I am happy to recommend a new blog Brazen And Tenured - Law Politics Nature and Culture from two of my colleagues: Pierre Schlag, Byron White Professor of Constitutional Law, and Sarah Krakoff, Wolf-Nichol Fellow. Pierre's research interests include constitutional law, jurisprudence, legal philosophy, and tort law. Pierre wrote an essay, The Faculty Workshop, which examines how the institution of law school faculty workshops expresses, regulates, and reproduces legal academic behavior, governance, hierarchy, norms, and thought. Sarah's research interests include civil procedure; Indian law, and natural resources law. Sarah is working on a book about the different stages of humans' relationship to nature, which extends her book chapter, Parenting the Planet.
As Pierre described their blog, it's quite idiosyncratic as far as blogs are concerned. That having been said, Glom readers are likely to find their blog to be amusing, informative, and thought-provoking. Here are the two most recent examples.
Pierre's post entitled Tips for Legal Commentators: How to Talk to the Press is a delightful compendium of speaking points. It explains why the legal talking heads who come out of the woodwork to appear on television during any high-profile trial or other legal event always seem to say the same things with a high noise to signal ratio. My personal expeirence when speaking to print media financial journalists about securities fraud, materiality, derivatives, and Goldman Sachs is there is a very high probability (equal to one minus epsilon, where epsilon is a very small positive number) that I'll be misquoted to have said exactly the opposite of what I actually said! Pierre's advice for speaking to journalists has the virtue that it has the property of being subject matter and position invariant. In other words, no matter what legal topic and what viewpoint you have, Pierre's suggested sound bites will apply. Because they are universal and timeless, these quotes have the added virtue of making you sound profound and wise. Finally, these sample responses to media questions are brief, intuitive, memorable, and predictable. Once you deploy one, there is likely to be repeat demand for your expertise. On the other hand, if you do not enjoy being a talking head, then do the opposite of what Pierre recommends to ensure that reporters will not seek you out.
Sarah's post entitled The Economy versus the Environment? Not! (Or Why to Be Tigger Instead of Eeyore this Halloween) is a welcome reminder for both economists and environmentalists that being offered a choice between the economy and the environment is a false dichotomy that privileges a myopic time horizon and local opposed to global perspectives. Her post also nicely dovetails the small but growing literature applying empirical happiness research to support sustainable environmental policy. For example, Daniel A. Farber recently posted a working paper entitled Law, Sustainability, and the Pursuit of Happiness, which demonstrates that sustainability for society and the pursuit of individual happiness do not have to be at odds.
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Some bemoan big government. Others bemoan big business. What if they're both right?
Therein lies the essence of "distributism," a "third-way" socio-economic philosophy that eschews bigness in general.
An important book in the distributist tradition is E.F. Schumacher's "Small is Beautiful: Economics as if People Mattered." A highly credentialed economist, Schumacher challenges the notion that "more is better" - a notion upon which everything seems predicated nowadays. I found it extremely interesting, and it launched my own personal interest in distributism.
I have kept my developing interest in distributism pretty much to myself given the fact that, well, there aren't too many distributionists out there. What's the point of talking about something if no one's interested in listening? But that might be changing.
A Washington Post article from a couple of weeks ago (now available on the Huffington Post) discusses the stirrings of a newfound appreciation of distributionist thought.
Although I'm far from ready to declare myself a "distributionist," I am comfortable admitting that there is much in distributism that strikes me as persuasive. As such, I certainly hope that distributist thought works its way into our conversations regarding the regulation of business and the role of government.
An article in today's Life section of USA Today titled Movies tap into anger at Wall Street describes how 3 movies in current release mirror public angst over economic inequalities and inequities: Tower Heist, In Time, and the already mentioned in 2 Glom blogs, Margin Call.
This autumn's documentary Chasing Madoff recounts Harry Markopolos’ multi-year crusade to expose the multi-billion dollar Ponzi scheme perpetrated by Bernie Madoff. Alleged victims of this massive fraud include the celebrity couple of Kyra Sedgwick (star of The Closer on TNT) and Kevin Bacon (of the original Footloose (1984) fame). The Dodd-Frank Wall Street Reform and Consumer Protection Act included a broad set of whistleblower provisions under which the Securities and Exchange Commission adopted specific rules and procedures to incentivize potential whistleblowers by way of cash rewards and protection from retaliation.
There is also a 2009 documentary about the subprime mortgage fiasco, which is now available on DVD, American Casino. 2001 economics Nobel laureate Joseph Stigltiz described it as being "a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film."
This May, the HBO Films production of Too Big to Fail, based on the book of the same name with the subtitle of The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves depicted the autumn 2008 U.S. financial crisis and the sequence of (less than intertemporally consistent) policy responses by the Treasury department, the Federal Reserve, and other financial regulators.
Last autumn's Inside Job made a compelling argument in five parts about how the American financial services industry systematically and systemically corrupted the United States government and in so doing brought about changes in banking practices and legal policies that led directly to the Great Recession.
Although the documentary Client 9: The Rise and Fall of Eliot Spitzer focused primarily on the interaction of ego, hubris, power, scandal, sex, and politics, it also touched upon Wall Street and efforts by Spitzer to reform its excesses.
Of course, no list of movies related to the recent financial crises would be complete without including documentary film-maker Michael Moore's 2009, Capitalism: A Love Story, which criticizes the current American economic system in particular and capitalism in general. At one point, it asks if capitalism is a sin and whether Jesus would be a capitalist, who wanted to maximize profits, deregulate banking, and have the sick pay out of pocket for pre-existing conditions via clips from Jesus of Nazareth. Moore asks if one could patent the sun and questions how the brightest American youth are drawn towards finance and not science. He proceeds to Wall Street asking for non-technical explanations of derivative securities in general and credit default swaps in particular. Both a former vice-president of Lehman Brothers and current Harvard University economics professor Kenneth Rogoff fail to clearly explain either term. Moore thus concludes that our complex economic system and its arcane terminology exist simply to confuse people and that Wall Street effectively has a crazy casino mentality.
Finally, the PBS Nova episode, Mind Over Money, which originally aired on April 26, 2010 asks whether markets can possibly be rational when people clearly are not. In other words, is there a version of the efficient markets hypothesis that can be true in a world populated by at least some boundedly rational actors? In posing this question, the show offers an entertaining, yet quite informative survey of elements of behavioral economics and finance. Its companion website provides additional resource materials concerning the role of emotions in financial decision-making. The debate which it depicts between the University of Chicago school of economics and the behavioral economics approach (including scenes of Dick Thaler playing pool) is a bit overdone and perhaps unintentionally comical, but it raises the question of whether it matters for law and policy how people make their financial judgments and decisions? Of course, the natural follow-ups of if so, then how and if not, then why not, are questions about which business law professors, Glom readers, and policy makers are likely to have perhaps quite strong and certainly divergent opinions.
A television program that has become quite popular is the USA network's original dramatic series White Collar, which is based upon the premise of an F.B.I. agent solving white collar crimes with the assistance of consultant who is a former (and current?) art thief and con man extraordinaire. Episodes have featured a black widow, baby selling, bank robbery, black market kidneys, bond theft, collusion, corporate espionage, derivatives, financial fraud by a Wall Street brokerage firm, identity theft, and political corruption.
It is reminiscent of the 1960's campy, classic, and tongue-in-cheek television series, It Takes A Thief.
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I recently saw the movie, Margin Call, which is currently playing in theaters and is available on demand at Comcast. There are curretly 34 reviews of it by viewers at imdb, where it has a rating of 7.3 out of 10.
I also just finished reading this paper, Fear, Greed, and Financial Crisis: A Cognitive Neuroscience Perspective, prepared for a forthcoming handbook on systemic risk. This chapter is by finance professor Andrew Lo, who is the director of the MIT laboratory for financal engineering. He also wrote another excellent paper which Glom readers are likely to find of interest, namely Reading About the Financial Crisis: A 21-Book Review, that was prepared for the Journal of Economic Literature.
In the interests of full disclosure, I taught at Temple law school a seminar titled Law, Emotions, and Neuroscience and co-taught at Yale law school with professor Dan Kahan a seminar titled Neuroscience and the Law. The seminars covered some basic materials about affective,cognitive, and social neuroscience before analyzing the potential and limits of applications to business law, conflict resolution, criminal law, ethics, evidence, morality, paternalism, and social policy. Media coverage of neuroscience and law has a tendency to focus almost exclusively on such controversial issues as free will and responsibility in the criminal law context. Glom readers are more likely to focus on neuroeconomics and neurofinance, two nascent fields that ask how human brains engage in JDM (Judgment and Decision Making) in general and over time and under risk in particular.
Also, as cognitive neuroscientist Michael Gazzaniga recently stated: responsibility, like generosity, love, pettiness, and suspiciousness, is a strongly emergent property, which although being derived from biological mechanisms, has fundamentally distinct properties, just like the case of ice and water. The press and the public also seem to be fascinated with very colorful fMRI brain scans because they like the idea of being as the Wall Street Journal science writer, Sharon Begley, calls them: cognitive papparazi.
My system 1 believes in synchronicity, so this post, as evidenced by its title's homage to Lo's chapter, approaches the movie Margin Call from a cognitive neuroscience perspective informed by Lo's chapter. Lo provides a brief history of what we know about brains. He then explains how fear and the amygdala can exacerbate financial crises. He also demonstrates how the reward of money appears to share the same neural system and the release of the neuortransmitter dopamine into the nucleus accumbens as these rewards do: beauty, cocaine, food, music, love, and sex.
Lo proceeds to discuss a neurophysiological explanation for Kahneman and Tversky's experiment demonstrating people's aversion to sure loss. Lo proposes a neuroscientifically informed view of rationality that differs very much from an economic rational expectations conception, with the key difference being the role that emotion plays in JDM. Lo extends his analysis from individuals to groups by explaining the neurophysiology of mirror neurons, theories of mind, social interactions, and the efficient markets hypothesis. He concludes his neuroscience survey by describing the marvels and limits of the human prefrontal cortex, also known as the "executive brain." Of particular interest to Glom readers is decision fatigue, documented recently among judges rendering favorable parole decisions around 65% of the time at the start of and close to 0% by the end of each of 3 daily sessions that were separated by 2 food breaks (a late morning snack and lunch). This empirical finding that parole rates increased after food breaks is consistent with recent experimental research finding that glucose can reverse decision fatigue and the common adage to not make important decisions when tired.
Lo provides several practical and reasonable suggesions based upon cognitive neurosciences about how policymakers can engage in financial reform to deal with systemic risk. He concludes by advocating that financial economists utilize the great recession to re-conceptualize, rethink, and revamp neoclassical economics by forging a consilience between the neurosciences and financial economic theory. Building a deeper and better understanding of economic phenomena through improved economic models and intellectual frameworks can and should lead to a more appropriate financial regulatory infrastructure.
And now onto a few comments about the movie Margin Call. Without giving away the plot for those who may want to see it without any knowledge of its ending, this movie raises ethical and moral questions about individual versus social optimality, trading on the basis of private information, panic selling, professional codes or norms of behavior, and the costs a company may impose on society and pay to others to survive. There is certainly lots of fear and greed on display in this film. Set over the course of a day and sleepless night in NYC, the movie viscerally illustrates various forms of JDM and how individuals and groups of individuals can persevere under stress and time pressures. It is a movie that can and should provoke discussion about what could have been done differently by individuals, financial firms, and regulators. It is a film that I'm going to put on the list of movies at the start of the chapter about business law in the text, Law and Popular Culture: Text, Notes, and Questions (LexisNexis Matthew Bender, 2007) by David Ray Papke, Melissa Cole Essig, Christine Alice Corcos, Lenora P. Ledwon, Diane H. Mazur, Carrie Menkel-Meadow, Philip N. Meyer, Binny Miller, and myself that we are revising for a second edition.
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Another college football scandal, another round of calls for the NCAA to get tough on schools.
Why can’t we just admit that the NCAA is doomed to perpetual failure? Enforcing amateurism in big revenue sports is just a price control on the labor of college-age athletes. Price controls succeed mainly in creating black markets. Although, if they are effectively enforced, price controls can reduce supply.
But does the NCAA really want to reduce supply? Does it really want to enforce its rules? Miami won’t be treated like SMU and have its football program shut down because that would hurt television revenue.
There are really three explanations for why the NCAA seeks to enforce price controls:
1. It sincerely believes that doing so will encourage schools to provide the students who are generating the billions of dollars in revenue to NCAA schools with an education. (This focuses only on the supply side of education and ignores the demand side. It also is only lightly tethered to reality.).
2. It wants to prevent rising labor prices for student athletes from eating into the revenue to schools.
3. It needs to protect the “amateur” brand that it thinks creates such strong demand for its product.
If this last assumption is true, it leads to a perverse result: demand for amateurism threatens to undermine that amateurism. As a result, the NCAA would have to do just enough enforcement to maintain a perception of amateurism.
Likely some combination of all three of the above explanations accounts for the continuing NCAA game: being “shocked, shocked” to find that college athletes are getting paid under the table and then imposing some penalties on schools, but not enough to actually hurt the egg-laying goose.
So let’s be frank. Division 1 football and basketball is about gobs and gobs of money. If universities would like to engage in a little less hypocrisy and actually serve the interests of its money-generating athletes, isn’t it time to actually test the premise of reason number three above? Is amateurism really essential to rabid demand for college football and basketball? Let’s pay college athletes a market rate for bringing in revenue to their schools. Better yet, let’s have schools sponsor professional athletic teams.
It's always a problem for legal scholars to make use of contemporary quantitative work, because it is, for almost all of those scholars (myself included), methodologically inaccessible. One strategy is to pretend that the econometrics don't matter and to simply evaluate the conclusion based on its trueness, and it is this kind of approach that is either vindicated or tested by the latest Dale and Kreuger article arguing that where you go to college doesn't impact your future earnings.
Of course, that thesis is not true. I doubt there's an economist alive - Dale and Kreuger included - who, upon reading their work, has encouraged their child to attend the cheapest community college they can find, and after two years, transfer to the cheapest four year institution they can find. Such preferences will not be revealed, even though the point of the article - and this, too, should raise an eyebrow - is that everybody who thinks there is value in an elite education (that is, everyone who will read the paper) is wrong.
It's even more obviously not true for law school, of course. But I do hope that Dale and Kreuger are running the numbers as we speak (better the lowest ranked state school than Yale, right? Think of the money you'll save, and if you're Yale-quality you'll do just as well as a Yale graduate).
More generally, the paper takes one variant of a personal-merit-is-the-only-thing-that-matters argument that we accept in very few other contexts. We think, for future earnings, that your parents matter, that your pre-college schooling matters, the quality of your employer matters, that how much you earn in life might turn on whether you happen to graduate during a recession or a boom, whether you marry or don't, how many children you have, where you happen to live, and the career you choose. We recognize that income is contingent on a myriad number of factors that don't simply turn on the innate character of the earner. So why would college be any different?
But of course, it's not really a critique that Dale and Kreuger would care about or be able to respond to, which sort of depressingly calls into question the whole point of consuming such work.
I am wondering how business associations and corporations teachers approach executive compensation. After teaching now at two law schools, I’m still surprised how this hot-button issue does NOT provoke one of the more interesting class discussions of the semester. I wonder if it is because I look at executive compensation in discrete units – first in fiduciary duties and later in discussing the proxy system. Does it pay to revisit executive compensation again as a stand-alone issue?
Two things I do think are worth imparting about compensation. First, is a question about what causes high levels of compensation for executives. The law school environment tends to promote a sense that legal rules or failures of legal rules are the key drivers to all sorts of problems. The business associations world tends to use agency costs as its prime prism. But older economic scholarship on “superstars” suggests other potential causes to extreme disparities in salary, in particular when the market for high level employees expands to national or even global levels. The Times had a nice feature on this scholarship a few weeks ago that provides for an interesting link between the compensation of star athletes and executives.
Second, I aim to spend at least one class at the end of the semester talking about corporate reform – including but not limited to corporate social responsibility. One point in the lesson plan is to beware of unintended consequences for any reform you tout. Executive compensation and “pay for performance” is Exhibit B. Now questioned for lining the pockets of wealthy executives at the expense of shareholders, the movement began as a reform effort to address concerns about entrenched management.
Ideas on teaching executive compensation are more than welcome in the comments.
Last month, the Glom hosted a book club for Bethany McLean and Joe Nocera's new book, All the Devils are Here. Today, McLean has an insightful editorial in the NYT on the 30-year mortgage. No one seems to be supporting Fannie Mae and Freddie Mac, and all seem to call for the end of government guarantees of residential mortgages. However, MacLean points out that ending government guarantees will almost certainly end the ubiquitousness of the 30-year mortgage. Investors will not want a piece of an unguaranteed residential mortgage that carries the risk that the homeowner will be creditworthy, and the interest rate profitable, for three decades.
Of course, these long-term mortgages wouldn't dry up overnight, but they would only be available to the most creditworthy borrowers, who are willing to make large down payments, at a higher interest rate. So, what would that mean? Are we ready to go back to a world where folks have to save more than a few years for a down payment? Where we have neighborhoods that are filled with owners and renters, instead of owners with substantial equity and owners with very little equity? Will this make a difference? We have preached the saving grace of home ownership for so long now it's hard to imagine middle America without the 30-year home mortgage.
If you are in San Francisco for the AALS Meeting in 2 weeks, check out the AALS Insurance Law Section's program on behavioral economics and Insurance regulation on Saturday, January 8th from 10:30 AM-12:15 PM in the Hilton. Daniel Schwarcz (Minnesota) will be moderating the following panel:
Tom Baker (University of Pennsylvania Law School);
Michelle E. Boardman (George Mason University School of Law);
Russell Korobkin (University of California, Los Angeles School of Law);
Joshua C. Teitelbaum (Georgetown University Law Center)
As an editorial aside, there is still much good work to be done in the application of behavioral economics to law, particularly as this field grows out of its adolescence. We are past the stage of whether behavioral biases and cognitive limitations affect individual decision-making and moving to much more difficult questions such as: which of the laundry list of biases is at work on any given decision? When and to what extent does a particular bias affect a particular decision? How do different groups of inviduals exhibit different biases? The low hanging fruit has been picked clean. There are lots of data in all sorts of fields showing anomalies inconsistent with rational actor models. But the challenge is now to move beyond speculating that a particular bias causes the anomaly and then proposing a policy remedy towards providing clearer links between particular biases and particular changes in behavior. If the easy pickings are gone, there is still a lot of ripe fruit higher up in the tree. Check out this section meeting!
The efficient markets hypothesis has come under heavy attack in the last couple of years. For defenders of EMH, the fallback position appears to be that, even though the theory may not be technically correct, it is the best approximation of market behavior. The implication is, therefore, that it is still a useful descriptive tool.
I’m not sure this position is sustainable, however. EMH says that stock prices are right—not in some absolute metaphysical sense, but at least in that they represent society’s best guess based on available information. Behavioral finance scholars point out, however, that there are ubiquitous limits to arbitrage that stand in the way of the market reaching this happy equilibrium.
We can’t, therefore, merely look at a stock’s price and assume it is accurate. What behavioral finance tells us is that what we see is the result of the interaction of a complex set of factors. A better description of market prices, therefore, may be that they are inaccurate, with the extent of the inaccuracy (anywhere from mild to wild) being a function of how constraints to arbitrage are interacting with and influencing market trading at any given time.
On a related point, even if EMH were correct, I think its usefulness can be questioned. EMH claims that stock prices represent society’s best guess based on available information. But what does that tell us? Nassim Taleb’s work would suggest not very much. Today’s stock prices are based on predictions of future events, specifically how future events will impact corporate profits and dividends. But if the future is dictated by “black swans” that are unpredictable a priori, then stock prices can only be accurate in an impoverished sense of the word. And even if we are not fully convinced by the black-swan metaphor, it still stands to reason that even if stock prices were rational, they would merely represent guesses regarding a cloudy future.
Most broadly, what all of this suggests is that we should adopt a more modest and skeptical view of market prices, rather than casually assuming market perfectionism.
Bailouts of megabanks preserved our financial system-for better and for worse. Next time around, Dodd-Frank allows winding down of big firms that cause systemic threats. But as I far as I can tell, the Act doesn’t require any liquidations—it’s up to the Treasury Secretary to decide whether to appoint the FDIC as receiver, (and up to the FDIC to pass the actual rules ). So it’s not clear whether there will be political courage to use this power in a future crisis; likely there will be bailouts again.
The obvious solution to the too-big-to-fail problem is to start breaking up the too-big ones that almost failed last time, and to prevent any more from getting that big. Then we can see a little creative destruction now and again. [How to do it? Luckily, I don’t have to bother with that part, since this forum is about the next two years and this is so not going to happen any time soon (if ever).]
Monetary policy: [Yes, I know this is mostly Fed policy, not legislative]
One has to wonder: the economy almost self-destructed because of easy credit, and the solution is…to ease up on credit?
I understand, and generally sympathize with, demand-side economics, and it may be the only way to mitigate the current pain of job losses. And I find it hard to believe there’s currently a real danger of inflation in the near term (those who claim to be worried about these days are probably most concerned about bond prices). But in the longer term, economic growth based entirely on expanding domestic demand seems like a snake eating its own tail. Is it prudish--or radical--to suggest there’s something wrong with our culture of consumption? If it needs fixing, punishing savings with low/negative interest rates ain’t the way to start. I don’t profess to have a palatable alternative. Maybe that’s the point—it’s time to take the nasty medicine….But I have tenure, so it’s too easy for me to say that.
Looks like I'm not the only wishing I'd written Dave Hoffman’s post, but since he got there first, let me polish the apple a bit: Instead of passing new laws, how about actually enforcing the laws already on the books? Oh, yeah, enforcement is the job of the executive branch. Then how about Congress just refrains from obstructing the enforcement of the ones it just passed? [Edit: Underbelly has more juicy stuff on this.] Just a thought.
I'm a bit late to this, but this speech by World Bank head Robert Zoellick, a lawyer, ripping into the applicability of economic research to development is pretty interesting. He's even unsure that randomized controlled trials, the current gold standard, is scalable enough to be useful. Why is the head of the World Bank denouncing economics?
I am not an economist. Enough said, you may argue. Why meddle? Why open such a Pandora’s Box? For the simple reason that policymakers look to economics, and policymakers in developing countries look to development economics even more. It matters.
Anyway, he wants to make the data collected by the bank, and the tools developed by it, much more open source, which would appeal, presumably, to open source zealots like Yochai Benkler and Matt Bodie. And he even says that, given that every fast developing country has pushed industrial policy pretty far, that maybe we ought to look again at that bugaboo of free market enthusiasts. Dani Rodrik is impressed.
While we're blithely looking at rankings, you might be interested in this top young economist list over at IDEAS. You've probably heard that the graduate programs are increasingly international, and that is reflected in the rankings, but to this casual empiricist, the interesting thing is the sort of international that they are. I could be missing something, but these people largely seem like they are from one continent: Europe. Most of them teach here of course. And some of those Marcs and Michaels might be Americans. But you rarely hear about Old European economic puissance over our own domestics and the young tigers of East Asia and the Middle East. Maybe you should be. Anywhere, here's the top 25 to whet your appetite:
|1.||3.05||2002||Marc J. Melitz|
|9.||12.27||2002||Marc P. Giannoni|
|17.||18.2||2002||David Malin Roodman|
|19.||19.21||2001||Juan F Rubio-Ramirez|
|21.||20.04||2003||Paresh Kumar Narayan|
|24.||24.13||2004||Dean S. Karlan|