Economic Growth and Legal Regularity
Izabella Kaminska is one of the most insightful writers at the Financial Times. In a recent post, she helps us understand the paradoxical relationship between legal regularity and economic growth. She first quotes from a recent work by Katharina Pistor, entitled “A Legal Theory of Finance,” which crystallizes the tensions at play:
Law lends credibility to financial instruments by casting the benevolent glow of coercive enforceability over them. But the actual enforcement of all legal commitments made in the past irrespective of changes in circumstances would inevitably bring down the financial system. If, however, the full force of law is relaxed or suspended to take account of such change, the credibility law lends to finance in the first place is undermined.
Kaminska applies this logic to explain why the shutdown threat eventually dissipated:
[In the] Tea Party shutdown standoff . . . . [i]t soon became clear that while upholding the debt ceiling and risking system collapse may have made a lot of sense to those without savings, lots of gold and many guns (i.e. those the Tea Party was representing) it did not serve the interests of the Tea Party’s wealthy benefactors who had a vested interest in seeing the system survive.
[For the middle class Tea Partiers,] the law, by yielding on bailouts and debt ceilings, is already failing them, so the step to outright lawlessness is hardly a step away. All they need is enough smarts (gold!), muscle (guns!) and divine favour (the constitution!) to survive the apocalypse, and re-establish the law on their terms. And this is how the apocalypse mindset arguably comes into play. Luckily for the markets, those in the apex of power are more likely to be aware that their wealth is symbiotically dependent on a functional and cohesive system anyway and that no man is an island.
I have to wonder, though, if the benefits of disorder are not greater for some very powerful players near the top of the system. Isn’t a classic recipe for financial success buying assets “on the cheap” in the midst of crisis?