The Fed Gives Up a Black Box

There are two basic ways to think about U.S. financial regulation1:

One way to put it is that these are two different ways of allocating the benefit of ambiguity. The world has infinite possibilities, and it is impossible to figure out in advance everything that anyone might do, and to write clear rules specifying which things are okay and which aren’t and what the consequences will be. The rules approach says, basically, that ambiguities and gray areas give power to banks: If no one has thought about it, you get to do it. The legal realism approach says, basically, that ambiguities and gray areas give power to regulators: They have lots of vague powers over banks, and can use the threat of exercising those powers to get banks to do what the regulators want, whether or not the rules clearly require it.