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

Recursive Collective Actions Problems: the Structure of Procyclicality in Financial and Monetary Markets, Macroeconomies and Formally Similar Contexts

The hallmark of a collective action problem is its aggregating multiple individually rational decisions into a collectively irrational outcome. Arms races, “commons tragedies” and “prisoners’ dilemmas” are well-known, indeed well-worn examples. What seem to be less widely appreciated are two complementary propositions: first, that some collective action problems bear iterative, self-exacerbating structures that render them particularly destructive; and second, that some of the most formidable challenges faced by economies, societies, and polities are iteratively self-worsening problems of precisely this sort. Financial markets, monetary systems and macroeconomies in particular are rife with them – as are other complex systems subject to group-mediated procyclicalities or “feedback” effects. I call the mentioned challenges “recursive collective action problems,” and show that a great many familiar regulatory and policy challenges – including asset price bubbles and busts, consumer price hyperinflations and debt deflations, “paradoxes of thrift” and “recessionary spirals” – constitute instances of this general phenomenon. I also hazard suggestions as to how best to address such challenges. Key to the effort is first to recognize their shared structure, second to recognize that collective action problems require coherent collective agency for their solution, and third to recognize that the collective agents in question must act to render no longer individually rational such decisions as aggregate into collectively irrational outcomes.I close with specific examples of what problem-solving strategies informed by the “three recognitions” will tend to look like. The implications for macroeconomic and “macroprudential” finance-regulatory policy in particular are manifold. If we but attend to the shared nature, structure, and pervasiveness of recursive collective action problems, I conclude, we can recoup much in the way of wealth and wellbeing that is now needlessly lost

Bailouts, Buy-Ins, and Ballyhoo

The bailout strategy now being pursued by Treasury under the recently authorized Troubled Asset Relief Plan, if “strategy” it can be called, remains obscure and erratic at best. All the while markets remain jittery and credit remains tight, as the underlying source of our present financial jitters—continued decline in the housing market and still mounting foreclosures—goes unaddressed. This piece proposes an interesting and novel approach to solving the financial problem. If it works out, it would eventually minimize the cost to the government

The Impossibility of a Prescriptive Paretian

Most normatively oriented economists appear to be “welfarist” and Paretian to one degree or another: They deem responsiveness to individual preferences, and satisfaction of one or more of the Pareto criteria, to be a desirable attribute of any social welfare function. I show that no strictly “welfarist” or Paretian social welfare function can be normatively prescriptive. Economists who prescribe must embrace at least one value apart from or additional to “welfarism” and Paretianism, and in fact will do best to dispense with Pareto entirely

Were It to Happen: Contract Continuity Under Euro Regime Change

One way or another, the European Monetary Union (EMU) is apt to endure. The prospect of continuation under the precise contours of the regime as we presently find it, however, is anything but certain. Hence many investors and other actual or prospective contract parties are likely to remain skittish until matters grow clearer. This skittishness, importantly, can itself hamper the prospect of expeditious European recovery. Addressing particular sources of ongoing uncertainty about EMU prospects can itself therefore aid in the project of recovery. This Essay accordingly aims to impose structure upon one particular, and indeed particularly complex, source of uncertainty now damaging EMU prospects. That is the matter of how best to defend, legally speaking, continuity of contract in the event of some basic change in the current Euro regime. The hope is that sizing up and breaking down this question into its constituent parts might accomplish at least three related aims. One is to render the hypothetical problems raised by the question more tractable than they would otherwise be. Another is to facilitate the development of provisional plans of approach to such problems in the event they should present themselves. Finally, yet another is to afford confidence to the markets by enabling contingency planning of the sort just suggested, thereby lessening the likelihood of self-fulfilling ‘run’-like activity on European debt instruments

What the New Treasury Must Do

After a number of heady false starts, against the backdrop of threatened financial catastrophe, Congress and the White House enacted a stopgap financial “bailout”plan early in October 2008. From that point onward the “plan” has repeatedly morphed, morphed again, and morphed back through a string of remarkably fleeting guises. One suspects this dynamic will continue, at least for a while, as a new president and Congress find their footing in the first half of 2009

Review Essay: The Limits of Their World

I take a recent monograph on international law, Jack Goldsmith & Eric Posner\u27s Limits of International Law, as case study in a more general inquiry into the limitations of rational choice and game theoretic accounts of international law. I argue that international law is irreducibly normative in character, and that the task before us is to ensure that it gives expression to the right norms, not to pretend that it gives expression to no norms at all

Recursive Collective Actions Problems: the Structure of Procyclicality in Financial and Monetary Markets, Macroeconomies and Formally Similar Contexts

The hallmark of a collective action problem is its aggregating multiple individually rational decisions into a collectively irrational outcome. Arms races, “commons tragedies” and “prisoners’ dilemmas” are well-known, indeed well-worn examples. What seem to be less widely appreciated are two complementary propositions: first, that some collective action problems bear iterative, self-exacerbating structures that render them particularly destructive; and second, that some of the most formidable challenges faced by economies, societies, and polities are iteratively self-worsening problems of precisely this sort. Financial markets, monetary systems and macroeconomies in particular are rife with them – as are other complex systems subject to group-mediated procyclicalities or “feedback” effects. I call the mentioned challenges “recursive collective action problems,” and show that a great many familiar regulatory and policy challenges – including asset price bubbles and busts, consumer price hyperinflations and debt deflations, “paradoxes of thrift” and “recessionary spirals” – constitute instances of this general phenomenon. I also hazard suggestions as to how best to address such challenges. Key to the effort is first to recognize their shared structure, second to recognize that collective action problems require coherent collective agency for their solution, and third to recognize that the collective agents in question must act to render no longer individually rational such decisions as aggregate into collectively irrational outcomes.I close with specific examples of what problem-solving strategies informed by the “three recognitions” will tend to look like. The implications for macroeconomic and “macroprudential” finance-regulatory policy in particular are manifold. If we but attend to the shared nature, structure, and pervasiveness of recursive collective action problems, I conclude, we can recoup much in the way of wealth and wellbeing that is now needlessly lost

Toward a Global Shareholder Society

With the American economy seemingly stalling, the global economy thereby imperiled, and another electoral campaign season well underway in the U.S., the outsourcing of jobs from the developed to the developing world is again on the public agenda. Latest figures indicate not only that layoffs and claims for joblessness benefits are up in the U.S., but also that the rate of American job-exportation has more than doubled since the last electoral cycle. This year\u27s American political candidates have been quick to take note. In consequence, more than at any time since the early 1990s, continued American, and with it other developed economies\u27, participation in the World Trade Organization and processes of global economic integration more generally appear to be up for grabs. It is not clear, on reflection, how to regard these developments from a normative point of view. On the one hand, there seems no gainsaying the claim that the gradual removal of transnational trade and investment barriers have resulted in more rapid economic growth worldwide. And that growth appears to be lifting many once desperately poor persons out of their erstwhile penury. Yet on the other hand, there also would seem no denying that global trade and investment liberalization are wreaking losses at least as conspicuous as the gains. For many if not most of the victims of globalization are those who till recently occupied positions much like those that are coming to be occupied by globalization\u27s more sympathetic beneficiaries, and who climbed out of them via precisely such legislated standards as offshoring firms now evade. Might we pay Peter without robbing Paul? This Article proposes an ethically and intuitively attractive answer to that question rooted in financial engineering. The key is to channel a portion of the globalization-wrought gains reaped by outsourcing firms to the outsourced employees themselves. This way the latter are directly benefited by the very processes that currently harm them. The method proposed is to adapt the familiar Employee Stock Ownership Plan, or ESOP, to spread firm-shares not simply to current labor, but to outsourced and otherwise harmed shadow labor as well. The Article also proposes means of diversifying the portfolio risk that will face OutsourceSOP participants, and maps the supporting role apt to be played by such globalization-constitutive financial institutions as the IMF and the World Bank. In the long run, the Article urges, we have here the makings of a grander ambition that all the world\u27s inhabitants can jointly support - a Global Shareholder Society

The Capital Commons: A Plan for Building Back Better and Beyond

To build our Republic back better we must build our banks better. The overwhelmingly greater part of our investment capital is now publicly generated yet privately managed. But pervasive and still underappreciated recursive collective action predicaments endemic to all exchange economies, combined with the decoupling of profits from production made possible by stratified capital ‘markets’ in such economies, render this unsustainable. The only way to get public capital allocation right, and thus to get credit modulation and long-term productive investment right, is to manage public capital publicly and private capital privately. This paper shows how to do that through the simple organizing framework of a public balance sheet conceived as a central bank balance sheet. Restoring our Regional Federal Reserve Banks to their original status as a network of regional development banks – ‘Spreading the Fed’ – will ensure that all assets financed with public capital are productive assets. This it will do both by discounting production-associated business paper, as in the past, and by strictly conditioning Fed lending to private sector banks upon promised local and regional production. The liability side counterpart to this asset side supplementation of the Fed balance sheet will be the provision to all citizens, businesses, and legal residents of digital P2P Citizen and Business wallets through which an upgraded ‘People’s Fed’ issues ‘Democratic Digital Dollars.’ This will end commercial and financial exclusion, leaky monetary policy, and consumer financial data ‘harvesting,’ while enabling the equitable sharing of public wealth growth through ‘Commonwealth Growth Dividends.’ A macro-prudential Price Stabilization Fund – or ‘People’s Portfolio’ – and FSOC-inspired National Reconstruction & Development Council, comprising the heads of all cabinet-level executive agencies with jurisdiction over infrastructure and industry, completes the picture, enabling perpetual democratic determination of what nationally ‘counts’ as ‘development’ and, therefore, ‘productive.