extract the full value of the innovation from the developer. under these circumstances, would any projects go forward? clearly not, because developers would be unwilling to bear the cost of evaluating potential sites knowing that they would reap none of the benefit of discovering suitable ones. a requirement for fuller disclosure of the potential, heretofore undiscovered value of the land would engender neither more disclosure nor improved land use. an example more immediate to current regulatory concerns is the issue of regulation and disclosure in the over - the - counter derivatives market. by design, this market, presumed to involve dealings among sophisticated professionals, has been largely exempt from government regulation. in part, this exemption reflects the view that professionals do not require the investor protections commonly afforded to markets in which retail investors participate. but regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets. all participants in competitive markets seek innovations that yield above - normal returns. in generally efficient markets, few find such profits. but those that do exploit such discoveries earn an abnormal return for doing so. in the process, they improve market efficiency by providing services not previously available. most financial innovations in over - the - counter derivatives involve new ways to disperse risk. moreover, our constantly changing financial environment supplies a steady stream of new opportunities for innovation to address market imperfections. innovative products temporarily earn a quasi - monopoly rent. but eventually arbitrage removes the market imperfection that yielded the above - normal return. in the end, the innovative product becomes a " commodity " made available to all at a modest, fully competitive profit. to require disclosure of the structure of the innovative product either before or after its introduction would immediately eliminate the quasi - monopoly return and discourage future endeavors to innovate in that area. the result is that market imperfections would remain unaddressed and the allocation of capital to its most - productive uses would be thwarted. even requiring disclosure on a confidential basis solely to regulatory authorities may well inhibit such risk - taking. innovators can never be fully confident, justly or otherwise, of the security of the information. regulators may not always be able to differentiate easily between secrecy to protect intellectual property and secrecy to deceive or to commit outright fraud. yet a supervisory system must make that distinction as best it can. there is nothing unusual about making difficult tradeoffs in

regulation. in fact, it is the rule rather than the exception for most regulatory regimes - - whether in the financial or nonfinancial sectors of our economies. indeed, such tradeoffs, in a wider sense, determine the differing regulatory regimes we see around the world. those differences in regimes reflect largely attitudes toward competition. competition is the facilitator of innovation. and creative destruction, the process by which lessproductive capital is displaced with innovative cutting - edge technologies, is the driving force of wealth creation. thus, from the perspective of aggregate wealth creation, the more competition the better. but unfettered competitive capitalism is by no means fully accepted as the optimal economic paradigm, at least as yet. some of those involved in public policy often see competition as too frenetic. this different perspective is captured most clearly for me in a soliloquy attributed to a prominent european leader several years ago. he asked, " what is the market? it is the law of the jungle, the law of nature. and what is civilization? it is the struggle against nature. " a major determinant of regulatory regimes is how a rule of law is applied to strike a balance between the perceived benefits of wholly unfettered markets and the perceived societal costs of overly fierce competition. there remains an uneasy balance in most countries between unleashing the forces of competition and reining them in when they are perceived to threaten the social order. with markets continuously in evolution and the political perceptions of the proper extent of regulation also changeable, it is no wonder that our regulations always seem to be in flux. such flux must be kept to a minimum to avoid fostering uncertainty among innovators. moreover, shifting regulatory schemes unavoidably leave obsolescent regulations in their wake. business people in the united states complain, perhaps with some exaggeration, that so many regulations are on the books that they are probably at all times unknowingly in violation of some of them. we at the federal reserve endeavor every five years to review all our existing regulations in order to revise or rescind those that are out - of - date. this schedule of review has worked well for us, and it is probably a good practice to apply to regulatory systems generally. the extent of government intervention in markets to control risk - taking is, at the end of the day, a tradeoff between economic growth with its associated potential instability and a more civil but less stressful way of