A Fixer-Upper for Finance

Three facts bear notice in connection with our current financial troubles. The first is that the First World War, before the Second began, was known as “the Great War.” The second is that the global Depression that struck between those two wars — which, thankfully, it appears we can still label “Great” for the time being — commenced with the burst of a multiyear real estate price bubble prior to the 1929 stock market crash. The third is that the United States accordingly addressed that depression through mutually reinforcing new regimes not only of financial regulation, but also of home mortgage finance — the very reforms that brought us “securitization” and the familiar thirty-year, fixed-rate mortgage. Our present difficulties, moreover, stem directly from recent departures from that originally bipartisan package of mutually reinforcing mortgage and finance-regulatory innovations. Approaches to today\u27s financial crisis have been strangely unmindful of the history, innovations, and bipartisanship just mentioned. They have also been inattentive to the well-established historical linkage between protracted economic contractions on the one hand, and paired stock and real estate crashes on the other. That is surprising not only because these matters are so salient right now. It is surprising also because the reason for the historical link between real estate slumps and broader economic contractions is not hard to find: For the overwhelming majority of Americans, homes are by far the most valuable assets they own. When their values plummet, wealth, credit, consumer confidence, and spending soon follow. The lesson for today is quite clear: No approach to our present financial crisis that does not address the mortgage crisis at its core can succeed in the long run, or even the short run. This Article prescribes means of addressing our current financial crisis by addressing the mortgage crisis at its core. It targets both the short and the long term. In a manner that is sensitive both to the historical roots and to the still operative etiology of the current crisis, it develops a fully integrated, systematic protocol for treating our present financial ills. The Article first structurally characterizes the nature of credit-fueled asset price bubbles and the financial pathologies to which they give rise. It emphasizes that this structure is compatible both with long-term informational efficiency on the part of asset markets, and with individual rationality on the part of market participants. The challenge presented by asset bubbles, the Article argues, is not individual irrationality or informational inefficiency, but a classic coordination problem. Mistaken assumptions to the contrary account in large measure for our failure to have prevented, and for our ineffectiveness thus far in addressing, the present crisis. Coordination problems require coordinative responses. Absent such responses to credit cycles and financial systems conceived as wholes, piecemeal regulatory measures cannot properly discharge their functions. The Article next shows our current difficulties indeed to have stemmed from a classic credit-fueled asset price bubble first in the stock, then in the housing markets over the decade ending in 2006. This bubble was strikingly reminiscent both of that which preceded the 1928-29 American real estate and stock market crashes and ensuing deflation, and of more recent such stories in Asia. The Article then lays out responsive near-term solutions to the present crisis as thus characterized, followed by longer-term measures that will maintain health both in real estate finance and in the financial system more generally. The key to a short-term solution lies in employing those institutions we first put into place to deal with our last great real estate bubble and burst, that of 1928. Those institutions are the Federal Housing Administration and its recently renationalized GSE siblings, Fannie Mae and Freddie Mac. The key to longer-term maintenance, the Article then argues, is twofold. Above all, we must restore the Federal Reserve\u27s original role as bubble-preventive credit-regulator — what the Article calls “regulation as modulation.” Complementary to this task will be the development of more effective bubble-detection methodologies, which can be developed but, as public goods, are currently underprovided. Likewise complementary to credit modulation will be the extension of familiar disclosure and firewall protections from those older fields of finance where they have been operative since the 1930s, to new fields of finance that have developed more recently in the shadows. Getting finance and the credit-debt cycle right, the Article concludes, will get the business cycle and stable growth right as well. Stop bubbles, and we will stop bursts and deflations alike

Digital Greenbacks: A Sequenced ‘Treasury Direct’ and ‘Fed Wallet’ Plan for the Democratic Digital Dollar

I propose means of immediately converting the Department of Treasury’s existing Treasury Direct system of freely available transaction accounts into a publicly administered digital savings and payments platform. A platform of this type is an essential public utility in any commercial society such as our own. It is additionally growth-promoting inasmuch as growth-tracking Gross Domestic Product (GDP) is a measure of transaction volume, while transaction volume is a function of more efficient and inclusive transacting. As Congress seeks means of streamlining the payments infrastructure in a time of pandemic-induced crisis, the Treasury route recommends itself as the fastest way to digitize payments for 95% of our citizens and business enterprises. I also map means of migrating the Treasury architecture to the Federal Reserve System (Fed) over time once the crisis is past—as the “Greenback” paper dollar itself did in the late 19th and early 20th centuries—and include my draft Treasury Dollar Act as an Appendix

An FSOC for Continuous Public Investment: The National Reconstruction and Development Council

The crisis our nation presently faces does not stem from COVID-19 alone. That was the match. The kindling was that we have forgotten for decades that “national development” both (a) is perpetual, and (b) requires national action to guide it, facilitate it, and keep it inclusive. Hamilton and Gallatin, Wilson and Hoover and Roosevelt all understood this and built institutions to operationalize it. Although the institutions were imperfectly operated, they were soundly conceived and designed. Abandoning these truths and institutions these past fifty years has degenerated not only our public health but also our nation’s industrial and infrastructural muscle to a critical point. The same now increasingly holds for our social fabric. Full national regeneration—Reconstruction in both the post-Civil War and the mid-20th century senses of the word—has thus become a matter of urgent, even existential, necessity. Continuous national development, in the perpetual renewal sense of the phrase, must follow that Reconstruction. This is what “Building Back Better” must mean. Key to any such national project is how it is organized and then orchestrated. This paper proposes means of both organizing and orchestrating. These means are simultaneously incrementalist in their reliance upon existing institutions, while also regenerative in enabling new synergies among those same institutions—much as our Financial Stability Oversight Council (FSOC) is meant to enable our post-Lehman financial regulators to develop. An FSOC for national reconstruction and development will better use what we already have and augment it with a financing arm linked to the Federal Reserve and the Treasury. I call the resulting synthesis a National Reconstruction and Development Council (NRDC) and National Investment Council (NIC), which will both rebuild capacity now, and perpetually renew such capacity going forward, as knowledge and technology progress as they always do. Building Back Better means Building Back Now and Forever

Whose Ownership? Which Society?

Whose Ownership? Which Society

Are Bank Fiduciaries Special?

A growing body of post-crisis legal and economic literature suggests that future financial crises might be averted by tinkering with the internal governance structures of banks and other financial institutions. In particular, contributors to this literature propose tightening the fiduciary duties under which officers and directors of the relevant financial institutions labor. I argue in this symposium article that such proposals are doomed to failure under all circumstances save one - namely, that under which the relevant financial institutions are in whole or in part treated as publicly owned. The argument proceeds in two parts. I first show that the financial dysfunctions that culminate in financial crises are not primarily the products of defects in individual rationality or morality, ubiquitous as such defects of course always are. Rather, I argue, fragility in the financial markets stems from what I elsewhere dub recursive collective action problems, pursuant to which multiple acts of individual rationality aggregate into instances of collective calamity. This form of vulnerability is endemic to banking and financial markets. I next show that the best understanding of fiduciary obligation is that pursuant to which she who is subject to the obligation minimizes the \u27space,\u27 or separateness, that subsists between her and the beneficiary of her obligation. Ideal fiduciaries, in other words, stand-in for those to whom they are fiduciaries, while legal allowances for departure from this exacting ideal amount to pragmatic compromises we make with the brute fact of fiduciaries\u27 being separate persons with interests of their own. It follows from these two lines of argument that merely tightening fiduciary duties back up in the case of financial fiduciaries will be no help at all if our object is to address financial fragility. It will simply ensure that fiduciaries behave more as their beneficiaries would behave - beneficiaries whose individually rational behavior is precisely the problem where markets beset by recursive collective action problems are concerned. Because the only way to solve a collective action problem is through collective agency, the only way to fashion a \u27fiduciary fix\u27 to financial dysfunction is to reconceive financial fiduciaries as collective agents, not individual agents. And that is to reconceive financial institutions as public institutions