A Plan to Save the U.S. Financial System: Q&A with Glen Weyl

By TAP Staff Blogger

Posted on June 6, 2012

GlenWeyl_140x140-(2).jpgWe sat down with E. (Eric) Glen Weyl to gain insight into his latest research about the U.S. financial system, and learned a little more about his journey to becoming the youngest TAP scholar (by a long shot). Glen is an Assistant Professor in the Department of Economics at the University of Chicago. In addition to being a TAP scholar, he also spends a month each year in Toulouse, France as a fellow at the Toulouse School of Economics (TSE).

TAP: When did you decide you wanted to be a scholar? And how did you end up at the University of Chicago?
Glen Weyl: The summer between my sophomore and junior years of college, I worked for a hedge fund in New York. Many of the transactions I saw making firms boat loads of money seemed like, at best, a waste and potentially quite destructive. I had dinner with the man who became my advisor, José Scheinkman, and he told me that if I became an economist I could think and write about how destructive this activity was, rather than having to engage in it. José, a University of Chicago professor for many years, inspired me to be an economist and eventually to join the faculty at Chicago.

TAP: What got you interested in economic policy?
Glen Weyl: Since I was a child, I was always fascinated by the conditions that made social life tick. As I grew up, it became clear to me that economic policy was one of the most important of these conditions. This made me feel that questions of economic policy were writ large across the face of history in a way other questions weren't and thus made it irresistible for me to think about them.

TAP: What are the biggest challenges currently facing the U.S. financial system?
Glen Weyl: The role of the financial sector is to allocate capital efficiently and to transfer risks created by the real economy to those best able to bear them. Instead, much of the financial system has become concerned with racing to predict stock prices a few moments before others do, and gambling. Re-orienting the financial system to serve the real economy, rather than weigh on it, is a great challenge facing our society.

TAP: What is a ‘financial overdose’ as you refer to in your research?
Glen Weyl: The financial sector in the United States has grown far too large, consuming more than half a trillion dollars each year and attracting far too many of the best young minds to engage in activities of limited social value. This overdose of finance is a drag on the rest of the economy because it saps many of the most valuable resources we have, our most talented young people.

TAP: How do you and Eric Posner propose in your recent paper (“An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets”) to combat a potential future financial crisis?
Glen Weyl: The theory behind derivatives was that they would help provide insurance and allocate risks to those best able to bear them, thereby reducing the risk in the financial system and the chance of crisis. In fact, many derivatives were instead used for gambling that increased the risk in the system. Weeding out beneficial, risk-reducing derivatives from harmful, risk-increasing derivatives is crucial to making the system safer.

TAP: Describe your proposed regulation and how is it similar to the Food and Drug Administration’s current regulations?
Glen Weyl: Just as drugs are tested for safety and efficacy before they can go to market, the agency would project how much of the demand for a product arises from demand for insurance and how much from gambling. Products that would mostly be used for gambling would be treated like other gambling products (strictly regulated or banned) while insurance products could be freely traded. When products look likely to increase the risk in the economy, we think that, just like the FDA would take a dangerous medicine off the shelf, dangerous products should be taken off the market rather than just made more "transparent" with a long and confusing fine print.

TAP: Do you expect your proposal to get off the ground before November elections? If not, when?
Glen Weyl: I am hopeful that, in the light of the JP Morgan debacle, there will be increasing demand for creative proposal to reform the financial sector in the course of the campaign. So while I doubt legislation could be signed before then, I am hopeful it will make some significant progress.