to recognize that no market is ever truly unregulated. the self - interest of market participants generates private market regulation. thus, the real question is not whether a market should be regulated. rather, the real question is whether government intervention strengthens or weakens private regulation. if incentives for private market regulation are weak or if market participants lack the capabilities to pursue their interests effectively, then the introduction of government regulation may improve regulation. but if private market regulation is effective, then government regulation is at best unnecessary. at worst, the introduction of government regulation may actually weaken the effectiveness of regulation if government regulation is itself ineffective or undermines incentives for private market regulation. we must be aware that government regulation unavoidably involves some element of moral hazard - - if private market participants believe that government is protecting their interests, their own efforts to protect their interests will diminish to some degree. whether government regulation is needed, and if so, what form of government regulation is optimal, depends critically on a market ’ s characteristics. a “ one - size - fits - all ” approach to financial market regulation is almost never appropriate. the degree and type of government regulation needed, if any, depends on the types of instruments traded, the types of market participants, and the nature of the relationships among market participants. to cite just one example, a government regulatory framework designed to protect retail investors from fraud or insolvency of brokers is unlikely to be necessary - - and is almost sure to be suboptimal - - if applied to a market in which large institutions transact on a principal - to - principal basis. recognizing that a one - size - fits - all approach is seldom appropriate, it may be useful to offer transactors a choice between seeking the benefits and accepting the burdens of government regulation, or forgoing those benefits and avoiding those burdens by transacting in financial markets that are only privately regulated. in such circumstances, the privately regulated markets in effect provide a market test of the net benefits of government regulation. migration of activity from government - regulated to privately regulated markets sends a signal to government regulators that many transactors believe the costs of regulation exceed the benefits. when such migration occurs, government regulators should consider carefully whether less regulation or different regulation would provide a better cost - benefit tradeoff without compromising public policy objectives. historical development of u. s. government regulation of derivative markets before evaluating the current regulation of derivatives in light of these considerations, it is

and inferring central bank signals easiest. but this is also the type of forward guidance central banks are, rightly, least willing to provide. the path of policy ought to depend on the path of the economy, not the passage of time. and that path is uncertain. so from a policymaker perspective, imprecise, state - dependent guidance is the preferred form. this difference in requirements gives rise to an inherent tension. either guidance ends up being ex - ante over - precise and ex - post unreliable. or it is ex - ante imprecise but then serves little or no ex - post signalling role. we have seen examples of both types in the uk, with early forward guidance erring towards the former and recent forms towards the latter. so - called “ dot plots ” combine, for me, the worst of both worlds. there is a second problem with forward guidance, first articulated by stephen morris and hyun shin several years ago. 42 the provision of public policy signals may dampen incentives among market participants to invest themselves in understanding the economy. these risks have i think been realised in practice, with forward guidance encouraging too much poring over central banks ’ words and too little poring over the data on which monetary policy decisions are based. that is the wrong way around. i do not conclude from this that forward guidance has no role. i do, however, think this role, its audience and its content needs to be rethought fairly fundamentally. this could build on the experience of what was, in my view, the one example so far of successful forward guidance in the uk. woodford ( 2012 ). morris and shin ( 2002 ). all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice in 2014, the mpc used three little words, “ limited and gradual ”, to describe the future trajectory of interest rates. this language was neither precise nor time - specific, but did offer a clear and simple description of the broad direction and destination of interest rates. it offered next to no guidance to those pricing short sterling assets - that was not its purpose. but it did help households when planning taking out a mortgage and businesses when contemplating taking out a loan. we know that from surveys the bank conducted at the time. the mpc ’ s message got through to around 75 % of companies and around a fifth of households. in other words, the words were both