Financial and Securities Regulation

The Financial Crisis of 2008-09: Capitalism Didn't Fail, But the Metaphors Got a "C," 95 Minn. L. Rev. 1532 (2011)

This is a paper for the Minnesota Law Review's October 15, 2010 symposium, "Government Ethics and Bailouts: Past, Present, and Future." The panel topic is "The Past: Did Capitalism Fail?" The paper addresses not the merits and demerits of modern global financial systems, but instead how those of us who are not financial professionals might make sense of them, particularly when they are in catastrophic mode. The thesis is that the question itself reveals the extent to which the financial crisis has not been so much about whether an economic system succeeds or fails, but the meaning human beings draw from natural and man-made catastrophes. When the world discombobulates our sense of order, our expectations of cause-and-effect, we seem either (a) to question our most fundamental assumptions about science, progress, and social order, or (b) to look for someone to blame. 

The paper considers whether the verb "fail" in the question is transitive or intransitive. Is the question whether capitalism failed intransitively, as in "died," or is whether capitalism failed transitively, as in "flunked the test"? I argue that the question itself, in syntax and meaning, reveals our ambivalent relationship with telos, the extent to which order and regularity in nature and human affairs reflect purposes or ends. Relying on Steven Pinker's insights about verb usage, I tie the ambivalent syntax of the question to its equivalent ambivalent meaning in connection with the financial crisis itself. In the frame of the atelic (or intransitive) metaphor, capitalism failed in the sense of getting sick or dying, and the real problem was the perception that the professionals did not know how to cure the patient. In the frame of the telic (or transitive) metaphor, a well-engineered modern society hums along smoothly, operated and regulated by well-trained professionals. In that case, either the machine or its operators failed our expectations. I conclude by suggesting that if we understand the source of the metaphoric frames themselves, we may not solve the financial crisis, but we may be able to calm the troubled waters of our fundamental assumptions and our concomitant desire to find human or divine villains to blame.

The Epistemology of the Financial Crisis: Complexity, Causation, Law, and Judgment, 19 S. Cal. Interdisc. L. Rev. 299 (2010)

The focus on complexity as a problem of the financial meltdown of 2008-09 suggests that crisis is in part epistemological: we now know enough about financial and economic systems to be threatened by their complexity, but not enough to relieve our fears and anxieties about them. What marks the current crisis is anxiety that the financial world has evolved to the point that there are hidden structures, like concentrated "too big to fail" institutions and mechanisms, or like credit default swaps, that have widespread and adverse downsides. I propose an analogy between medicine and law in the sense of "regulatory technology." If bubbles are the disease, then the analogy is to bipolar syndrome - exuberance, or even a little hypomania is okay on the upswing, but true mania is bad, as is the resulting swing to depression. Good regulation, then, would be something like lithium, which keeps us on an even keel. There are two questions. The first is really whether we understand the forces well enough to regulate them. Regulation is a function of prediction; prediction is a function of observed regularity; observed regularities invoke the problem of scientific (not legal) causation; causation returns us to the question whether the human system being analyzed is capable of being reduced to helpful predictive models. The second question is who does the understanding. What we are dealing with instead is a crisis of confidence in those who purport to be experts in what we cannot fathom merely through common sense. The conundrum, of course, is that if it takes an expert to see the problem caused by complexity, how are we, possessing merely common sense, supposed to do anything but rely on their judgment? The epistemological crisis arises from our own judgments to rely on, believe in, trust, or have faith in, that judgment.

Disclosure and Judgment: "We Have Met Madoff and He is Ours," 35 U. Dayton L. Rev. 139 (2009)

This short essay addresses the role of securities regulation of mortgage-backed in the present financial crisis. While there is certainly a role for securities regulators to play in curing systemic flaws that contributed to the present situation (for example, the regulation of credit rating agencies), the federal system is primarily based on disclosure, not the merit of the underlying security. My view is that the problem here is not the availability of information in the markets for these securities, now or in the past, but judgments made with respect to that information. To paraphrase Kant, judgment without information is empty; information without judgment is blind. Information without judgment gives us bubbles; judgment without information leaves us at the mercy of Madoffs.

This is an essay prepared for the "Fallout from the Bailout" symposium at the University of Dayton on March 20, 2009.

© Jeffrey Lipshaw 2013