My hopes—and again, looking at financial services—I really do think that the consumer’s going to continue to demand more integrated products: being able to do banking, easily send their money, and so on and so forth. Shopping, financial management, and all this in one platform. We’re trying to get ahead of that, but we really need to have the regulation do that as well. And I think it’s going to get there, because that’s what the consumer’s already demanding.

Jeb Hensarling: Jeff?

Jeff Dinwoodie: As I look into the future, and to try to be an optimist: the advantages that this country has, I don’t see going away. The geographic advantages, the cultural advantages, the rule of law, I don’t see those going away. I think the risk, and what’s the old saying? Most ships sink because they have a leak inside. So it’s something inside the country, some of the political pendulum swings. But I think when you reflect on history and everything this country has been through for 250 years, and that’s the importance of studying history, it gives you that perspective: we’ve gotten through a lot worse. So I’m very optimistic. And again, optimistic looking forward in part because look at all the other problems every other country has, and I think they pale in comparison to what we’re dealing with. And so again, very hopeful and optimistic for the next 250.

Jeb Hensarling: Brian?

Brian Quintenz: Yeah, I think my fear goes back to what we were talking about, about over-managing, and trying to reduce or eliminate risk in markets, which therefore reduces opportunity and risk-taking. I see that in a lot of different areas. I see that in an interest in reappropriating assets and property. I see that in targeting successful entrepreneurs for their success and the businesses they run. And I think if we as a society or a country do that too much, we will disincentivize future citizens and young people from doing it more, and I think that’s a path to decline. And the path to decline is very hard to reverse, so that’s the fear.

I think the optimist in me recognizes that people live in this country and come to this country for its opportunity and face a lot of hurdles in trying to do new things and create new things. And some of those dialogues or systems that might try to evolve to prevent that from happening might just be one more hurdle over which they climb, and I think that they hopefully will. And the robust, fascinating new landscape of things like a space economy, for instance—we are scratching the surface of what that actually means from a technology, from a communications, from a scientific landscape. It’s kind of way outside of the realm of what we’re talking about, but if we have good risk management markets to manage risk, good capital markets to develop capital formation to incentivize that economic development, I think we can be a leader in something that’s going to be an incredible, incredible thing.

Mr. Chairman, can we get your thoughts on that question?

Geoff Anderson: What are you seeing going into the—give us yours.

Jeb Hensarling: You’re turning the moderator into the panelist.

Jeff Dinwoodie: Yeah.

Jeb Hensarling: My fear is that we do not teach our children what is the source of America’s prosperity, how wealth is actually created, and why it is so ennobling. That is my fear. My hope is that we can indeed teach them, and that they understand that if we remain true to our foundational principles—as I often say, our founders were flawed, the founding principles were not—and if we remain true to the foundational principles, including capitalism and freedom, there’s really no limit on what we can achieve as a republic. And my prediction is that we will, and when we do, we won’t be here for it. But there’s going to be a sign up there: “The American Financial Experiment at 500.” That’s my prediction.

Okay, well, I was going to have you applaud for our panelists, but I think you just did. Jeff, Jeff, Brian, thank you very much. Some housekeeping. We’re about to take a 15-minute break. Please come back for the closing session with our director, Norbert Michel. It will be well worth your time and effort. Thank you very much.

This transcript was generated using AI automation and may contain minor formatting or transcription errors. Please refer to the original audio to verify specific quotes or context.

Norbert Michel: To wrap things up, I’m going to start off doing something that I’m pretty sure nobody at the Cato Institute has ever done before. I’m going to show you a TV commercial that ran during the Super Bowl that’s about bank capital requirements. And it’s from Super Bowl LVIII, which was in 2024, and it was part of a longer campaign that banks ran against the Basel III endgame proposal, which sounds a lot like an Avengers movie, but was not. So let’s watch this clip really quickly.

[Video clip plays]

Video Clip: You see this? The Federal Reserve is considering new basil guidelines.

Video Clip: What? The Fed’s trying to tell me how to make my pizza?

Video Clip: Not basil, Basel. And no matter how you slice it, it’s bad for small business. If the Fed implements Basel III endgame, small businesses may not be able to access the capital that we need.

Video Clip: We’re squeezed enough already, and now they’re going to make it even harder for small businesses?

Video Clip: That’s really grating.

Norbert Michel: Okay. Other than the puns, I’m sure you’re probably sitting there thinking, “Yeah, the banks were against the regulations. That’s just truly shocking.” Well, it actually was shocking. It was shocking that they ran this campaign at all, because banks never do anything like this. They have a very, very complicated love-hate relationship with regulation. They frequently hate it, but they rarely pick a fight with their regulator. They hardly ever talk about it in public, and they never ask for deregulation. They pretty much accept that they’re going to be heavily regulated, and then they work with Congress and the agencies very quietly to make marginal improvements here and there, just so that they can live with a few things and smooth out some of the edges. It’s very complicated, especially for the big banks. In fact, right after Congress passed the Dodd-Frank Act in 2010, the law that ultimately led to this campaign, many of the big bank CEOs came right out and praised the Dodd-Frank Act, and praised regulation more broadly. One of the big bank CEOs even said, “Hey, this is great. Regulation puts a moat around our bank. It keeps out the competitors. Regulation is very costly and expensive and difficult for the smaller, nimbler competitors to deal with, so we’re good.” And waging a campaign against the regulators is pretty much the polar opposite of that, right? So that tells you just how bad that regulatory proposal must have been.

And that makes it very easy to say, “Well, let’s bash the Biden administration for coming out with these crazy rules,” right? Well, I would resist the temptation to do that, because it was only a matter of time before somebody in this crazy system that we have went too far. What I mean is, Congress has given the regulatory agencies an enormous amount of discretion to write the rules. So it was really only a matter of time before somebody with a somewhat controversial agenda came in and used that discretion. And that’s what happened here. Somebody did that. They went too far, and you saw the hate part of that love-hate relationship kind of bubble over.

To a lot of people, this relationship seems surprising and contradictory. But we’ve talked about many surprising, sort of contradictory things today, because there are so many things like that in our system. That probably could have been our conference theme. But Anne had a better idea, so we went with that one.

One of the biggest conflicts is inherent to our nation’s founding, though, and that’s that the United States is supposed to be all about freedom and free enterprise and free markets. And in many ways, it has been, but not at all when it comes to money and financial markets. That’s been the opposite. It’s why we started this morning with the Hamilton-Jefferson panel. Nothing exhibits the fundamental conflict in the US founding like that debate. It has many, many layers, including the basic question of whether the US would become a powerful industrial nation, sort of the Hamilton side, or it would be mostly based on farming, sort of the Jefferson side.

Now, I’m actually from Louisiana, which is the tip of the territory that Jefferson purchased when he was president, even though he was against a powerful executive branch. Nobody among the founders exhibits contradictions any better than Jefferson. The very first time that I ever set foot in Northern Virginia was a trip to Charlottesville that just happened to coincide with the 225th anniversary of America. So it’s like I’m having an anniversary today too. On that trip, I was able to visit Jefferson’s home, Monticello, on Fourth of July weekend. It was such a great trip that I moved here in less than a year. That part’s true. Since then, I’ve visited Monticello at least 10 times, and that’s also true. I went again just a few weeks ago, and I’m actually right now still kicking myself for not taking a selfie, because I really was there. I love going there, and I love all the contradictions and conflicts. They tell us a lot about human nature, and there’s all kinds of layers to that there. Things like Hamilton casting the tie-breaking vote for his hated political rival, Jefferson, to become president, and really only doing that because he hated Aaron Burr so much more. So many things have changed since that vote, but politics, those haven’t changed.

Something else that hasn’t changed is the way a lot of people view financial markets. We still have a great many Jeffersonian-style skeptics of finance. And Jefferson was pretty much on Team Freedom, radically so for his time, but not when it came to money and finance. That’s where we see a profound mistrust of money and finance, even though he borrowed a ton of money. It’s a lot like today. Right now, we have a populist president who made a fortune in New York real estate, but who just supported a bill to bash Wall Street for investing in too many homes. And if you read the text of what they’re saying, it’s very difficult to tell whether it’s coming from President Trump or Senator Elizabeth Warren or Bernie Sanders.

Now, here’s a little example from a Trump administration executive order that was titled “Stopping Wall Street from Competing with Main Street Home Buyers.” And it opens up with, “People live in homes, not corporations.” You know, just in case you were confused. And it goes on to talk about how important it is to stop Wall Street from treating your neighborhood like an evil trading floor. That’s a Trump administration executive order. That’s not a Bernie Sanders political rally. And just about six months after this order came out, the President signed a bill into law that was sponsored by Senator Warren. And when Senator Warren introduced it, her sales pitch was, “Homes should be for families, not for giant corporations.” These are the same political slogans, but they’re just that. They’re political slogans. They’re propaganda. Wall Street doesn’t compete with anybody for homes. That’s ludicrous. These slogans ignore how financial markets work, and they ignore how much financial markets help us. That’s not why they’re using them. These politicians are using those slogans because they want to play on people’s fears. And they know better. They know how markets work, especially someone who is from the real estate industry. So that’s bad enough, right? But they’re doing it to gain more power over what people do with their money. So that makes it that much worse.

Either way, the truth is that diverse financial markets, ones that help people buy and sell all kinds of different investments, even the supposedly crazy things like derivatives and asset-backed securities, that’s what helps people get the things that they need, things like homes. It helps people get capital to start a business or to run a business, even really small businesses. But many of these populist politicians won’t acknowledge that, and they even attack any kind of financial activity that doesn’t directly raise money to buy capital goods, physical capital goods. Personal retirement accounts, E‑Trade accounts, those kinds of things, they don’t even like those too much, because when people buy shares through those accounts, the money doesn’t go directly to those companies to buy things. And it’s true. Companies don’t raise money in those particular markets. That’s why populists say things like, “Markets just move money around.” But they’re missing the point, completely missing the point, because those trades in those E‑Trade accounts and those 401(k)s, they do fund capital goods indirectly, and it turns out that that indirect relationship is vital for capital investment. Why? Because when people can buy and sell all kinds of assets and investments to and from each other on a regular basis, it makes it that much easier for any company to sell their shares directly to investors, which is exactly what it means to make it easier to get money to make capital investment, to buy physical capital goods. Those E‑Trade accounts might look like they’re just moving paper around, but that’s not all they’re doing. They’re making it easier for everyone, pretty much anyone, to raise capital.

My dad was a combination mechanic/​electrician kinda guy. He fixed standby generators and engines and transfer switches. And for much of my life, he ran a small business. Nothing fancy, just a very small business. He knew very little about finance, and he really didn’t care to. He had me. No, no, I’m just kidding. I was too young. But he was able to rely on financial markets to raise capital because US financial markets are so well developed, despite whatever flaws we have. He was able to borrow money for trucks, for special equipment, for tools, and for working capital, even to do things like do oil changes on industrial engines. That became harder for him as time went on, but he still relied on those markets. And even though it’s not so easy to see, it is those well-diversified capital markets that make it easy for people like him who don’t have a lot of money and don’t need a lot of money to do that. It opens up more possibilities and opportunities for people like him.

Financial markets are not the enemy. They’re not. And the more we restrict people in those markets, the more we restrict what people can do with their money, the harder we make it for people like my dad to find a bank, to find investors, and to find opportunities. And once we start drawing arbitrary lines in the sand, saying things like, “That activity over there, that’s too risky,” or, “This particular activity over here isn’t productive enough,” that’s where things start breaking down, because there’s no way to do that objectively. That’s how we end up with a system that has too many decisions in the hands of too few people. It’s how we get a system that literally negates the benefits that markets provide. It’s how we get a system that’s too fragile and that leaves too many people dependent on those in power, which is the opposite of what we’re supposed to be representing here in the United States. We shouldn’t have a system like this, one that holds everyone hostage to some degree to the whims of just a few people, or in some cases, just one person, even if that person is the President of the United States or the Treasury Secretary of the United States, who just happens to think 350 homes is too many for any one investor. That kind of system makes lawyers and ex-officials very wealthy, but it makes it harder for everyone else to get the things that they need.

The whole thing is thick with irony too. A bunch of millionaires running around telling everybody else what it means to be too rich or what it means to invest in something that’s too risky. The best we can say about that is it’s not really very new. It’s a very, very well-worn phenomenon. We can go back to Jefferson. Supposedly, he hated the financiers, right? Well, he borrowed money every day and twice on Sunday just to fund his lifestyle. Monticello was not a profit-making enterprise. It was a money pit. And he loved books, and he loved Bordeaux. He tried to make that, and he couldn’t. Didn’t work that well. That’s a whole nother story. But he loved these things so much that he died in debt. Not a little bit of debt. In today’s dollars, it was about three million in debt, and he did that knowing that people enslaved on his land would probably have to be sold in order to pay off those debts. This is the man who, in 1774, publicly blamed the King of England for bringing slavery to the American colonies, and who declared that human rights were derived from the laws of nature and given by God to all people, and that trade with people from all parts of the world was a natural right. It’s one of the many contradictions of Jefferson’s life.

But we do still owe Jefferson a great deal. His radical philosophy that all men are created equal, that’s still the best starting point if you’re going to set up a government. His mistrust of money and finance, he kinda messed that up. Unfortunately, he wasn’t alone. There were many people in his time that viewed finance as some kind of mystical, unnatural evil force. It predated him by thousands of years. But it’s still with us today. Another good example from recent times is the Occupy Wall Street movement. Those guys supposedly hate Wall Street. Well, turns out they really like money. And they all had laptops and cell phones and used wireless communication, and the truth of the matter is, you don’t get those things in the hands of so many people so easily without Wall Street. So they should have tempered their hate just a touch and come up with a better slogan.

I come across a more subtle example of these kinds of contradictions all the time in the policy world. Many of the staunchest supporters of free markets, not just here in DC, just broadly in the free-market policy world, draw a line at financial markets. So these are people who have supposedly dedicated their lives to free markets, to fighting regulation, to fighting government intervention, but not when it comes to financial markets. That’s different for some reason. And the most common reason that I hear, their explanation, is that we have to regulate financial markets to keep people safe. To prevent a financial crisis. That sounds great, I admit that. The problem, of course, is that we know it doesn’t work. That’s what they’ve been doing for hundreds of years, and the whole period is littered with financial crisis after financial crisis. It just doesn’t work, because no matter how fancy and sophisticated we make all those rules, what they’re really doing is restricting what people can do. They’re narrowing down people’s choices. They’re narrowing down markets. They’re shrinking those markets. They’re making them less diverse. That’s how you make markets more fragile, not how you make markets more resilient. And because all government officials are people, they’re subject to the same flaws and limitations as all the rest of us. And the truth is, nobody knows beforehand which assets are going to blow up or how they’re going to blow up or certainly when they’re going to blow up.

Another problem with this whole concept, and this is a funny problem to me, is that it ignores how the world works. Before I came to DC, I used to think that there was somebody here, at least one person, who knew what was going on, who knew how to fix everything. Poring over all the data, the statistics, using whatever models they had, and they could just get on whatever problem there was, that was it. They knew exactly what to do. But once you work here, after about a week, you know there’s nobody like that here, or anywhere else for that matter. On the other hand, the sausage-making exercises that give us things like the Dodd-Frank Act and all these rules and regulations that we have, those things, those are reality.

Dodd-Frank is a great lesson, too. Like most of our major new financial laws, it was spawned out of a crisis. So the crisis hits, and then everybody starts running to Congress telling them what they think and what they want. And it’s all dressed up in the guise of, “We need to stop the next crisis,” right? “This is what we need to do to stop the next crisis.” So what happens? Members of Congress go back and forth. They make political compromises. Two years later, two full years later, we get an eight-hundred-plus-page bill, and it’s a mess, which is kind of the norm. It’s supposed to address all the problems that caused the financial crisis. But as Jeb would tell you, nobody could agree on what caused the financial crisis. The only thing everybody could agree on was we needed more regulation. And funny enough, all the people running to Congress, they’re telling them exactly the same thing: “We need more regulation.” Remember, it’s not the average American running to Congress to tell them what to do. It’s people from the industry, and it’s not even everybody from the industry. It’s a very, very small group within the industry telling them what they think and what they need and what they want. And it’s where you see the love part of that love-hate relationship really blossom.

There’s also people from the regulatory agencies. People think I’m joking when I tell them this, but believe it or not, the Federal Reserve lobbied Congress on the Dodd-Frank Act. That’s how these things work, guys. The Fed lobbied against a few things. One was a provision in an early draft of the Dodd-Frank Act that would have collapsed all the federal banking regulators into one. Well, the Fed is one of those regulators, so the Fed didn’t like that. So it lobbied and it won. And as a result, we’re still stuck with three official federal banking regulators, the OCC, the FDIC, and of course, the Fed. You might be asking yourself, “Well, why do we need three federal banking regulators?” The answer, of course, is that we don’t. But we have three.

Later on in the Dodd-Frank sausage-making process, some of the major clearing firms and exchanges lobbied Congress on Dodd-Frank for something called a derivatives clearing mandate. This is something—excuse me—this is something that would funnel billions of dollars to those companies. Well, the Fed didn’t like that either, but maybe not for reasons that you think. The Fed went to Congress and said, “No, don’t do that, because instead of people using derivatives all over the place with the risk diversified everywhere, you’re going to concentrate it in just a few really large firms. And if something goes wrong, you’re going to have to bail them out. So don’t do that.” Well, Congress stuck to their guns, and the Fed lost on this one. So when they realized that they were going to lose, they went back and they said, “Okay, fine. You’re going to do this here. You’ve got to put this in the law too.” And this is a workaround. It’s a workaround for the mandate. And what it does is it plugs those large firms directly into the Fed so that the Fed can make loans to those companies if they get in trouble. Think about that, right? Think about that process and think about the incentives in there, right? You’ve got one arm of the federal government telling another arm of the federal government—and one of them controls the money in one way, the other one controls the money in the other way—you’re going to have to do a bailout, but you don’t want to call it a bailout, so here’s a good way to do it. I mean, this is crazy, but this is a real example. All of these examples are real, and they’re just the tip of the iceberg.

This is how laws get made. This is how our system has been built. Every time something goes wrong, Congress comes in and they add new layers on top of the old layers, and the old layers are the ones that were supposed to prevent the problem in the first place. We don’t just start over. This process has been accelerating since the Great Depression, constantly ratcheting up, and what we have now is a ridiculously complex web of laws and rules and regulations that functions, at best, like a kind of crazy Whac-A-Mole game.

The Super Bowl commercial that we started with is a great example of this. That commercial was about Basel III, which of course means it was the third version of Basel, right? And it was built on Basel II, which was built on Basel I. Basel II was never fully implemented in the United States. What happened? Federal regulators were working on Basel II when the crisis hit, and that’s when everybody realized, oh no, Basel I contributed to the crisis, so you have to whack that one down with the mallet. And they also realized Basel II wasn’t going to do much better, so they had to whack that down or sweep all of it under the rug, whatever metaphor you want, and just go straight to Basel III. That’s literally what happened. So if you really think Basel III is going to work any better, okay, fine. I doubt it.

To be even more accurate with that slide, we would have had to have about 12 or so people standing around, each with their own mallet too, because you also have all these agencies enforcing this web. If you’re a full-service financial company, you could have as many as 12 federal regulators and state regulators trying to smash down all the problems and enforce those laws and rules. Even if you’re a very small, simple bank, you could still have three federal regulators plus state regulators watching over everything that you do. This is the system that we’ve been expanding for more than a century, constantly replacing regulators’ judgment for the judgment of the people who are actually in the markets. And the period is littered with financial crises.

Nobody would design a system like this. We know that it doesn’t keep us safe. We know that it makes everything more costly and more ineffective. We know that it gives a small group of people power over everyone else. It’s undoubtedly time for a different approach. The problem is that the fix is really straightforward, but it’s not politically easy. The thing that we need to do is stick to the core principles that make the case for limited government. The best way to minimize abuse of power is to not give government officials too much power to begin with. The best way to benefit from what financial markets can do is to let them be financial markets. And remember, financial markets are millions and millions of people making mutually beneficial exchanges to improve their lives. A system that gives government officials the power to tell everybody which decisions they can make and which decisions they can’t make to improve their lives defeats the whole purpose. It negates the benefits that you can get from the markets. Markets work great. Letting a few people tell everyone else what they can do never works that great.

So Jefferson and Hamilton were both kind of in the ballpark on this. What they missed, though, was that their mistrust of centralized government and power also applies directly to finance and money. Letting a handful of people decide what everyone else can do with their money is exactly the same as letting a handful of people decide what everyone else can do with their lives, and that’s bad. We shouldn’t be doing that.

I’ll leave you with one more thought. My dad passed away quite a few years ago. And I know with confidence that he never really thought too much about Basel I or Basel II. And I can’t ask him about this, but I’m good. I know that he wouldn’t have cared about Basel III or the Endgame, or any of those Avengers movies either. That’s a whole nother story, but I’m also positive that he never read a single word of the Dodd-Frank Act. Completely positive. But the thing is, all of those rules and regulations from the Dodd-Frank Act and all the laws that came before it, they all found their way to him, and thousands, if not millions, of people just like him. All that stuff shows up in how hard it is to get a truck loan or an equipment loan or a construction loan or a line of credit. It shows up when somebody can’t find a bank that’s willing to deal with a very small account, or an investor who wants to invest in a very small business. Members of Congress love to tell you that they’re fighting for guys like him. The truth, though, is that guys like my dad are never in the room or anywhere near it when they’re building this system. They’re out working, fixing things, getting covered in diesel fuel and sweat. They do not have lobbyists, and they don’t have anybody that runs to the Senate with a workaround for a bad law. We need to let markets work, because markets work better for people than government officials, especially the guy with the truck and a toolbox. A line of credit will do more for that guy and his family than any government official who thinks they know how to keep him safe, and I know that my dad would have said the same thing. Thank you.