The first (and the one I'll focus on) is an authoritative paper opposing more regulation of the financial derivatives market, which includes sub-prime mortgages and CMOs. It was written about 10 years back by 1990 Nobel laureate (in Economics) Prof. Merton Miller.
He says that: a) Regulating this market further will impose an undue burden and stifle it, and drive away business from the US to overseas competitors. b) There will of course be winners and losers, but no chance of a system wide failure because of the strong and well capitalized institutions participating in this market, the tough oversight by the SEC, and the rigorous credit rating of the participants by S&P, Moody's, etc. c) The customers are mostly sophisticated institutions that need to freely use this market for hedging or risk-based investment purposes. They ought to know how the securities work and the attendant risks, and if they don't they'll learn to do so in a decade or so as the market matures. d) The valuation of these financial derivatives is typically very complex and dependent on the model being used, so it is very hard to specify disclosure requirements.
As Kaku says, "it is almost comical to see Prof. Miller's arguments so completely refuted by the causes of today's financial crisis" and wonders if "he is man enough to eat his words (which are still used as evidence by so many on the right)."
I've been taught by and interacted with Prof. Miller up close, and he was as fine, brilliant and witty a person that you could meet, with a heart to match. His paper here should not detract from his seminal work in finance that earned him the Nobel prize (including the famous Modigliani and Miller theorem of dividend irrelevance that's a staple in finance classes.) He passed away in 2000 at age 77, and so cannot retract his words.
I also think he deserves some benefit of the doubt as his stance was based on market conditions in the mid 1990's. He didn't see the explosion of sub prime mortgages and CMOs in the early 2000's that made Paul Krugman rightly and urgently call for more regulation, and for Greenspan to wrongly and disastrously oppose this. Had Miller been alive and observed the new developments, he may just for all we know have changed tack and weighed in on Krugman's side.
Here are the condensed reasons for blaming lack of regulations for letting the financial crisis occur, contrary to Miller's assessment:
a) The principal - agent problem. The "agent" here is the mortgage originator who gets paid on selling mortgages, even over-valued ones to financially unsound borrowers. Or it's the fund manager who makes large and risky bets on CMOs. If the bet pays off the fund manager gets filthy rich, and if it doesn't, it's the investor loses heavily and the fund manager pays nothing. In either case the "agent" has incentives not to act in the Principal's (investor's) interest.
b) The information asymmetry problem. The buyer or investor does not know or understand the risks involved in the funds like the originator does. This is especially true when the securities involved are highly complex and what is in them is not revealed. So the buyer is at a disadvantage unless regulations force greater transparency.
c) The time horizon mismatch. This can cause agents like fund managers with near term outlook to take risks or pump up short term performance that is not sustainable. The consequences eventually catch up with the investors, but by then the agent (hopes that he) has left.
d) Cozy regulator and rating agency relationships with their target entities. The S&P and Moody's are hired and paid by the very firms whose credit they rate - an inherent conflict of interest. Miller lauds "the two way nature of the flow of top regulators and top executives" within the industry, but this can be a curse instead of a virtue, as such connections weakens oversight.
e) Systemic shocks. Everyone is happy and buoyed up by bubbles in stocks or the rising tide of real estate prices. But a reversal of this trend causes a downward spiral that (absent of safeguards) sinks a lot of boats.
f) Letting the ignorant and the stupid self-destruct. This is a harder sell, but we may need laws to protect the ignorant from their own bad decisions, just as we have laws to compel use of seat belts while driving, or those banning the use of heroin or crack.
Moreover, special interests and right-wingers have bastardized the term "free markets." It should mean freely traded goods and services in a competitive setting without the burden of distorting taxes, duties or undue restrictions. What it shouldn't mean is lack of checks on deception, the selling of spurious products, withholding information about what's being sold, or failure to mandate safety standards. Regulations compelling transparency in where money is being invested and in the detailed disclosure of returns, and better scrutiny enhances free markets, not detract from them. It may also prevent the havoc wreaked by future Bernie Madoffs, or ill-conceived CMOs.
The other U. of C. paper that Kaku looked up is titled "Are CEOs Rewarded for Luck? The Ones Without Principals Are." Note the spelling of "Principals" as they're referring to main investors, not ethics. This topic needs a separate discussion, and this academic paper is (as typical) fairly long and involved. You can see the conclusions at p. 23 - 24: essentially that a major chunk of the CEO salary depends on luck (the fortunes of that industry rather than individual performance) and the problem is worse for poorly governed firms. It undercuts some big arguments for large US-style CEO compensation.
The findings aren't surprising. For instance, compare the salaries in past years of the CEOs of the Big Three US automakers with their Japanese (Toyota, Honda, etc.) counterparts who make a fraction of that. Look at the fortunes of these respective companies now. Still, there are defenders of the US (and detractors of the Japanese) system: see for example this Feb. 23 BusinessWeek article titled "Japan: No Model For Executive Compensation." I am underwhelmed by the logic and the case sought to be made out here, though.