Category: General Law


Harry Truman and the Bill of Rights

Harry_S._TrumanMy research on the Bill of Rights is at a new stage, and I thought I’d talk about where that is going.

Two conceptions of the Bill of Rights developed in the first half of the twentieth century. One was the countermajoritarian version that we are familiar with and was expressed best by Justice Jackson in Barnette.  (Basically, that the Bill of Rights is about judicial review and protecting minority rights.) The other is unfamiliar today and is the focus of the paper that I’m submitting to this law reviews.  Let’s call this the “majoritarian” Bill of Rights, which refers to how that text was used to legitimate greater national authority over the states, foreign territories, and the economy.  FDR’s “Second Bill of Rights” speech was the most powerful expression of this idea.

Here’s the fascinating question.  Why did the first understanding oust the second one?  My working hypothesis is that the Cold War had a lot to do with this, and part of my evidence for this is the shift in Harry Truman’s rhetoric on the Bill of Rights during his tenure.  Truman talked about the Bill of Rights as often as FDR did and was the last President who did so in a substantive way.

How did Truman’s rhetoric change?  Well, in 1945 and 1946 almost all of his references to the Bill of Rights involved the majoritarian understanding I described above.  He was either talking about the GI Bill of Rights or FDR’s Second Bill of Rights (which Truman called an Economic Bill of Rights).  In 1947, though, Truman starts using the Bill of Rights as a cudgel against Soviet Communism and repeats that theme in many significant speeches until 1952.  More on that in the next post.


Pearls Beyond Price

Guido Calabresi is now in the sixth decade of his remarkable career as a scholar, Dean, and Judge. With luck there will be more to come, but in the meantime we have The Future of Law and Economics: Essays in Reform and Recollection (2016), his late-career reflections on the work of, and recommendations for, what he calls “lawyer economists.” Because my colleagues in this Symposium are focusing on the substance of Judge Calabresi’s explicit program, I will instead say a bit about the implicit message of the book.

The explicit program of the book is to urge lawyer economists to attend to, and when possible to model, what economists more generally find it difficult to deal with: merit goods, altruism, benevolence, tastes, and values. Much of the book consists of Calabresi’s explications of the nature of these phenomena, the reasons that ordinary markets do not, cannot, or should not be relied upon completely to allocate them, and the ways in which hybrids – what he calls “modified markets” and “modified command” (which is essentially modified regulation) — address and allocate them. Mainstream economists often have little to say about these devices, and Calabresi wants lawyer-economists, to whom he ascribes a greater willingness, and perhaps a greater ability, than ordinary economists, to break out of conventional patterns of economic analysis, and thereby to deal with, analyze, and contribute to the ways we can think about hard-to-quantify but important phenomena and make better policy about them.

In addition, however, I think that there is an implicit program in the book, though perhaps “implication” would be a better term, because I am not sure that it was even consciously in Calabresi’s mind when we was writing. But this implication is certainly part of what I came away with. The implication concerns what the rest of us, who are not directly his audience, should do, and it follows pretty automatically from what Calabresi hopes lawyer-economists will do. The rest of us also should attend to merit goods, altruism, benevolence, tastes, and values, even if do not have the skills to model them, quantify them, or demonstrate with precision how they figure in what we are analyzing. I don’t want to put words in Calabresi’s mouth, but the message I received, as someone who does not do modeling, is that — to give just a single example of what could be many — we should not talk about the internalization of costs through tort liability without recognizing that one of the reasons we impose liability is because the rest of us, even when we are not victims, lose something when others suffer. Perhaps at some point lawyer-economists will be able to model this phenomenon, but in the meantime the rest of us should not be thinking that a simple negligence calculus is all we would ever need in order to determine when to impose liability for accidental injury, or that any number of other legal rules are simple reflections of simple values.

Because, deep down, Calabresi is fundamentally a teacher, the book is in a sense is an extended lecture in print. His scholarship, for all of others’ identification of some of his most celebrated, earlier work with a preference for strict liability over negligence, is often essentially positive rather than normative. Both his scholarly and his personal energy are heavily devoted to explaining. And that is what someone who is always teaching does: explain. Sit down with him for a chat about torts, or insurance, or constitutional law, or baseball, or Yale, and his side of the conversation will often consist largely of explanation.

Thus, although the book is ostensibly and expressly about his hopes for a certain kind of future for law and economics, in a larger sense it is an explanation of how rich and complex both ordinary life and the life of the law are, and how conventional economic analysis of law so often misses this richness and complexity. In the past Calabresi has contrasted messy reality with the artificial and simplistic “wonderful worlds” conjured up by some other scholars. This book, in contrast, is effectively a tribute to the actual wonderful world in which has lived, a wonderful world that is full of pearls beyond price, kindness, and difficult or impossible-to-quantify treasures of many other kinds. All of these he has loved, and has been interpreting and savoring, for an entire career. Do not ignore these things, his book said to me, for you cannot understand law, or life, without understanding and deeply appreciating them.


The Liability Rule Continuum(s)

One conception of liability and property rules sees property rule protections as a continuum of punishments sufficient to deter potential takings, but sees liability protections as a specific quantum of damages sufficient to compensate an entitlement owner for a non-consensual taking or as the quantum that mimics the price of arms-length consensual trade. Chapter 6 explores the latter conception and quite expressly argues that policymakers should think of liability rules as having, like property rules, a continuum of potentially appropriate damages. For example, Guido tells us:

[I]t should not be surprising that the amount charged to permit entitlement changes might mirror neither the price that a market would set nor the penalty that a pure command structure would impose. In such instances, the assessment that both allows and limits entitlement shifts may be chosen to reflect that polity’s liking for, and devotion to, its ideologically mixed foundation.
I have, of course, used the terms “price,” “penalty,” and “assessment,” above, intentionally to indicate when the liability rule is being used, respectively, in place of a market, in place of a command, and for reasons having to do with its own ideological desirability. But I must confess that, in many instances, I cannot say which of the three is represented by the charge made under the liability rule.

Guido Calabresi, The Future of Law and Economics: Essays in Reform and Recollection 127-28 (2016).
Here I want to extend this Calabresian project of expanding the policy rationales that can support a continuum of liability rule damages.

First, the same continuum that separates a liability-rule “price” or “assessment” from a property-rule “penalty” might also exist with regard to inalienability protections. While the traditional conception of inalienable rules as being enforced with the threat of severe penalties, the Calabresian thrust suggests that policymakers might want to merely tax or impede certain kinds of alienation if the externalities or parentalistic concerns are not sufficient to warrant full-blown inalienability protection. For example, we might want to generally prohibit cars from driving in the breakdown lane of a highway, but make an exception for those with elevated need. Of course, the necessity doctrines provide one route to this result. But one can also imagine charging elevated amounts that deter casual usage but facilitate usage where the private benefit exceeds the external cost. Calabresi thus opens a space for both quasi-inalienable and quasi-property rules which produce intentionally intermediate deterrence and channeling effects. See also Ian Ayres, Regulating Opt Out: An Economic Theory of Altering Rules, 121 Yale L. J. 2032 (2012) (“When externality concerns or paternalistic concerns to protect the contractors themselves are insufficient to justify a full-blown mandatory rule, lawmakers might at times usefully impose “impeding” altering rules, which deter subsets of contractors from contracting for legally disfavored provisions. Impeding altering rules produce an intermediate category of “quasi-mandatory” or “sticky default” rules, which manage but do not eliminate externalities and paternalism concerns.”).

Second, the continuum of amounts charged can be more clearly seen if we better appreciate the “opportunity” charges that are often woven into our existing election of remedies or could be. Jon Hanson and Matt Stowe have shown that the venerable decision in Vincent v. Lake Erie, 124 N.W. 221 (Minn. 1910) is a vivid example where the common law election of remedies implicitly uses opportunity costs as incentives. Jon Hanson & Matt Stowe, Lecture Notes, Torts, Harvard Law School (Fall 1996). Vincent of course held a ship owner liable for damages when his ship damaged a dock during a storm. The decision is usually characterized as a traditional liability rule—in which a ship owner during a storm has the option (by exposing itself to a damage suit) to take the dock owner’s original entitlement to exclude mooring ships. But Vincent’s discussion of an earlier case makes clear that the ship owner’s liability option is itself only protected by a liability rule:

In Ploof v. Putnam, the Supreme Court of Vermont held that where, under stress of weather, a vessel was without permission moored to a private dock at an island in Lake Champlain owned by the defendant, the plaintiff was not guilty of trespass, and that the defendant was responsible in damages because his representative upon the island unmoored the vessel, permitting it to drift upon the shore, with resultant injuries to it. If, in that case, the vessel had been permitted to remain, and the dock had suffered an injury, we believe the shipowner would have been held liable for the injury done.

Vincent, 124 N.W. at 222. Vincent’s parsing of Ploof v. Putnam makes clear that the dock owner holds the initial entitlement; the ship owner (during the exigencies of a storm) has a first-stage option to take but in doing so makes itself liable for the injury done; and finally the dock owner has a second-stage option to unmoor the ship—which causes it to incur the opportunity cost of giving up its cause of action against the ship owner but also to expose itself to tort liability.
A different kind of opportunity cost arose in Producers Lumber & Supply Co. v. Olney Bldg. Co., 333 S.W.2d 619 (Tex. Civ. App. 1960) where the court discussed what should happen where a good-faith improver built a home on a vacant lot:

The landowner will first be permitted to pay the enhanced value and keep the land, but if he is unable or unwilling to do so, then the improver may be permitted to pay the value of the land before the improvements were placed thereon, and thus become the owner of the land and the improvements.

Id. at 624. The landowner in deciding whether to exercise its initial liability-rule option to “pay the enhanced value and keep the [improved] land” would rationally take into account that doing so would eliminate the possibility of being paid by the improver “the value of the land before the improvements.” The cost of foregoing prospective opportunities can also influence the total liability incentive effect. In filling out the liability rule continuum, judges and other policymakers can utilize a dizzying array of second-order liability rules that confront potential takers with pay or be paid choices, as in Olney, or even pay (a larger amount if you take) or pay (a smaller amount if you don’t take) choices. By manipulating the mixture of costs and opportunity costs, policymakers can maintain allocative efficiency while varying the expected payoffs of the parties to better accord with distributive notions of equity or to better promote ex ante investment decisions. See Ian Ayres, Optional Law: Real Options in the Structure of Legal Entitlements 89 (University of Chicago Press, 2005) (discussing this decoupling result).

President Barack Obama in his valedictory State of the Union said “for my final address to this chamber, I don’t want to just talk about next year. I want to focus on the next five years, the next 10 years, and beyond. I want to focus on our future.” But his speech quite appropriately used the successes of his administration as a spring board for motivating four big questions that he argued our country in the future will have to answer. Obama’s address in many ways parallels Guido’s book. While not his valedictory contribution, Guido leverages his reflections about the past to allow us all to better peer into the “future of law and economics.”


Beyond Law and Economics: A Review of Guido Calabresi’s “The Future of Law and Economics”

Any book by Guido Calabresi is self-recommending. Not only is he among the founders of modern (that is, the second great movement in) Law and Economics; his carefully wrought and nuanced work marks him as among the most important and influential scholars and jurists of the past half-century (at least). His new book, The Future of Law & Economics: Essays in Reform and Recollection (Yale 2016), provides, as his subtitle announces, both a glance backward to the historical evolution of Law and Economics and issues some challenges for 21st century economists to make their work more relevant to real-world policy dilemmas.

Judge Calabresi begins by reminding readers that Law and Economics has never been monolithic, despite what some of its critics believe. His own brand of Law and Economics has always been decidedly different from Chicago-school thought; but, at the same time, it was never outside the mainstream of economic thinking. Which is to say that Judge Calabresi’s approach to Law and Economics, as reflected in works such as The Cost of Accidents (Yale 1970), his famous Cathedral article with A. Douglass Melamed, and “The Pointlessness of Pareto” (100 Yale L.J. 1211 (1990-1991)) consistently offered an alternative perspective on Law and Economics to the “economic analysis of law” approach advocated by Richard Posner, William Landes, and others (not including Ronald Coase) at the University of Chicago. Instead of engaging in economic analysis to determine the efficiency properties of alternative legal rules – with a decidedly normative goal of ridding society of inefficient legal rules – Judge Calabresi’s approach has always been to use economics to explain or understand the real world of law as it is.

To take a simple example from Calabresi’s own work, when a property entitlement is protected by a “liability rule” (money damages) rather than a “property rule” (injunctive relief), a Chicago-school scholar would simply ask whether the one remedy is more efficient than the other. By contrast, Judge Calabesi (and his co-author Melamed) first sought to understand the economic meaning of the alternative remedies – a liability rule results in a forced sale of an entitlement from plaintiff to defendant at a price set by the court, while a property rule informs the defendant that if she must enter into a voluntary market transaction with the plaintiff in order to acquire the entitlement. Then, they explained why such a remedy might have a legitimate role in circumstances where transaction costs might impede efficient market transfers.

In his new book, Judge Calabresi calls for an “expanded economic theory” to better explain certain social and legal realities that cannot be explained by simple “economic analysis of law.” Those realities include the persistence of a healthy non-profit sector (as just one example of a preference for some amount of altruism and beneficence in society), the legal protections provided for the admittedly ambiguous and potentially very large category of “merit goods,” and, more broadly, the diversity of tastes and preferences of aggregations of social actors. While aware of the great challenge this poses for economists, Judge Calabresi expresses great optimism that economic theory can meet the challenge. After all, he observes, way back in 1937 Ronald Coase was able to explain a preference for certain hierarchically organized command-structures (that is, firms) within markets, based on the implicit costs of using the market mechanism for organizing production in certain sectors.

As this is a review rather than a summation – you should definitely read the book for yourself – I will not recount the specific analyses and arguments found in Judge Calabresi’s very rich book. Instead, I will offer a few observations, some of which will challenge certain of the judge’s claims, others of which will offer additional support for his claims or put his claims into a broader context.

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“The Future of Law and Economics”

41h5puOXxSL._AA320_QL65_This week CoOp will be hosting a symposium on Guido Calabresi’s new book entitled The Future of Law and Economics.  I hope you enjoy the posts, which will come from guest bloggers and regulars. The guests are:

Ken Abraham–UVA

Ian Ayres–Yale

Dan Cole–Indiana University, Bloomington

Lee Fennell–University of Chicago

Carol Rose–University of Arizona

Arden Rowell–University of Illinois





William Crosskey’s Unconventional Ideas

I just finished reading the first two volumes of William Crosskey’s magnum opus on Poiltics and the Constitution.  It’s a stimulating book, in part because he pays almost no attention to conventional wisdom on anything.  I thought I’d outline his themes:

1. Congress was given a police power by the Framers.

This is Crosskey’s central argument.  He was fiercely opposed to interpretative theories that embraced states’-rights, and argued that those who took that view–especially Madison–were just supporters of slavery who should be disregarded.

2.  The enumeration of Congress’s powers was meant to express that the President lacked those powers.

Given Crosskey’s first point, he needed some explanation for the enumeration of Congress’s authority.  His answer was that the list should be understood as limits on executive authority.

3.  Most of the Bill of Rights was originally meant to bind the states.  (In other words, Barron v. Baltimore was wrong.)

He argues that Congress intended the First Amendment to apply only to the Federal Government and made that clear by including the word “Congress.” The other amendments, except for the 7th, were general and thus should be read as applying to everyone.

4.  Madison’s Notes on the Constitutional Convention were a fraud.

This, of course, has some truth to it, as Mary Bilder’s new book says.

On all of these issues, Crosskey was a prophet, which is not the same as saying that he was historically accurate.  Still, his historical claims on these issues are very interesting, not to mention some of his other points (for example, Erie was wrongly decided and judicial review of Acts of Congress was not part of the original understanding).  He was a true iconoclast.





B Corps for Bankers

Claire Hill and Richard Painter’s new Better Bankers, Better Banks aims to find a way forward by looking backward – and by casting a few sidelong glances as well. It is valuable for what it has to say about the view in all directions.

Begin from where we are – the point from which Hill and Painter would like to see forward movement. Where we are now is a world in which, even seven years out from the crash of ’08, banking scandal is near boring in its ubiquity. From Libor in 2012 to Euribor, forex, commodity and precious metal cornering thereafter, the story of financial markets of late seems an unending parade of horribles.

How do we get out of this seeming cesspool? Here is where Hill and Painter look backward and sideways.

First let’s look back. Time was when ‘bankers’ – Hill and Painter employ the term broadly to cover all folk who hold ‘other folks’ money’ – invested not only our money, but their money too. By organizing as general partnerships whose partners were jointly and severally liable for losses, they kept, as the current idiom has it, ‘skin in the game.’ This of course aligned their interests with client and institutional interests – to some extent, anyway. (Names like ‘Jay Gould’ should remind us that ‘some extent’ wasn’t the ‘full extent.’) And so there were limits on how much by way of other folks’ money the bankers were likely to fritter away.

Now let’s look sideways. There appears to be growing consensus, in the face of such scandals as those just rehearsed, that our regulatory and law enforcement regimes’ penchant for penalizing banks rather than bankers just isn’t cutting it. Compared to the gains to be had from wrongful behavior unlikely to be caught, even five or twelve billion dollar settlements between banks and their regulators are chump change. Oughtn’t we, then, focus our efforts upon the human agents through whom the banks act? After all, five billion – or five years in jail – are more likely to pinch if you’re human.

Hill and Painter like what they see in both directions. They find limitations, however, in how effective the enforcement of finance-regulatory provisions can be. These, they believe, are just too easy to game – a fact that might partly account for regulators’ going after the banks rather than the bankers in the first place. Why not, then, take yet another sidelong glance in another direction – that of contemporary moves to simulate better regulation through private ordering? Are there not means, for example, of appealing to socially responsible investors by committing to operate as a socially responsible business – e.g., as a ‘B Corp’ or ‘Benefit Corp’?

Indeed there are, and though they do not discuss these new business forms, Hill and Painter valuably adapt, in effect, the idea behind them to financial firms. Herewith the authors’ novel suggestion to introduce a practice of what they call ‘Covenant Banking.’ The idea is for financial firms whose owners or managers are comfortable with the idea to undertake ‘skin in the game’ commitments on the part of their managers. Managers would voluntarily assume some liability for losses, thereby partly replicating the ancien regime of pre-corporate partnership banking. Investors could then choose between what kinds of institutions through which they invest – the more risk-averse perhaps working through covenant banks, the more risk-cavalier working through today’s more familiar casinoish firms.

It would be hard not to like this proposal. What’s not to like? Like recent proposals for Wall Street voluntarily to maintain ‘naughty lists‘ of bankers who have gotten themselves into trouble, it imposes nothing, yet offers something – the prospect of ‘better bankers,’ hence ‘better banks,’ for at least some investors. It simply expands the field of choice, and who in these times doesn’t like choice?

If I have any reservations about Hill and Painter’s proposal or their brief in its favor, they have to do with the prospect of some people’s possibly taking the authors to claim or to promise more than they actually intend.

To begin with, we should note that wrongs such as those alleged in connection with Libor, Euribor, forex, and commodity and precious metal cornering are not wrongs of excessive risk-taking. They are wrongs of sheer fraud and manipulation. It isn’t the case that ‘skin in the game’ on the part of the relevant fraudsters in these cases ‘would’ have helped; the ‘skin’ seems to have been at the core of the ‘game’ from the start, and was indeed part of the problem – the fraudsters profited precisely by illicitly betting their own money on what they controlled. Hill and Painter, then, should not be taken to be targeting this form of market abuse through their proposal.

A distinct but related point has to do with the lead-up, not to 2012 and after, but to 2008. It is still common to hear that year’s cataclysm blamed upon venal behavior or ‘excessive risk-taking’ by ‘bankers.’ And such behavior clearly occurred – it always does. But a very strong case can be made – I think I and others have made it – that the principal causes of 2008 were more radical than mere vice or recklessness on the part of some bankers. They are endemic to capitalism itself absent serious and sustained effort on the part of the polity to distribute capital’s returns – or capital itself – far more equitably than we’d managed before 1929 or between 1970 and 2008. ‘Better bankers’ would certainly be better than worse bankers; better still would be better distributions of that with which bankers bank.

Finally, there is a danger in underselling what proper law enforcement, adequately funded and staffed, can do where finance-regulation is concerned. When Wall Street contributes more to political campaigns than most other industries, when DOJ officials openly admit to having feared to prosecute bankers for fear of rattling markets, and when regulators like the CFTC and the SEC are chronically understaffed and underfunded, we should be skeptical of suggestions that ‘gameability’ of the rules is the sole – or even principal – reason for old fashioned law enforcement’s not having eradicated rulebreaking by financiers. Indeed, as Hill and Painter themselves note, a rule change at the NYSE in 1970 played a critical role in the move from partnership to incorporated form among Wall Street investment banks. If that is so, could a legal re-imposition of some variant of the old rule not itself make for ‘better bankers’?

None of these caveats should be taken as more than what they are – mere caveats. There is much, much to be learned from a reading of Hill and Painter, and much is quite plausibly promised by their Covenant Banking. And since, as before noted, their proposal is made in effect to the banks rather than the polity, it seems to be all upside, no down. Let, then, those bankers intrigued by the Hill/Painter proposal give it a go. One might even imagine some funds offering their services in A and B flavors, so to speak – in Covenant and Noncovenant forms. In such case consistently better performance by one kind over the other might in future foment a stampede to the winning kind, and with it a privately worked transformation.


The Mis-Education of the Banker

More than eighty years ago, Carter G. Woodson—the historian-educator known as the “Father of Black History Month”—published his most enduring work, The Mis-Education of the Negro (1933). That book, among the most important education scholarship ever written, reveale

Carter G. Woodson. The Mis-Education of the Negro was the culmination of teaching work he began as a young man.

d with unassailable precision a fact that seems like pedestrian common sense when its evidence is laid out: The U.S. education system educates learners about much more than reading, writing, and arithmetic. Rather, in its structures, schedules of reinforcement, and other curricular choices, it determines an individual’s place and value in society and the understanding of that situation. Education—in all its forms—is a profoundly identity-constituting mechanism. Woodson was among the first to engage this epistemological and ontological power. With Better Bankers, Better Banks, Hill and Painter make this same type of invaluable contribution.

As a work of legal genealogy, historiography, psychology, sociology, diagnostics, etc. (the authors’ bricolage is impressive and enviable), the book offers wholly persuasive arguments and evidence (1) that the culture of banking and, at least some, bankers presents systemic problems in the industry that have economy-wide consequences and (2) that changes in the banking industry are at least partially implicated in the proliferation, persistence, and repetition of these problems. However, how all this happens remains locked in a black box Hill and Painter mark “culture,” “incentives,” “ethos.” But culture, incentive, and ethos are not formed by accident, happenstance, or default. Instead, they are part of the same type of curriculum Woodson charted in his work. The Mis-Education of the Negro revealed that school-based curricula shape students’ understandings of themselves and the society in which they live. As Woodson explained with respect to the implementation of social ordering of African Americans through schooling,“If you can control a man’s thinking you do not have to worry about his action. When you determine what a man shall think you do not have to concern yourself about what he will do. If you make a man feel that he is inferior, you do not have to compel him to accept an inferior status, for he will seek it himself. If you make a man think that he is justly an outcast, you do not have to order him to the back door. He will go without being told; and if there is no back door, his very nature will demand one.” In other words, the curriculum imparted will lead to predictable and self-sustaining results.

Elsewhere, I have suggested that law functions as a societal pedagogy. As John Dewey defined it, pedagogy is just a purposeful process that “shapes, forms, or molds” peoples’ behavior, activity, and thinking. This is what law does. Indeed, the evidence Hill and Painter offer powerfully illustrates that the same educative forces identified by Woodson are at play in the banking industry. The curriculum, obviously, is different than the one Woodson critiqued. But, centralize, say, risk-taking and winning (among core themes in the curriculum latent in the Hill-Painter banking narrative), and you will find problematic behavior in the banking industry.

Hill and Painter clearly show, that banking law (or the lack thereof) is part of an identity-forming process for bankers and that process is shaping problematic behavior, activity, and thinking within the industry. What is missing from Better Bankers, Better Banks, then, is a pedagogical account of the banking industry and the law that structures and regulates it. I want to know how the ethos, incentives, and culture are internalized. I want to understand the content, structure and form through which the ethos, incentives, and culture are imparted. These types of questions are explored in the academic field of education. And I want to read the curriculum of banking law.

Silence on the question of pedagogy is not surprising. A large body of socio-legal scholarship, for example, reveals the educative function of law, leaving the specific processes and mechanisms of the pedagogy unexamined. However, without a comprehensive pedagogy of banking, I am unable to determine whether the Hill-Painter “skin-in-the-game” covenant banking solution is as promising as it sounds. I am inclined to think that the limitations of the approach—readily acknowledged to exist by the authors—include pedagogical deficiencies that, were the model to be widely adopted, would result in our discussing Better Bankers, Better Banks 2.0 some years from now. That is, I intuit that, were it to be revealed, we would find a pedagogy of banking law steeped in the autonomy of limited regulation, the flexibility of contract, the security of economic interdependence, and the hegemony of certain ways of economic thinking. Such a pedagogy of “free market rule making insured by systemic safety nets” for for the privileged banking class—if it were identified as the problem—may be reinforced rather than undermined by covenant banking, which is predicated upon the institution of contracts (even in the sub-ideal regulatory version of covenant banking Hill and Painter address). This is not meant as an attempt to join the “vampire squid” school of banking analysis. Rather, I merely hope to emphasize that if we do not map more than the why and the what of modern banking culture to capture the how—to unveil its curriculum—we just don’t know what ideas will effect the change we seek…

My call for a pedagogy of banking is not a critique of Hill and Painter. Covenant banking is a proposal that actually looks at the problem in a nuanced fashion and proposes a nuanced solution that is responsive to the problem and not merely its symptoms. That is exciting. Moreover, as of today, there is no field called law and pedagogy on which they could have drawn to enrich their already robust work. So, I can offer no greater praise of their work than that it constitutes one of the best proofs of the value of the pedagogical analysis of law. Carter Woodson’s work spawned more than eighty years of constructive, proactive examination of and experimentation on the education of African Americans. I hope Better Bankers, Better Banks spurs the same for banks.


Better Bankers Symposium: Appreciation and Quasi-Response by one Better Bankers author

I want to start out by thanking Naomi and June, who organized this symposium, and all the contributors. I also want to thank the blog itself and those who run it for giving us this opportunity. There is something deeply thrilling about having one’s ideas taken very seriously — and to have them taken seriously by people of this caliber is an almost indescribable honor.

One of my motivations for writing the book was to respond to people who think that the “greed is good” variety of self-interest is either descriptively accurate, normatively desirable (“rational”), or both. The book is my way of shouting “No. It’s not. And saying that it is is part of the problem.” Getting caught up an arms-race competition for more — more money, more status, more “points” –- is, for many (I think probably, for most) people who engage in it, not a recipe for happiness or satisfaction. My own view- again, I don’t want to attribute this to my co-author– is that the extent to which what people want, and what they think is acceptable and unacceptable behavior — is more malleable than is commonly appreciated, that attempts to influence preferences and behavior are pervasive, and that making such attempts expressly, to try to get people to be more mindful of the societal effects of their behavior, is a good thing.

Another one of my motivations was to see what happened when we proposed that some–even many– bankers might in fact want to get out of the arms race, making a concrete suggestion as to how they could do so. Would we be denounced as naïve dreamers?

The reaction, on this blog and generally, has been very heartening. Maybe we are naïve dreamers but we are apparently fairly persuasive or at least endearing in our naivete. Would many banks want to become covenant banks? Here, I think I can speak for my co-author when I say that we very much look forward to trying to persuade bankers, regulators, judges, shareholders, creditors, policymakers, and others in a position to move covenant banking forward to do so, and commentators generally, including readers of this symposium, to take the idea seriously, propose ways to make it better, and join with us in trying to make bankers, and banking, more responsible.

Claire Hill


The Arc of Covenant Banking: Hill & Painter’s Better Bankers, Better Banks


University of Minnesota law professors Claire Hill and Richard Painter do a great service in their new book, Better Bankers, Better Banks, by focusing concretely on an issue that many have discussed but few have offered to change: how to align the incentives of bankers and banks.

They argue that “bankers [should] be personally liable from their own assets for some of their banks’ debts” for money owed due to insolvency, fines, or fraud-based liability. Thus, they propose formal, liability-creating contracts—which they call “covenants”—between banks and bankers: “Covenant banking operates directly on bankers’ monetary rewards” because, under their proposal, “highly paid bankers would bear some personal liability if their banks become insolvent, are fined by regulators, or are found liable in civil cases involving fraud. The liability would not be unlimited, but should potentially adversely affect the banker’s standard of living.”

The Hill/Painter proposal is valuable and interesting both in its own right, and for the harder questions that it raises.

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