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Good Regulation,
Bad Regulation
The Anatomy of Financial Regulation

Imad A. Moosa
Professor of Finance, Royal Melbourne Institute of Technology (RMIT), Australia
© Imad A. Moosa 2015
All rights reserved. No reproduction, copy or transmission of this
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To my fellow citizens of the world, the victims of
fraud and corruption who lost their homes, jobs
and livelihoods in the name of the free market

Lest we forget
Contents

Preface and Acknowledgements x

List of Abbreviations xi

1 Definition and Theories of Regulation 1

1.1 Definition of Regulation 1
1.2 Forms of Regulation 4
1.3 The Public Interest Theory of Regulation 7
1.4 The Capture Theory of Regulation 9
1.5 The Special Interest Groups Theory of Regulation 13
1.6 Concluding Remarks 14
2 Arguments for and against Regulation 16
2.1 Introduction 16
2.2 Avoiding Corporate Failure 17
2.3 Creature of the State 17
2.4 Market Failure 18
2.5 The Protection of Rights 20
2.6 Efficiency 20
2.7 Impeding Innovation 21
2.8 The Cost of Compliance 22
2.9 Circumvention of Regulation 23
2.10 Ineffectiveness 24
2.11 Corruption as a Justification for Financial Regulation 24
2.12 The Greed Game 28
2.13 Concluding Remarks 29
3 Regulation, Deregulation and Financial Crises 31
3.1 The Free-Market Doctrine 31
3.2 Free Banking and Financial Laissez-Faire 40
3.3 Regulation and Banking Efficiency:
The Empirical Evidence 43
3.4 Deregulation as a Cause of Financial Crises 48
3.5 Concluding Remarks 55
4 Good Regulation: Payday Loans, Securitisation
and Insider Trading 56
4.1 What is Good Regulation? 56

vii
viii Contents

4.2 Payday Loans 57

4.3 Arguments for and against the Regulation of
Payday Loans 59
4.4 Securitisation and Derivatives 62
4.5 Insider Trading 70
5 Good Regulation: Leverage and Liquidity 78
5.1 The Leverage Ratio: Why Does it Matter? 78
5.2 Leverage as a Cause of the Global Financial Crisis 81
5.3 The Basel 3 Leverage Ratio 83
5.4 Arguments for and against the Leverage Ratio 85
5.5 The Concept of Liquidity 87
5.6 The Role of Liquidity in the Global Financial Crisis 90
5.7 Arguments for the Regulation of Liquidity 94
6 Bad Regulation: Basel 1 and Basel 2 98
6.1 The Basel 1 Accord 98
6.2 From Basel 1 to Basel 2 104
6.3 A Critical Evaluation of Basel 2 106
6.4 Basel 2 and the Global Financial Crisis 117
6.5 Conclusion 119
7 Bad Regulation: Basel 2.5 and Basel 3 121
7.1 From Basel 2 to Basel 2.5 121
7.2 A Critique of Basel 2.5 124
7.3 Basel 2 to Basel 3 128
7.4 The Basel 3 Provisions 129
7.5 A Critique of Basel 3 132
7.6 The Verdict on Basel 3 and the Basel Culture 135
7.7 Conclusion 139
8 Bad Regulation: Short Selling 141
8.1 Introduction 141
8.2 Some Preliminary Remarks 142
8.3 The Past and Present of Short Selling 145
8.4 Arguments for Short Selling 148
8.5 Arguments against Short Selling 154
8.6 The Regulation of Short Selling: A Critique 160
8.7 Naked versus Covered Short Selling 165
8.8 Conclusion 167
9 Bad Regulation: High-Frequency Trading 168
9.1 Regulating the Unknown 168
9.2 What is HFT? 169
 Contents ix

9.3 The Proclaimed Profitability of HFT 174

9.4 HFT as the Cause of the Flash Crash 179
9.5 Arguments against HFT 180
9.6 The Case for and against the Regulation of HFT 188
9.7 Conclusion 190
10 Bad Regulation: Too Big to Fail, Bail-Out and Bail-In 192
10.1 Introduction 192
10.2 The Concept of TBTF 193
10.3 Evolution of the TBTF Doctrine 194
10.4 Arguments for TBTF 196
10.5 Arguments against TBTF 198
10.6 Dealing with the Menace of TBTF 201
10.7 Bail-Out versus Bail-In 208
10.8 Conclusion 210
11 Concluding Remarks 212
11.1 Recapitulation 212
11.2 What is Good Regulation? 213
11.3 Corruption as a Cause of Instability and Crises 214
11.4 Banks Always Win 215
11.5 Taleb’s Ten Commandments 216
11.6 Light at the End of the Tunnel? 218

References 220

Index 240
Preface and Acknowledgements

This book is about financial regulation in the aftermath of the global

financial crisis. While regulation (good regulation) is required to
combat corruption and fraud in the finance industry, banks still get
what they want and commit fraud, such as the recent episodes of
price manipulation in the money market (the LIBOR scandal), foreign
exchange market and commodity futures markets (price fixing and mar-
ket manipulation). It is argued that the most important justification for
financial regulation is corruption and that financial instability is related
to (caused by) corruption. The arguments presented in this book are dia-
metrically opposed to those suggested by the free marketeers who argue
against regulation in any shape or form. The book presents ideology-
free arguments for and against specific types of regulation, hence it is
about the identification of good regulation and bad regulation.
Writing this book would not have been possible if it was not for the
help and encouragement I received from family, friends and colleagues.
My utmost gratitude must go to my wife and children (Afaf, Nisreen
and Danny) who had to bear the opportunity cost of writing this book.
I would also like to thank my colleagues and friends at RMIT, including
Kelly Burns, Vikash Ramiah, Larry Li and Mike Dempsey. I am grateful
to the friends I socialise with, including John Vaz, John Watson, Liam
Lenten, Brien McDonald and Pashaar Halteh. In preparing the manu-
script, I benefited from an exchange of ideas with members of the Table 14
Discussion Group, hence I would like to thank Bob Parsons, Greg O’Brien,
Greg Bailey, Bob Brownlee, Bill Breen, Peter Murphy and Paul Rule.
My thanks go to friends and former colleagues who live far away but
provide help via means of telecommunication, including Kevin Dowd
(whom I owe an intellectual debt), Razzaque Bhatti, Ron Ripple, Bob
Sedgwick, Sean Holly, Dave Chappell, Dan Hemmings, Ian Baxter and
Nabeel Al-Loughani. Naturally, I am the only one responsible for any
errors and omissions in this book.

Imad A. Moosa
November 2014

x
List of Abbreviations

ABC Australian Broadcasting Corporation

ABS Asset-Backed Securities
AIG American International Group
AMA Advanced Measurement Approach
APR Annual Percentage Rate
ASIC Australian Securities and Investment Commission
BBA British Bankers Association
BCBS Basel Committee on Banking Supervision
BIA Basic Indicators Approach
BIS Bank for International Settlements
CDO Collateralised Debt Obligation
CDS Credit Default Swap
CEO Chief Executive Officer
CFMA Commodity Futures Modernization Act
CFO Chief Financial Officer
CFTC Commodity Futures Trading Commission
CLO Collateralised Loan Obligations
CMBS Commercial Mortgage-Backed Securities
CNBC Consumer News and Business Channel
CRM Comprehensive Risk Measure
CRSP Center for Research in Security Prices
CSFI Centre for the Study of Financial Innovation
DEA Data Envelopment Analysis
DEA Drug Enforcement Administration
DTCC Depository Trust and Clearing Corporation
EU European Union
EUIBOR Euro Interbank Offered Rate
FCIC Financial Crisis Inquiry Commission

xi
xii List of Abbreviations

FDIC Federal Deposit Insurance Corporation

FOIA Freedom of Information Act
FPU Financial Products Unit
FSA Financial Services Authority
FX Foreign Exchange
G10 Group of Ten
GCHQ Government Communications Headquarters
GDP Gross Domestic Product
HFT High-Frequency Trading
IMF International Monetary Fund
IPO Initial Public Offering
IRB Internal-Ratings Based
IRC Incremental Risk Charge
LCR Liquidity Coverage Ratio
LDA Loss Distribution Approach
LIBOR London Interbank Offered Rate
LTCM Long-Term Capital Management
MBS Mortgage-Backed Securities
NASA National Aeronautics and Space Administration
NSA National Security Agency
NSFR Net Stable Funding Ratio
NYSE New York Stock Exchange
OECD Organization for Economic Co-operation and
Development
OTC Over the Counter
RBS Royal Bank of Scotland
RMBS Residential Mortgage-Backed Securities
ROA Return on Assets
ROE Return on Equity
SBA Scenario-Based Approach
SCA Scorecard Approach
SEC Securities and Exchange Commission
 List of Abbreviations xiii

SIFI Systematically Important Financial Institution

SSRN Social Science Research Network
STA Standardised Approach
TAQ Trades and Quotes
TBTE Too Big to Exist
TBTF Too Big to Fail
TBTM Too Big to Manage
TBTS Too Big to Save
TPCTF Too Politically Connected to Fail
UBS United Bank of Switzerland
VAR Value at Risk
WTO World Trade Organization
1
Definition and Theories
of Regulation

1.1 Definition of Regulation

Before discussing the pros and cons of regulation in general and finan-
cial regulation in particular, we have to understand what regulation is
all about and what forms it takes. Although there are arguments for
and against regulation in general (hence against and for deregulation),
some arguments are type-specific. For example, environmental regula-
tion is motivated by the desire to protect human health from the effect
of pollution (which provides an argument for regulation) whereas a
primary argument for financial regulation is corruption in the financial
sector. Regulation in general is a form of government intervention in
economic activity and interference with the working of the free-market
system. According to some views, regulation is “synonymous with
government intervention in social and economic life” (Moran, 1986).
Free marketeers dislike regulation because they do not like any form of
government intervention and prefer to feel the full power of the mar-
ket. However, those who believe that government intervention may be
necessary (even a necessary evil), and that people should not be exposed
to the full tyranny of the market, find regulation to be tolerable, even
desirable.
Regulation can be defined in more than one way, as suggested by
Mitnick (1980), who presents the most comprehensive review of com-
peting definitions. Moran (1986) argues that “regulation is a contested
concept, its essential nature being the subject of continuing argument”.
However, he goes on to define regulation as “an activity in which the
discretion of individuals or institutions is restricted by the imposition
of rules”. Likewise, Den Hertog (2000) argues that “in the legal and
economic literature, there is no fixed definition of regulation”, then he

1
2 Good Regulation, Bad Regulation

goes on to define regulation as “the employment of legal instruments

for the implementation of social-economic policy objectives”, pointing
out that “a characteristic of the legal instrument is that individuals or
organizations can be compelled by [the] government to comply with
prescribed behavior under penalty of sanctions”. Den Hertog illustrates
the definition of regulation with examples, suggesting that firms can
be forced to observe certain prices, to supply certain goods, to stay out
of certain markets, to apply particular techniques in the production
process, and to pay the legal minimum wage. Sanctions include fines,
the publicising of violations, imprisonment, the imposition of specific
arrangements, injunctions against withholding certain actions, and (in
the extreme) closing down the business.
These definitions paint a bad picture of regulation, reflecting an
ideological anti-regulation stance. This is obvious from the use of words
like “restricted”, “imposition”, “compelled”, “penalty”, “sanctions” and
“forced”. Moran’s definition portrays regulation as tantamount to a par-
tial confiscation of liberty, which is true in certain cases. For example,
the US Patriot Act, which is a piece of regulation, does confiscate civil
liberties and so does the “regulation” of private communication by the
NSA and GCHQ. However, preventing a polluter from dumping toxic
waste in a river does not represent confiscation of liberty, but rather
a justifiable confiscation of the profit obtained by pursuing an illegal
activity. Den Hertog’s definition contains words that convey a bad
image of regulation but it does not say anything about why “compel-
ling”, “penalising” and “forcing” may be necessary—perhaps as neces-
sary as when they are used to deal with a serial killer. Is it not a good
idea that our behaviour in a court of law and interaction with other
people are regulated? The animal kingdom is not regulated, and this is
why lions and crocodiles are not compelled to be nice to their victims
(or, in a way, the animal kingdom is regulated by the laws of nature).
In the human kingdom, things are different. Traffic lights represent
a form of regulation that we have to abide by. We have all experienced
the chaos resulting from the failure of traffic lights, which is why the
most enthusiastic free marketeer would not argue for the “deregulation”
of traffic lights even though we are forced to comply under a penalty of
sanctions.
Deregulation, the opposite of regulation, is the process of removing or
reducing the extent of regulation. Like regulation, deregulation is typi-
cally (but not always) implemented by legislation, often by abolishing
or revoking existing legislation. For example, the Gramm–Leach–Bliely
Act of 1999 (which was signed into law by President Clinton) was
 Definition and Theories of Regulation 3

intended to revoke the Glass–Steagall Act of 1933, to allow banks more

freedom in conducting business. These two acts pertain to financial
regulation, which encompasses the laws and rules that govern the
operations of financial institutions and the working of financial mar-
kets. Macey (1989) argues that regulation and deregulation occur simul-
taneously (even in closely related areas) because both of them reflect
changes in the equilibrium conditions that provide the underpinnings
of the special interest groups theory of regulation. This view reflects
Macey’s preference for the special interest groups theory as opposed to
the public interest theory of regulation—we will examine these theories
later on.
The laws and rules that prescribe financial regulation are promul-
gated by the government or international groups (such as the Basel
Committee on Banking Supervision) to protect investors, maintain
orderly markets and promote financial stability. Whether or not these
novel objectives are achieved depends on whether the regulation is
good or bad and whether or not it is enforced effectively. The range of
financial regulatory activities may include setting minimum standards
(for capital, leverage and liquidity), making regular inspections, and
investigating and prosecuting misconduct. An important distinction
should be made between legislation setting the rules and procedures
for implementing regulation and the enforcement of such legislation.
For example, it is arguable that Bernie Madoff managed to swindle his
clients, not because of the absence of appropriate regulation but because
the regulation was not enforced.
Some observers argue for regulation but not for rule-based regula-
tion. In his book, The Rule of Nobody, Philip Howard argues for “broad,
principle-based regulation”, whereby officials and judges are allowed to
use their discretion, common sense and compassion when enforcing
the law (Howard, 2014). The underlying idea is that regulation should
not be overly detailed, which arguably comes in as a result of pressure
from special interest lobbies. For example, instead of using detailed
rules governing nursing homes, a broad principle can be used to provide
“homelike environment” and to respect the dignity and privacy of the
residents (The Economist, 2014a). While this argument is valid for
the regulation governing nursing homes, it is unlikely to work with
bankers who are very skilful at avoiding the tightest of regulatory rules.
Moran (1986) argues that the immediate origins of regulatory change
in financial markets lie in the structural transformation of markets
that occurred in recent decades. He identifies four kinds of structural
change that have led to the evolution of financial regulation: (i) an
4 Good Regulation, Bad Regulation

extraordinary rate of growth in the volume of business conducted in

financial markets; (ii) a sharp increase in the fierceness of competition;
(iii) frenetic bursts of innovation; and (iv) the use of satellite and com-
puter technologies to organise markets on a global scale. Moran seems
to overlook one important factor, which is growing corruption in the
financial sector.

1.2 Forms of Regulation

Regulation may take several forms. It may take the form of legal restric-
tions imposed by the government. It may also take the form of public
standards or statements of expectations issued by regulators. In many
cases, regulation requires registration or licensing, whereby the regula-
tor approves and permits (or otherwise) some economic activity. The
regulator may conduct periodic inspections to ensure compliance
with prescribed standards, including the reporting and management
of non-compliance. Licensing implies the possibility of de-licensing,
whereby a firm that is deemed to be operating unsafely is ordered to
stop operating or suffer a penalty for acting unlawfully, improperly or
recklessly. In extreme cases, regulation takes the form of prohibition of
an entire activity such as insider trading, money laundering and short
selling. Distinction may be made between private (or self-) regulation
and public (government) regulation. However, Moran (1986) suggests
that this distinction is “difficult to maintain” since self-regulation is
effective only because it is underwritten by state power. He points out
that “unusual hybrids of public and private regulation are constantly
developing”. However, experience shows that “selfie”, which is what
bankers like and advocate, is tantamount to allowing the inmates to
run the asylum.
Viscusi et al. (2005) distinguish between economic and social regula-
tion. Two types of economic regulation can be identified: structural
regulation and conduct regulation (Kay and Vickers, 1990). Structural
regulation pertains to market structure, including issues such as restric-
tions on entry and exit, and rules mandating firms not to supply
professional services in the absence of a recognised qualification (for
example, financial planning). Conduct regulation, on the other hand,
pertains to the behaviour of producers and consumers—examples are
price controls, the labelling of products, advertising rules and minimum
quality standards. Economic regulation is exercised primarily on natural
monopolies and market structures with imperfect or excessive competi-
tion. The objective in this case is to offset the negative welfare effects
 Definition and Theories of Regulation 5

of the behaviour of a dominant firm and to stabilise market processes.

Social regulation pertains to the environment, occupational health and
safety, consumer protection and labour. Examples of social regulation
are measures taken against the discharge of environmentally harmful
substances, safety rules in factories, the obligation to include informa-
tion on the packaging of goods, and the prohibition of the supply of
certain goods and services without a permit.
Machan (1988) distinguishes among regulation, management and
prohibition. This distinction seems to be rather superficial, as both
management and prohibition are forms (extreme forms) of regulation.
A government may choose to nationalise an enterprise and manage it
to circumvent the problems associated with monopoly power, which
falls under the regulation of monopolies. Prohibition is an extreme
measure of regulation that may be taken when necessary. For example,
the regulation of short selling may take the form of a total ban (prohibi-
tion) or allowing the practice with restrictive conditions (for example,
by restricting the list of shortable stocks or by allowing covered short
selling only). Alternatively the regulation of money laundering takes
one form only, prohibition, because it is (or should be considered)
a criminal activity.
In this book, we are mainly concerned with financial regulation,
which may be classified into two forms: safety-and-soundness (or sol-
vency) regulation and compliance regulation. The basic objective of
safety-and-soundness regulation is to protect fixed-amount creditors
from the losses arising from the insolvency of financial institutions
owing those amounts, while ensuring financial stability. Examples of
fixed-amount creditors are bank depositors and claimants of insurance
companies. This kind of regulation does not cover those holding stock
portfolios with fund managers (and similar arrangements) because the
next step would be to protect gamblers and compensate them for the
losses they incur at the Blackjack and roulette tables in casinos. However,
regulation aimed at financial stability should reduce the amplitude of
boom and bust cycles in financial markets, thus reducing the incidence
of big losses on securities portfolios. Likewise, anti-corruption regula-
tion should help investors in hedge funds avoid the fate of those who
invested with Bernie Madoff.
For more than three centuries that banks and insurance companies
have been chartered by governments, regulatory measures have been
imposed to ensure that these institutions remain both solvent (assets
exceed liabilities) and liquid (they can meet payment requests, such as
cheques and insurance claims, when presented). The predominant form
6 Good Regulation, Bad Regulation

of solvency regulation is capital regulation, whereby financial institu-

tions must maintain a positive capital position (assets exceed liabilities).
For example, the Solvency II Directive (put through in 2012) is used
to codify and harmonise EU insurance regulation, which is concerned
mainly with the amount of capital that EU insurance companies must
hold to reduce the risk of insolvency. Other solvency regulations are
designed to achieve asset diversity, by limiting loan and investment
concentrations among various classes of borrowers, and the amount of
credit extended to any one borrower. In general, safety-and-soundness
regulation is intended to curb the tendency of banks to gamble with
depositors’ savings, which is reinforced by the absence of separation
between commercial and investment banking.
Solvency regulation is enforced by inspectors who assess the value of
an institution’s assets and liabilities. A financial institution can become
insolvent (the value of liabilities exceeds the value of assets) if it endures
a large sudden loss or a sustained period of smaller losses. Likewise, a
seemingly solvent institution may turn out to be insolvent if inspectors
find hidden losses—overvalued assets or liabilities that have not been
recognised. For a long time before its eventual collapse, Enron (through
fraudulent accounting) appeared to be solvent when it was not. While
fraud is quite often the underlying cause of those losses, a firm with
honest management may also experience sudden losses—for example,
a natural disaster is likely to cause a spike in insurance claims, resulting
in operational losses caused by an external factor (the natural disaster).
Often, an insolvent bank is illiquid—that is, the bank does not have
adequate cash on hand to meet withdrawals, which is certainly true
when there is a run on the bank. This, however, does not mean that illi-
quidity cannot strike a solvent bank, although that is relatively rare. To
prevent banking panics in the event that banks cannot accommodate
withdrawals, central banks are typically authorised to act as lenders of
last resort by standing ready to lend to illiquid banks when no one else
will, provided that those banks can fully collateralise their loan with
high-quality assets. The basic difference between solvency and liquid-
ity is that solvency pertains to the ability to meet long-term financial
commitments whereas liquidity refers to the ability to cover short-term
obligations and to sell assets and raise cash quickly. In Chapter 5, we
will come back to this issue and discuss it in relation to Northern Rock
(a British bank that experienced a run in 2007).
Compliance regulation is intended to protect individuals from
“unfair” dealing by financial institutions, to impede illegal activity
(such as money laundering and insider trading), and to ensure “fair”
 Definition and Theories of Regulation 7

and non-discriminatory treatment of the customers of financial institu-

tions. Compliance regulation is a firm’s adherence to laws, regulations,
guidelines and specifications relevant to its business. Violations of
regulatory compliance often result in legal punishment, including fines.
Examples of regulatory compliance laws and regulations include the
Dodd–Frank Act and the Sarbanes–Oxley Act. Compliance regulation
has become a major responsibility for the regulators and a major cost
burden for financial institutions. For example, the Credit Suisse Group
(2001) estimated the Basel 2 compliance costs to average $15 million for
about 30,000 banks worldwide. Even worse, compliance is sometimes
required for the sake of compliance, as in the case of the Basel accords.
Moosa (2012a) argues that Basel 2.5 (the transitory accord between
Basel 2 and Basel 3) is not a risk management exercise but rather a pure
compliance exercise—effectively compliance with the requirement of
“buying insurance against possible losses”. He further argues that while
compliance with effective regulation is good to strive for, the Basel
accords are neither simple nor effective. If compliance is required for
the sake of compliance, the underlying regulation must be bad—this
is one reason why the Basel accords represent bad regulation. We will
elaborate on this issue in Chapters 6 and 7.

1.3 The Public Interest Theory of Regulation

The public interest theory was developed initially by Pigou (1932). The
underlying proposition is that the supply of regulation comes in
response to the demand of the public for the correction of inefficient
or inequitable market practices. The basic assumption is that regulation
benefits society as a whole rather than a particular vested interest. Other
assumptions are that markets may operate inefficiently or inequitably
and that regulatory bodies represent the interest of society. Criticism
directed at the public interest theory is based mostly on scepticism
about the validity of these assumptions.
In the public interest theory, the government steps in to regulate
markets when they are unable to regulate themselves (which the propo-
nents of regulation believe to be the rule rather than the exception). In
other words regulation is government intervention triggered by market
failure, a situation where the price mechanism breaks down and the
allocation of resources is sub-optimal. Public interest can be described
as the best possible allocation of the scarce resources available for a par-
ticular economy. In theory, it can be demonstrated that, under certain
conditions, the allocation of resources as dictated by market mechanism
8 Good Regulation, Bad Regulation

is optimal (Arrow, 1985). Because these conditions are not satisfied in

practice, the allocation of resources is not optimal, which brings about
the need for improvement. One of the means for achieving allocative
efficiency is regulation, whereby resource allocation can be improved by
facilitating, maintaining or imitating market operations. For regulation
to be effective, regulators must have sufficient information and enforce-
ment power to promote public interest. Furthermore, regulators must be
benevolent and aim to pursue public interest. Opponents of regulation
question the validity and soundness of the proposition that regulators
have sufficient information and that they are motivated by (and only
by) public interest.
The public interest theory explains regulation in terms of imperfect
competition, unbalanced market operations and missing markets, as
well as the need to prevent or correct undesirable market outcomes.
The correction of undesirable outcomes can be desirable for other
than economic reasons, such as considerations of justice, paternalistic
motives and ethical principles. Posner (1974) interprets the public inter-
est theory more broadly to imply that regulation is intended to correct
inefficient or inequitable market practices. Examples of the laws and
rules aimed at preventing or ameliorating undesirable market outcomes
are legal minimum wages, maximum rents, rules enhancing accessibil-
ity to health care, and rules guaranteeing income in the event of sick-
ness, unemployment, disablement, old-age and so on. In all of these
cases, trade-offs may arise between economic efficiency and equity. Free
marketeers, however, are concerned with efficiency and nothing but
efficiency, which means that trade-offs do not count and that regula-
tion that reduces efficiency to achieve a non-efficiency objective should
be abandoned or not implemented in the first place.
The public interest theory has been criticised on the following
grounds. First, criticism is directed at the notion of market failure
because the market mechanism itself is often able to compensate for
any inefficiency. For example, the problem of adverse selection result-
ing from inadequate information can be solved by companies them-
selves when they adopt brand names and pursue extensive advertising
campaigns to signal high quality. Second, the theory assumes that regu-
lation is effective and cheap to implement, when in reality this may not
be the case. Third, while the theory assumes that regulation is intended
to boost economic efficiency, it does not explain why other objectives
(such as procedural fairness and redistribution) may be aimed for at
the expense of economic efficiency. Fourth, the theory is incomplete—
for example, it does not indicate how a given view on public interest
 Definition and Theories of Regulation 9

translates into legislative actions taken to maximise economic welfare.

Yet another criticism is that regulators do not have sufficient informa-
tion with respect to cost, demand, quality and other dimensions of the
production process—without this information, regulators are not in
a good position to promote public interest by correcting market failure.
As economic agents, regulators pursue their own interest, which may or
may not be consistent with public interest. This point forms the foun-
dation of the capture theory, which we examine next.
All of these criticisms of the public interest theory convey the mes-
sage that we should overlook regulation and let the market run the
show. While it is true that regulators may pursue their own interest,
that is no reason to abandon regulation. This is the same as the argu-
ment that we should dismantle the police force because some cops are
corrupt. The argument that regulation is not cheap is exactly why the
introduction of new regulation should be considered and evaluated in
terms of costs and benefits. The efficiency argument depends on what
we mean by efficiency. For free marketeers, efficiency is about the allo-
cation of resources with respect to commercial output. But allocative
efficiency may, and should, refer to the allocation of resources when
output includes things like safety, fairness and the prevention of cor-
ruption. The other arguments are too abstract and rhetorical that they
do not deserve any comment.

1.4 The Capture Theory of Regulation

Regulatory capture is a form of political corruption that occurs when

a regulatory agency, established to act in the public interest, instead
advances the commercial or special concerns of the firms or industries it
is charged with regulating. It becomes a “captured agency”. Regulatory
capture is a form of government failure—it creates an opening for firms
to behave in ways that cause harm to the public.
The likelihood of regulatory capture is a risk to which an agency
is exposed by its very nature (Adams et al., 2007). This suggests that
a regulatory agency should be protected from external influence as
much as possible. It may even be better not to establish an agency at
all if it is likely that the agency would become a victim of regulatory
capture, in which case it would serve its regulated subjects rather than
those whom the agency is established to protect. A captured regulatory
agency is often worse than no regulation, because it wields the author-
ity of the government. However, increased transparency of the agency
may mitigate the effects of capture. Recent evidence suggests that, even
10 Good Regulation, Bad Regulation

in mature democracies with high levels of transparency and media

freedom, more extensive and complex regulatory environments are
associated with higher levels of corruption, including regulatory capture
(Hamilton, 2013).
The notion of regulatory capture has an obvious economic basis, in
that vested interests in an industry have the greatest financial stake in
regulatory activity and are more likely to be motivated to influence the
regulatory agency than dispersed individual consumers, each of whom
has little particular incentive to influence regulators. When regulators
form expert bodies to examine policy, these bodies invariably involve
current or former industry members or, at the very least, individuals
with contacts in the industry. Hanson and Yosifon (2004) argue that the
phenomenon extends beyond just political agencies and organisations.
Businesses have an incentive to control anything that has power over
them, including institutions from the media, academia and popular
culture. This phenomenon is called “deep capture”. For example, the
finance industry has certainly captured academia, because some aca-
demics (in return for favours) have been providing the intellectual justi-
fication for giving financial institutions and markets a free hand. Posner
(2009) provides an explanation by arguing that “the entwinement of
finance professors with the financial industry has a dark side”, suggest-
ing that “if they criticize the industry and suggest tighter regulation,
they may become black sheep and lose lucrative consultantship”. To its
benefit, the finance industry interprets the efficient market hypothesis,
with the help and encouragement of academia, to imply that the mar-
ket is capable of pricing financial assets correctly and that deviations
from fundamental values could not persist. In other words, financial
institutions use the efficient market hypothesis to tell the government
that regulation produces sub-optimal outcomes.
The capture theory is based on the proposition that regulators do not
pursue public interest, but rather they look after private interests that
may demand to be regulated as a way of boosting their (the private
interests’) profits. In this sense, the regulator is captured by an organised
interest (a firm or business association). For example, Epstein (1981)
argues that the reason behind the insulation of the Federal Reserve from
popular control (justified by the notion of central bank independence)
is to allow bankers to be in control of their regulator. While this obser-
vation may sound like some sort of conspiracy theory, it is supported
by stylised facts and observable patterns of behaviour. The Fed has argu-
ably made a major contribution to the advent of the global financial
crisis by keeping interest rates low for a longer time than was necessary,
 Definition and Theories of Regulation 11

which was good for bankers and stock traders but bad for the economy
and people at large. In the aftermath of the crisis, the Fed has indulged
in quantitative easing on a massive scale to provide cheap funds for
banks while taking the risk of igniting hyperinflation (Moosa, 2013a).
In his book, End the Fed, Congressman Ron Paul explains how, why and
for whom the Fed has been pulling the strings of the American financial
system for nearly a century (Paul, 2009).
The capture theory is criticised on the following grounds. The first
is that the theory cannot be distinguished sufficiently from the public
interest theory, because it also assumes that public interest provides the
motivation for the initiation of regulation. The second criticism is that
it is not clear why a firm can succeed in subjecting a regulatory agency
to its interests but cannot prevent its establishment. Third, regulation
often appears to serve the interest of groups of consumers rather than
the interest of firms. Regulated firms are often obliged to extend their
services beyond the voluntarily chosen level of service (for example, the
supply of telecommunication services to consumers living in sparsely-
populated areas and the granting of credit to subprime borrowers to
buy houses). Fourth, firms typically oppose most forms of regulation
because of the perceived negative effect on profitability (examples are
environmental regulation and the regulation of product safety and
labour conditions). Finally, the theory does not explain why a firm is
able to take over a regulatory agency but consumer groups fail to pre-
vent this takeover.
These arguments do not invalidate the capture theory because it is
highly consistent with empirical observations that confirm the propo-
sition that under certain conditions regulators serve the interest of
the firms they are supposed to regulate. Furthermore, it is not hard
to respond to these criticisms. While the public interest theory and
capture theory may be similar with respect to the motive for initiating
regulation, the two theories are different in all other aspects. A firm
that is powerful enough to control a regulatory agency will not want to
prevent the establishment of that agency for the very reason that the
agency will serve the firm’s interest. The proposition that regulation
appears to serve the interest of consumers rather than the interest of
firms is not always true, particularly in the case of financial regulation.
Measures of deregulation, which serve the interest of firms, may come
from the regulators or their bosses. Not all forms of regulation are bad
as far as the regulated firms are concerned—regulation may provide
and sustain monopoly power, not to mention financial assistance and
subsidies. As to why consumers cannot prevent firms from taking over
12 Good Regulation, Bad Regulation

a regulatory agency, the answer is simple: big firms are more powerful
and politically connected than consumers.
D. Kaufman (2009) describes capture as “one neglected dimension
of political corruption”, whereby powerful companies (or individuals)
bend regulatory policy and legal institutions for their private benefit.
This is typically done through high-level bribery, lobbying or influence
peddling. He distinguishes between small jobs, such as bribing a bureau-
crat to obtain a permit to operate a small firm, and big jobs such as a
telecommunications conglomerate that corrupts a politician to shape
the rules of the game, granting it monopolistic rights, or an investment
bank influencing the regulatory and oversight regime which governs it.
He also points out that as a country becomes industrialised, corruption
does not disappear—rather, it becomes more sophisticated (transfer
of a briefcase stashed with cash becomes less frequent). He introduces
the concept of “legal corruption”, which he describes as “subtler forms
of capture”, such as an expectation of a future job for a regulator in a
lobbying firm, or a campaign contribution with strings attached. The
influence is often legally exercised by powerful private interests, which
in turn influence regulatory policies and laws.
Some proponents of the capture theory, who dislike regulation,
seem to say the right thing for the wrong reason because the theory
can be interpreted to mean that regulation does no good. The theory
may indeed be used to support deregulation to prevent the capture of
regulators by regulated firms. The problem here is not regulation as
such but rather corruption, as capture is a form of corruption. The fact
that the Fed serves the interest of its owners, the banks it is supposed
to supervise, does not mean that the Fed should be abolished and
the alternative of free banking pursued. Rather, it means that the Fed
should be nationalised and scrutinised so that it serves the interest of
the economy and people at large rather than the interest of banks. Good
things can be abused, and regulation is no exception.
Strictly speaking, the capture theory is not a theory that explains the
initiation or the supply of regulation as is the case with the public inter-
est theory. In both theories it is more plausible to argue that regulation
is initiated and supplied for the declared objective of protecting public
interest than to suggest that an influential financial institution initiates
the establishment of the regulatory agencies that supervise financial
markets and institutions. Capture is not pre-meditated, it evolves with
the passage of time, following the establishment of a regulatory agency.
The capture theory is about how and why regulatory agencies are
captured, in which case it is not a competing theory or an alternative to
the public interest theory. The two theories are actually complementary.
 Definition and Theories of Regulation 13

Sometimes a whole government may be captured. This is what The

Economist (2014b) says:

“It was always the French and the Germans,” grumbles a senior
financial regulator, blaming counterparts from those two countries
for undermining international efforts to increase capital ratios for
banks. Every time the Basel committee, a grouping of the world’s
bank supervisors, neared agreement on a higher standard, he says,
a phone call from the Chancellery in Berlin or the Trésor in Paris
would send everyone back to the table. Similar phone calls almost
certainly inspired the committee’s decision on January 12th [2014]
to water down a proposed new “leverage ratio” for banks.

We will describe and discuss the manipulation of the leverage rules in

Chapter 5. We will also explain why banks always win and get what
they want.

1.5 The Special Interest Groups Theory of Regulation

The main difference between the capture theory and the special interest
groups theory is that the latter conveys the message that competition
among special interests can be both widespread and intense. Special
interest groups are also called pressure groups, advocacy groups, lobby
groups, campaign groups and interest groups. They can be firms, con-
sumers or consumer groups, regulators or their staff, legislators and
unions. As political pressure intensifies, political influence strengthens
and the financial yield obtained from the pressure exerted rises.
Scholars advocating the special interest groups theory reject the cap-
ture theory’s emphasis on the control of individual agencies by a firm or
one narrow group of powerful firms. Instead, they suggest that multiple
groups compete for the control of an agency’s activities, including con-
sumers and the regulators themselves. According to this theory, power-
ful groups fight among themselves for the use of the coercive power
of the government to introduce rules and regulations that would help
their businesses. As in the capture theory, regulation is not regarded by
the regulated firms as an inherently bad thing—rather, regulated firms
demand regulation if regulation is conducive to the preservation of
power and enhancement of profitability.
Macey (1989) uses the special interest group theory to argue that
politicians are not necessarily greedy or evil when they enact laws that
exalt the preferences of narrow special interest constituencies over the
public good. The alternative view he expresses is that the preferences
14 Good Regulation, Bad Regulation

of organised interest groups inevitably triumph in the political arena

because politicians need to maximise political support to stay in office.
He points out that in a governmental system in which politicians must
compete with one another for votes, they must garner political support
to survive. He then contends that a major contribution of the special
interest groups theory is the recognition that well-organised groups
are in a better position to provide political support than are the poorly
organised members of the public at large. Politicians pass laws for the
benefits of those groups that are able to pay for the laws with promised
political support. The costs of these laws are borne by those who are in
the worst position to object to them (the public at large). Macey con-
cludes that the economic interests of organised interest groups are more
reliable predictors of regulatory outcomes than are public opinion and
public ideology.
The special interest groups theory is criticised on several grounds.
First, while redistribution is seen as the cause of regulation, redistribu-
tion in practice is always associated with deregulation. Investigating
who derives benefit from regulation and who bears the costs does not
establish the cause of regulation. This is exactly why, like the capture
theory, this theory is not a theory of the initiation and supply of regu-
lation—it is about why and how special interest groups capture their
regulators.
Another weak point is that the theory does not say anything about
which groups will be the most effective politically and who will collect
income transfers. The theory assumes that interest groups determine
the outcomes of elections, that legislators honour the wishes of the
interest groups, and that legislators are able to control regulators. The
theory pays little or no attention to (i) the motivation and behaviour of
various political actors, such as voters, legislators, government workers
and agencies; (ii) interaction between various actors in the regulatory
process; and (iii) the mechanism through which legislators and regula-
tors conform to the wishes of the organised interests. These criticisms
are trivial compared to the fact that the theory is a valid representation
of stylised facts.

1.6 Concluding Remarks

Theories of regulation are classified according to several dimensions,

but there is significant overlapping in the classification schemes. The
theories are classified into positive and normative, into public and pri-
vate interest theories, into categories ranging from teleological theories
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 JASKA. Hölmölän kylä.

MAAILMAN-MATTI. Olen kuullut siitä paljon puhuttavan. — Siat

raitilla ja kuhilaat vielä pellolla.

EPRA. Joutaahan ne… siinähän ne ovat törröttäneet jo pari

aastaikaa.

MESAKKI. Ei meillä kiirettä.

JASKA. Niin, ja taivaan linnutkin saavat osansa.

MESAKKI. Mikä hurskas ajatus.

MAAILMAN-MATTI. Sopiva maa-ala minunlaiselle matkamiehelle.

JASKA. Kuules, hän puhuu jo siitä maa-alasta.

EPRA. Mesakki, kysy siltä noin kautta rantain.

MESAKKI. Saisimmeko luvan kysyä…?

MAAILMAN-MATTI. Ei kysyvä tieltä eksy!

MESAKKI. Oletteko te se mittaaja… se maanmittaaja?

MAAILMAN-MATTI. Kyllä on virka vaikkei ole empeetiä. Maita ja

maanteitä olen koko ilmotun ikäni mitannut.

EPRA. Se on hän, ihan varmasti se on hän.

JASKA. Mutta hän ei tullut vaunuissa… (Tunnustelee takaa

Maailman-Matin takkia.)

MAAILMAN-MATTI. Ha, mitä sinä siellä minun takkiani nuuskit?

 JASKA. Minä vaan hiukan tunnustelen, pyyhin sormeni oikein
puhtaaksi.
(Sylkee sormiinsa.)

EPRA. Katsos kuinka se maklakoittee.

MAAILMAN-MATTI. Se takki on nähnyt parempiakin päiviä, usko

poist Mutta ei koiraa ole karvoihin katsomista.

JASKA. Ei, ei! Minä vaan, että onko se oikein ulkomaaa verkaa?

MAAILMAN-MATTI. Vieraissa maissa olen ollut ja taidan

usevammaallaisia kieliä.

MESAKKI. Menikö vaunut rikki?

MAAILMAN-MATTI. Niin, vaunut menivät rikki ja vaatteet

riekaleiksi, täytyi lainata nämät vanhat rievut.

JASKA. Entä se aasi?

MAAILMAN-MATTI. Se kuoli nälästä kahden heinäkucrman väliin,

ei tiennyt kummastako ottaa, siitä se kuoli se aasi.

EPRA (Näyttää kuvakaappia). Tiesinhän minä, että jalkaisin se

tulee.
Onkos tämä se mittauskone?

JASKA. Katsos kuinka se makeilee.

MAAILMAN-MATTI. Kone se on? Horoskooppi, rahakone,

taikakone.

EPRA. Ha, vai horroskaappi!

 JASKA. Ettäkö vallan taikakone?

MAAILMAN-MATTI. Niin, rakkaat hölmöläiset, siitä saatte nähdä

kaikki maailman yhdeksän ihmettä, arkut ja aarteet, Egyptin
pimeyden ja…

JASKA. Kysy, josko se tietäisi, missä se kentraalin kultasapeli on.

MESAKKI. Näyttäkääs meillekin niitä ihmeitä, ehkä se olisi opiksi

meille hölmöläisillekin, me olemme piskuinen lauma, kovin
riidanhaluisia olemme, ratki raadollisia ja henkellisesti vaivaisia,
totisesti, minä havaitsen sen selkeästi.

JASKA. Mutta Mesakki, kultasapeli!

EPRA. Ja rahakirstu!

MESAKKI. Asia on sitä laatua, että tämä Justiinan Jaska ja Ylä-

Hölmän
Epra - eivät tiedä kenelle oikeastaan tämä maapilkku kuuluu.

JASKA (Innostuen). Mun isonisäni isä oli sanonut että…

EPRA. Ha, oli sanonut, oli sanonut… Kyllä minä sen asian
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minun taatani taata sen omisti.

MESAKKI. Viisikymmentä aastaikaa sitten kasvoi tällä samalla

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EPRA. Kerran minun isäni aikana krapsutti kukko eräänä aamuna

tästä samasta paikasta esille vanhan ruostuneen hevosenkengän.
Se oli sen saman kukon isonisä, jonka ehkä näitte tunkiolla
tullessanne.

MESAKKI. Ja siitä hevoskengästä käräjöittiin kaksikymmentä

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MESAKKI. Mutta nyt kulkee semmoinen tarina, että tähän

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JASKA. Kultasapeli.

EPRA. Ja rahakirstu.

MAAILMAN-MATTI (Viheltää). Ai, veikkoset! Nyt minä alan

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Katsokaa nyt tuosta reijästä! (Maailman-Matti asettaa kaksi kynttilää
kaappiin ja vääntää veiviä.)

JASKA. Munalukonko reijästä?

MAAILMAN-MATTI. Ei kun tästä?

JASKA (Katsoo reijästä). Hihii! Voi jeekuna vyrrää!

MAAILMAN-MATTI. Tässä on se Pommerin paukutus.

EPRA. Voi ihme ja kumma! Onkos tämä se sotakentraali?

 MAAILMAN-MATTI. Se on sen suuren sotakentraali
Napaljoonivainaan sotahaamu.

EPRA. Voi tokiinsa, silläkin on kultasapeli. Mikäs tämä nummi

sitten on?

MAAILMAN-MATTI. Se on Pariisin hedelmällinen maa Aahrikassa.

EPRA. Tehdäänkö sielläkin makkaratikkuja?

MAAILMAN-MATTI. Ei siellä ole mustia ihmisiä eikä ihmissyöjiä.

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AMALIA (Tulee). Mitäs lintuja noi on?

ANSU. Kuuluu olevan paratiisilintuja.

JASKA. Mitähän se linnuilla?

 EPRA. Taitaa vaan olla silmän lumeiksi, ikäänkuin emme me
tietäisi, että maanjakaja se on.

JASKA. Ei se meitä jutkuta.

MAAILMAN-MATTI. Niin, osta nuori neitonen onnen lehti. Joka

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JASKA. Mitäs se Amalia kiertotähdellä. Ansuako se Amalia tai

ehkä
Akianteria?

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varvasta leikattu.

MESAKKI. Niin, totisesti, minä näin Akianterilla kukonkoiven, se

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Amalia säädyssäsi.

JASKA. Ansua se…

ANSU. Mitäs se Jaska nyt tohisee?

AMALIA. Että viitsiikin, hyi! (Menee tupaan.)

ANSU. Mikäs sille nyt tuli? (Menee portista.)

JASKA. Jahka minäkin otan. Mesakki lue sinä, joka olet

kirjanoppinut.

EPRA. Minä en osta Jaskan kiusallakaan.

 MESAKKI. Jahka haen nokkalasini. (Lukee syrjässä Jaskalle.)
"Kiertotähti tietää, ettet sinä elä naapurisi kanssa oikein hyvissä
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MESAKKI. Jaska, onni hymyilee sinulle niinkuin täysikuu?

EPRA. Lähestyen. Ha, vai niinkuin täysikuu!

JASKA. Niinkuin täysikuu Hölmölän lantapatterin takaa. Kuulkaas

armollinen munalukkoherra, ettekö voisi nyt heti kääntää
kärpästikkeliänne ja tutkia kenelle tämä maanpilkku kuuluu.

MAAILMAN-MATTI. Missä ne viiskivet ovat? Sydänkivi on vaan

paikallaan, siitä ei saa mitään tolkkua. Mutta pois aita, en minä tässä
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JASKA. Vest ja varjele!

EPRA. Minun aitani! Olisi sen tehnyt joku muu, niin…!

JASKA. Mitä arvelette, eikös tämä maa ole minun?

 EPRA. Älkää kuunnelko häntä, hän on aina hanakkana kuin
kuhmolainen vasikan hännässä.

JASKA. Ja sinulla on puheet mahtavat kuin lehmänostajalla.

MESAKKI. Molemmilla on puheet mahtavat, mutta työt menevät

rasiaan.

MAAILMAN-MATTI. Kyllä minä keinon keksin.

EPRA. Onkohan tässä aarre?

JASKA (Mesakille kahden). Sopisikohan hiukan niinkuin

tunnustella sen ajatuksen meininkiä, ottaisikohan se kaivaakseen
sitä aarretta. (Tunnustelee maata.)

EPRA. Mitäs sinä siellä kronit ja krahnustat?

JASKA. Ai, ai, enhän minä, kysyn vaan, että tahtoiskohan se

horroskaappimestari niinkuin että kaivaa tätä paikkaa.

EPRA. Kaivakoon hän, mutta sinä et siihen näppiäsi pistä.

MAAILMAN-MATTI. En minä ole juuri sellaista työtä tehnyt, mutta

voisihan sitä koettaa hyvää maksua vastaan… hyvää maksua
vastaan.

JASKA. Kuinkas niin isoinen herra, arvaahan sen, mutta kun te

olette niin sukkela, niin alhainen ja niin armollinen, niin…

EPRA. Niin, kun minä sitä asiaa tuumailen, niin suostun minäkin
siihen.
 JASKA. Sanokaahan minulle kahden kesken, onkos tässä
aarretta?

MAAILMAN-MATTI (Mesakille). Antakaa minulle nokkalasinne, niin

minä tarkastan paikkaa.

MESAKKI. Tässä ovat vaskisankaset nokkalasini, minä sain ne

kerran jalolta piispaltani ja esimieheltäni, näillä nokkalaseilla voi
lukea kaiken maailman aikakirjoja.

JASKA. Me käytämme niitä vuoron perään täällä Hölmölässä. Kun

niillä katselee, niin koko maailma suurenee kuin saippuarakko.

MAAILMAN-MATTI (Tekee temppujaan). Katsokaas! Ei tämä

tärpästikkeli mitään tee, sormet ne maneitin antaa. Nyt se näyttää
maan keskipisteeseen! Katselkaa te sillä aikaa taivaan napaa
kohden. (Hölmöläiset töllistelevät ilmaan.) Kuuletteko kuinka
maanakseli pyörii? (Maailman-Matti pistää lasisilmät taskuunsa ja
kopeloi hölmöläisten taskuja, ravistaa päätään ikäänkuin, olisi
pettynyt.)

JASKA. Totisesti, minä kuulen jotakin, se ratisee ihan kuin se ei

olisi saanut tervaa sitten maailman luomisen.

EPRA. Mies kuussa on varastanut koko tervaleilin. Siitä se niin

pahasti niksahtaa.

JASKA. Ja me niksahdamme sen mukana.

MESAKKI. Viisaasti haasteltu. Tämä on liikuttava hetki, minun

vanha syntinen sydämmeni vapisee mielenliikutuksesta.

JASKA. Vai raappiiko Justiina makkarapataa?

 MAAILMAN-MATTI. Salaperäisellä äänellä. Johorimuikkus!

EPRA (Säpsähtäen). Häst!

JASKA (Säpsähtäen). Häst! Mitä hän sanoi!

EPRA. Johorimuikkus!

JASKA. Johorimuikkus!

EPRA. Mitäs se on?

MAAILMAN-MATTI. Se on hepreiskaa!

EPRA. Hää!

MAAILMAN-MATTI. Tässä minun jalkojeni alla on jotakin!

JASKA. Heijuvei! Siellä on aarre, siellä on aarre!

EPRA. Vai että aarre, no sitte siellä on jotakin.

MAAILMAN-MATTI. Nyt minä olen väsynyt kuin rättiukon hevonen,

mutta huomena minä alan sitä kaivaa.

MESAKKI. Ja aarteet tasataan kristillisesti.

JASKA. Minä tahdon sen kultasapelin.

EPRA. Mutta minä tahdon rahakirstun.

JASKA. Ei, ei, kaikki pannaan tasan, niinhän oli määrä.

Tikka ja Akianteri tulevat, jälessä tulee Koputus-Liisa y.m.

hölmöläisiä.
 MESAKKI (Rientää heitä vastaan). Herra herrastuomari! Täällä on
se ihmeellinen maanjakaja.

TIKKA. Me tervehdämme sinua, sinä suuri Salomoni.

AKIANTERI (Määkii hiukan, sitten hän alkaa rummuttaa sormillaan

otsaansa ikäänkuin hän laskisi säkeitä). Me tervehdämme! — Minun
pääpajassani syntyy ja kasvaa nyt jotakin. Paluppii, paluppii,
krasnajeli saminaa, nairuma nitsaa, nieruma natsaa, sijooni nokkii
aapramia!

TIKKA. Kuulkaas vaan, lukee niinkuin lakia!

MESAKKI. Maailman-Matille. Se on Aaretti Akianteri, meidän

rekilaulumestarirnme, hänen päänsä on täynnä neropatteja.

AKIANTERI. Olettekos kuulleet ikiliikkujasta, minä olen sen

vuntieraaja.

MAAILMAN-MATTI. Onko se jo valmis?

AKIANTERI. Ei vielä, mutta minun ajatukseni liikkuu aina.

MAAILMAN-MATTI. Ja minä liikun aina.

JASKA. Me heilumme kaikki niinkuin maito elämän kirnussa.

KOPUTUS-LIISA. Ja minä olen Hölmölän Koputus-Liisa, olette kai

kuullut puhuttavan. Jos teilläkin on neropatteja ja ne syhyvät, niin
minä hieron niitä. Minä olen hieronut esille paljon salattuja asioita. —
Mutta nyt minä menen katsomaan, mitä se Jaskan rakas Justiina
tekee. (Menee tupaan.)
 AKIANTERI. Katsokaa minun päätäni, eikös minussa ole jotain
merkillistä! — Minä näin yöllä unta pässistä…

MAAILMAN-MATTI. Kovin on mörköllinen.

TIKKA. Mitäs siitä sanotaan Sipillan ennuskirjassa..

AKIANTERI. Pässi tietää varallisuutta. Kun minä keksin sen

ikipyörän… jaa, jaa! Te, herra aarremestari, voitte olla minulle apuna.

JASKA. Tämä muukalainen on oikea ihmeiden tekijä ja hän liikkuu

aina.

MESAKKI (Osottaen Mattia). Kallistakaa korvanne tämän miehen

puoleen, sillä hänellä on viisauden merkit.

AKIANTERI (Paatoksella). Nimi sen oli rohvetissa Sipillä, ihana,

kaunis, lahjoitettu avuilla, kaikille kuninkaille tuttu oli, ruhtinailta,
herroilt' ylös otetuks tuli, taivaan merkist nähdä taisi.

MAAILMAN-MATTI (Hullunkurisen salaperäisesti). Jahorimuikkus!

AKIANTERI (Asettaa sormen otsalleen). Jahorimuikkus! Mikä

ihmeellinen sana, mikä oli ensin, muna vai kana?

TIKKA. Johorimuikkus! Kuinka älyllisesti Akianteri pukee sanansa!

MAAILMAN-MATTI. Peijakas, te hölmöläiset olette kaukaa viisaita

ja varovaisia.

HÖLMÖLÄISET (Asettavat etusormen otsalleen). Johorimuikkus.

Mitäs se on?
 MESAKKI. Eivätkä he tienneet, mitä se oli? Hän on sen suuren
Sipillan jälkeläinen.

AKIANTERI. Hän eikä kukaan muu. Sillä hän puhuu

ennusmerkkien kautta.

HÖLMÖLÄISET. Totisesti, Akianteri on sen sanonut!

JASKA. Hän tuo taloon onnen ja varallisuuden. Nyt ei minun

enään tartte laittaa tynnyrintappia, ei voita kirnuta, eikä porsasta
paimentaa. Ehei!

EPRA. Niin, nyt tuli talooni makian leivän päivät. En minä enään
viitsi makkaratikkuja veistellä.

MAAILMAN-MATTI. Hei, nyt tuli minullekin makian leivän päivät!

TIKKA. Iloitkaamme ja riemuitkaamme! Ja nyt minä arvoni mukaan

julistan käräjärauhan ja kotirauhan. Olkoon tämä ylösrakennukseksi
meille huoneenhallituksessa.

AKIANTERI (Rummuttaa sormilla otsaansa). Minun pääni kiehuu

kuin. ampiaispesä. — Nyt, nyt se tulee!

MESAKKI. Hyss! Henki on hänen päällänsä.

AKIANTERI.

Nyt ompi ratki tapahtunn meill ihme yksi suur, kun

hölmöläisten riita loppui aivan alkuuns juur! Natikuti vii ja
natikuti naa.

JASKA (Puoleksi tanssien). Natikuti, vitikuti.

 MAAILMAN-MATTI (Puoleksi tanssien). Nat, nat, naa! Nyt alkaa,
sano, suutari nälkää!

TIKKA. Mikä ylösrakentava ja virkistävä veisu!

MESAKKI. Niin, niin, laulun lahja tulee ylhäältä.

MAAILMAN-MATTI. Hyvät hölmöläiset, tämä kaikki on kuin

pumpulia minun sydämmelleni, mutta minä olen halkinainen mies ja
sanon suoraan, että minulla on nälkä kuin sudella, söisinpä vaikka
tynnörintappia ja makkaratikkuja.

JASKA (Kiskoo häntä käsivarresta). Tulkaa minun tupaani!

MAAILMAN-MATTI. Se on hyviksi. — Niin, ei se työ mitään

herkkua ole.

EPRA. Meillä on hyvää puolukkapuuroa ja talkkunaa.

MAAILMAN-MATTI. Nythän minä elän kuin pellossa.

JASKA. Puolukkapuuroa! Mutta meillä on makkaroita.

EPRA. Ette saa mennä sinne.

JASKA. Ei, ei!

MAAILMAN-MATTI. Kyllä, kyllä. Jollei syö iltasta, niin surma hioo

kirvestä.

EPRA (Toisesta käsivarresta). Ei, tulkaa minun tyköni!

MAAILMAN-MATTI. Kyllä, kyllä, mutta näin minä kuolen kuin

aasinikin kahden heinäkuorman väliin.
 EPRA (Kiskoen omalle puolelleen). Tulkaa vaan meille yöksi, ette
te ole heinäkuormana kahden aasin välissä.

MAAILMAN-MATTI. Niin, kahden aasin. — Johan te teette minusta

nuuskaa.

JASKA. Epra, älä luule, että tämä poika on pottuvoista ja

linnunluista.

EPRA. Tiedäthän sen jo vanhastaan, etten riitaa rakenna, rauhaa

en rukoile, vaan mörkö elämän ei pidä puuttuman. - Kyllä minun
talossani ruokitaan yhtä hyvin kuin sinunkin talossasi.

JASKA. Mutta meillä syödään niinkuin rikkaat oikein lusikalla.

EPRA. Niinhän tuota luulisi kun outo kuulisi.

JASKA. Älä luule rakas sielu, että kissa lentää!

EPRA. Katso itseäsi!

MAAILMAN-MATTI. Älkää repikö, päästäkää irti!

JASKA. Kyllä minä näytän, mitä kummipoika taitaa! Hii!

Epra ja Jaska retuuttavat Maailman-Mattia, toinen toisesta, toinen

toisesta hiasta, hölmöläiset rientävät apuun, toiset kiskovat Epraa
toiset Jaskaa, mutta siten Maailman-Matti kieppuu kuin pallo heidän
välillään ja takinhiat repeävät.

MAAILMAN-MATTI. Kyllä minä nyt jouduin hullujen hoijakkaan. Ai,

auttakaa, paitani repee, paitani repee, auttakaa, auttakaa, ai!

Esirippu.
TOINEN NÄYTÖS.

Sama paikka kuin ensimmäisessä näytöksessä.

MAAILMAN-MATTI (On puettuna uusiin vaatteisiin, hän on

polviaan myöden kuopassa, heittää kuokan ja nousee kuopan
reunalle istumaan). Hohoo! Hullu työtä tekee, elää viisas
vähemmälläkin.

JASKA (Tulee hiipien nurkan takaa toisessa kädessä hattu,

toisessa nassakka, joka on selän takana). Eihän vain akkani lie
täällä?

MAAILMAN-MATTI. Tunnen käryn hajun kodasta.

JASKA. Taitaa olla saunaa lämmittämässä. (Katsoo kuoppaan.)

No, joko siellä alkaa näkyä mitään.

MAAILMAN-MATTI. Ei vielä, hiljaa hyvä tulee.

JASKA. Kas tässä tuon minä vielä isävainaani kirkkohatun.

MAAILMAN-MATTI. Ei nyt ole hätäpäiviä. (Koettelee hattua.) Ihan

kuin minua varten tehty! Ja entäs tämä takki sitten.
 JASKA. Minun häätakkini, jolla minä astuin vihkipallille rakkaan
vaimoni Justiinan kanssa.

MAAILMAN-MATTI. Säämiskähousut, kengät, paidat, ja nyt vielä

kirkkohattu, kyllä nyt kelpaa, kun on hyvä nimi ja uudet vaatteet.

JASKA. Kuulkaasta, taisin raastella hiukan kovakouraisesti

nuttujanne siinä eilisessä käsirysyssä. Minä olen perin siivo ja
säyseä mies, mutta annas kun minä suutun, niin minä olen kauhea
kuin krokotiili, silloin ei minua kymmenenkään miestä pitele. Vest ja
varjele, eihän vain Justiina kuuntele.

MAAILMAN-MATTI. Nythän minä elän oikein herroiksi.

JASKA (Ottaa esille nassakan). Pitäkää vaan hyvänänne,

armollinen herra johorimuikkus!

MAAILMAN-MATTI. Suoraan sanoen, en minä ole juuri koskaan

työtä tehnyt.

JASKA. Niin, arvaahan sen, mitäs noilla pehmeillä naisen käsillä!

Kyllähän minä sen heti käsitin, vaikka Epra sanoi, että te olette
kostjumalan kauppias, mutta kylläpäs te olette koitelleet meitä ja
taitavasti olette te pimittäneet meitä. Me hölmöläiset olemme
yksoikoisia ja me pongerramme aina eteenpäin kuin sontiaiset
piimäleilissä, mutta me olemme hyvin laulavaista kansaa, hyvin
laulavaista kansaa, esimerkiksi, joka mies meillä osaa Akianterin
rekilauluja… niin, niin, se laulun lahja tulee ylhäältä kuten Mesakki
sanoo.

MAAILMAN-MATTI. Meinaatteko, ettei se viisaus ole kaikille suotu.

Minusta te hölmöläiset olette viisaita kuin muurahaiset.
 JASKA. Jeekuna vyrrää! Vai viisaita, sanoitte, niin, niin, emmehän
me sentään niin kovin tokkeloja ollakaan, kun meitä lähemmin
katselee. Kuulkaas, hihi, otetaan pieni kulaus iltatuimaan tästä
kaljanassakasta, piiloitin sen perunakuoppaan, se meidän äiti
haistaa aina… On siinä joukossa hiukan miestä väkevämpääkin.

MAAILMAN-MATTI (Juo). Tätä rataa on mennyt monta sataa!

JASKA. Vest ja varjele! Eikös maarin Epra katsele tuolta

ikkunarievun takaa kuin vanha ukuli. (Sieppaa nassakan ja vie sen
porstuan alle piiloon.)

MAAILMAN-MATTI. Se Epra taitaa olla sellainen vanha kitsuri,

joka piilottaa rahojaan lattian alle ja seinänrakoihin.

JASKA. Taitaa tehdä niin. Minä sanon sen teille kaksisteen, se

Epra on sellainen pomo ja pölkkypää; jo vuosikausia on se aina
vastaan harannut, me olemme käräjillä kiljuneet, me olemme
muljotelleet toisiamme kuin mullikat, ja jollette te olisi tähän meidän
hyvään kyläämme tulleet, niin pahuus tietää, koska tämä riita-asia
olisi päättynyt. Mutta mitenkäs siellä teidän kylässä eletään?

MAAILMAN-MATTI. Siellä on minulla kartano komea Pohattala

nimeltään.

JASKA. Vai oikein kartano?

MAAILMAN-MATTI. Kyllä se onkin nimensä arvoinen. Kun

markkinamiehet vaihtavat hevosia ovensuussa, ei talonväki perällä
siitä mitään tiedä.

JASKA. Voi, jeekuna vyrrää!

 MAAILMAN-MATTI. Ja on siinä tuvassa hirretkin. Kun koira kairan
reikää päivän juoksee, tuskin iltaan ehtii hirren läpi.

JASKA. Ja navetta se on vissiin niinkuin kirkko.

MAAILMAN-MATTI. Ei, veikkoseni! Kun lehmä navetan perällä tuli

härille, vietiin se oven suuhun härän luokse, mutta ennenkuin se
sieltä parteensa takaisin ehti, niin se välillä poiki.

JASKA. Vest ja varjele! Entä vilja, kuinka se kasvaa, meidän ohra

ei ota oikein poutiakseen.

MAAILMAN-MATTI. Talon sikolätissä on kullattu salpa, se kun

heijastaa, niin kaikki vilja tuleentuu.

JASKA. Mutta sepäs oli sukkela temppu, minä teen heti saman
tempun, minulla on vielä pönttöössä kultamaalia, jolla minä maalasin
"keisarin saunapiippuni". — En minä viitsi maalata taloani mutta
posliinipiippuni pitää aina olla kullattu, se on paras piippu koko
Hölmölässä, ja Epran käy sitä niin kateeksi, ai, niin kateeksi — Mutta
sanokaas, minkästähden te niin komiasta kodosta läksitten?

MAAILMAN MATTI. Minä heitin isääni virsikirjalla päähän ja

karkasin maailmanrannan kouluun.

JASKA. Vai maailmanrannan koulussa teistä tuli näin iso herra.

MAAILMAN-MATTI. Niin, se on kaikkein paras koulu, ja siellä

opetettiin minulle, että jollei maailmassa olisi typeriä tomppeleita, niin
ei kannattaisi olla viisas.

JASKA. Niin, monen järki onkin tylsä kuin vanha pellavaloukku.

 MAAILMAN-MATTI. Minä sain sieltä hyvät paperit, ja minua
sanottiin mestari Maailman-Matiksi.

JASKA. Vai että vallan maailman mestarismiehiä, sen minä jo heti

huomasin vaikkei se Epra uskonut. Mutta hullu ei huomaa eikä viisas
ymmärrä.

MAAILMAN-MATTI. Mutta kesken kaikkea, onko horoskooppini

hyvässä tallessa?

JASKA. Se on meidän porstuan peräkamarissa.

MAAILMAN-MATTI. Niin, olkaa varovainen, jos vieteriin koskee,

niin se voi räjähtää.

JASKA. Vest ja varjele!

MAAILMAN-MATTI. Mut kas kun ei kuriirini jo tule rahojen kanssa.

JASKA (Makeasti). Kuulkaas mestari Maailman-Matti. Sanokaa

minulle kaksisteen ja hiukkasten ennemmin kuin löydätte ne sapelit
ja raha-arkut.

MAAILMAN-MATTI. Niin, jos minä vaan löydän ne ennenkuin minä

huomaan ne.

JASKA. Kas se kävi jetsulleen, tässä olisi hiukan

seuranpitämispalkkiota — kolme kaisantaalaria. (Kaivaa rahat
nenäliinastaan.) Mutta älkää puhuko tästä mitään Epralle.

MAAILMAN-MATTI. En, en. Kyllä minun kuriirini sen kuittaa. Kyllä

se aarre löydetään ja silloin hölmöläisistä tulee visuja ja varakkaita.
Laitatte kai oikein ison maailmanrannan koulutalon.