The financial crisis caught many unawares, and not just in their pocketbooks. Those of us who do corporate law had been operating for ever so long under a paradigm favoring market control of corporate actors. In so doing we familiarized ourselves with the financial economics of market success. Market failure did not escape our view, however. Between the standard objections to law and economics, the tech bubble of the late 1990s, and emerging literatures on behavioral influences on stock prices and pricing under heterogeneous expectations, we spent plenty of time writing about it and debating it. But matters like total or near-total economic collapse and prudential regulation occupied the desks of only a handful of people – specialists on structured finance like Steve Schwarcz and banking experts like Pat McCoy, Dan Tarullo, and Arthur Wilmarth. Lehman and TARP meant that the rest of us had some catching up to do, especially those of us who purport to know about finance.
Since last fall I have read a stack of papers and books about financial crisis, theoretical and historical. Some of this has been old material, old here meaning publication before the fall of 2008, and some of it has been new. But for the aforementioned colleagues, it has been the work of economists.
I would like to take the occasion to note that a new member has joined the small club of legal academic writers who have something to teach us about financial crisis. The writer is Anna Gelpern of American University, and the paper of admission is Financial Crisis Containment, 41 Conn. L. Rev. 1051 (2009), available at http://ssrn.com/abstract=1401062. The thesis is that crisis containment proceeds in a distinct regulatory space. Those who occupy it do not and cannot play by the usual rules. When regulators stand at the precipice and try to get things stabilized, standard concerns like ex ante incentive compatibility, security of contract, moral hazard, and even the liquidity-solvency distinction take the back seat. Gelpern reorients our perspective, coaxing common patterns of response from five past crises – this country in 1933, Mexico in 1982, Japan in the mid 1990s, Indonesia in 1997-1998, and Argentina in 2001-2002. As she does so, she emphasizes political choices and their distributive consequences. The account is refreshing and instructive.
Now, do not pick up this paper looking for the roadmap forward. This is description and typology. But the limits do not matter. It is compelling reading. Some of it is as gut wrenching as financial discourse can get. I found it especially valuable because I read it in tandem with a stack of material that approached the same phenomena within tight methodological boxes or with built in policy agendas. Some papers teach you volumes of what you need to know to formulate sound policy without purporting to dictate policy to you.