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Still working, as I was yesterday, from the recommendations in my final chapter: I proposed that "we must learn to let the failures fail." As a closely related point, I also said that this would involve a reform of corporate bankruptcy law. This is worth some emphasis, so I'll quote myself here:
"Well-functioning bankruptcy courts perform the vital role of allowing the assets of a failed enterprise to find new owners -- owners who will be in a better position to find their highest-return use. Unfortunately, the courts at present do not accomplish that function effectively, and this contributes sadly to the too-big-to-fail mentality."
Gravelle takes issue with me here, saying if I understand her that some institutions really are too big to fail, and that government (in association with its central bank) needs the authority to rescue them as necessary if doing otherwise "means disaster for the broader economy, as well it might."
Yet her meaning requires some cross-examination. Does she really mean that some institutions have to be rescued
outside of the context of bankruptcy courts, because the latter aren't doing their jobs? Is a bankruptcy filing the sort of "failure" that sometimes cannot be allowed?
Certainly in the 1970s there was a widespread opinion that Chrysler was too big to fail. It was too big for its fate to depend upon our existing corporate bankruptcy system. Thus, in 1979, the U.S. Congress passed a loan guarantee act, which President Carter signed into law in January 1980.
Obviously, that act did not cure what ailed the US auto industry. Both Chrysler and Gemeral Motors would have to pass through the bankruptcy system nearly thirty years later, after a generation's worth of stop-gaps, hems, and haws. Would it not have been better done, when it could have been done more quickly, in 1979-80?
Bankruptcy is an important concept here because it is through bankruptcy filings and reorganizations that common-law jurisdictions re-jigger ongoing enterprises in ways that sacrifice the value of the old equity to the owners of debt. Through that process the significance of equity as the residual bearer of risk is acknowledged, and in fact (unless the process ends in liquidation) a new group of claimants become the bearer of that residual risk, the risk of the next failure.
The role of government bail-outs outside of bankruptcy is all too often to short-circuit this healthy process, diluting our core sense of what equity is, of what ownership means in the corporate context.
And ... why? To save the assets involved, so they'll continue to be of productive use? The assets of a Chrysler (or a Lehman) don't disappear when it goes into bankruptcy. Ownership may pass, over time, to the next round of owners of equity. Or (if it is feared that some of the assets are blocks of ice on a summer day -- liable to disappear entirely unless someone inherits them immediately) ownership may pass much more quickly to new owners through an auction arranged by a bankruptcy trustee.
This, after all, is what happened to the more valuable, and 'melting,' assets of Lehman. The British bank Barclays had been unable or unwilling to come to Lehman's rescue in any alternative-to-bankruptcy arrangement, but it did buy up the choice assets almost immedisately after Lehman's actual filing. Whatever was the productive capacity of those assets: that was not lost by virtue of the bankruptcy filing.
Gravelle (following Bernanke's lead in this) says that it is too simplistic to dedicate ourselves to the proposition that failures should be allowed to fail. Her solution, and his, are "regulatory changes" that will limit the moral hazards associated with bail-outs.
At their very best, if we agree to be wildly optimistic in our assessment of the ongoing or likely regulatory changes, what they'll be able to do is give us something akin to a finctioning bankruptcy system -- a way of letting the failures fail, having the equity owners take their loss, and finding someone else to carry on with the valuable assets of the failed enterprise. Yet that very best is, as it happens, what I proposed. If the "regulatory changes" are not to work through the reforming the bankruptcy system and facilitating its operation, they'll only be (at best) a pale duplicating of a bankruptcy system elsewhere.
And really ... why duplicate? Why not fix up the original?
Or maybe it isn't about productive use of assets. Maybe, (some of you are thinking this now, surely) the real reason the Treasury and central bank need the flexibility for bailing out 2B2Fail firms is to "avert panic." But consider that for a second ... as a matter of mass psychology, do bailouts real calm the waters?
The events of 2007-08 would seem to indicate that they do not. After all, in the spring of 2008, the authorities effectively bailed out the counterparties of Bear Stearns by arranging a shotgun marriage between Bear and JPMorgan. That doesn't seem to have had any very soothing consequences. It merely stimulated traders to look for "who's next." They settled on Lehman. So a bailout at one site generally shifts panic to another.
I have not yet encountered
any point of view that would make sense out of the 2B2Fail mentality. Indeed, I'm delighted to read where Gravelle complains that "a gold standard ... does not allow flexibility to manage the economy." I'm not an unequivocal advocate of a gold standard, but that contention is surely a big point in its favor for those of us who don't believe an economy should really be "managed." With a gold standard (or any other hard money system) central bankers cannot conjure money up out of thin air, so bail-outs are much trickier to arrange. That would suggest that there will be fewer of them, and that in many more cases failures will be allowed to fail.
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Still and all, I have not yet gotten to the core of my quarrel with Gravelle, and hers with me. I'm enjoying this so much that, frankly, I've been spinning it out. I do believe that money must be 'hardened' -- and I think that this may involve the repeal of existing U.S. legal tender laws and will surely have to involve the abolition of the Federal Reserve. Both of these ideas leave Gravelle aghast.
We will discuss some final points next week: Thursday and Friday. See you there!
The Moors of the 12th century had access to the writings of Aristotle -- the Christian world didn't rediscover Aristotle until they started winning back large parts of Spain, and ended up in the possession of some of the (formerly Moorish) libraries.
The first time I wrote of microcredit in thisblog, in December2010, I noted that Muhammad Yunuswas generally considered its father, Grameen Bank was the DNA, and Bangladeshwas the cradle. 
Well, perhaps in the PowerPoint sense I don’t “specifically propose” anything. It is hard to reduce a critical cultural shift to a list of specific proposals. It isn’t a matter for departmental white papers. It is a matter of focus. 
We now get to the core of our dispute. (“At last!“ you cry.) Lament not, for we have passed through some essential preliminaries. 
My book, Gambling withBorrowed Chips, calls for the abolition of legal tender laws. For a sense of what that means, dear (American) reader,please take a dollar out of your wallet. Above and to the left of GeorgeWashington’s head, you’ll see in small print the words, “The Note is legaltender for all debts, public and private.” 
I am confident I have accomplished all I meant to accomplish with this series of posts, stimulated as they were by Gravelle's critique of my book, GwBC. In conclusion, I will speak to the notion, widespread today, and present in Gravelle's review, that a moderate and non-accelerating level of inflation is a good thing, in that it is predictable on the one hand and it accomodates the growing demand for money that comes with a growing population and economy on the other.This notion is presumably why Gravelle instructed me that only an "accelerating" rate of inflation should be considered "easy money." 
The popular law school study aids, Examples & Explanations, including Contracts, Federal Income Tax, Copyright, Debtor and Creditor, Evidence, Criminal Law, Property, and many others, are available online. Google has digitized the full content of many of the titles from this series. They are available on Google Books and large portions are available for free. Although the online collection does not include the most recent editions, some of the titles are as recent as 2007, 2008, or 2009.
Some of the most recent additions to our Law in Film Collection include A River of Waste (2009), a documentary about modern industrial system of meat and poultry production in the U.S. and elsewhere, Copyright Criminals (2010), a documentary about copyright, creativity and technological change in the hip-hop music making industry, Capitalism (2010), a documentary by M. Moore about the history of free-market capitalism in post-Reagan America, and Sin by Silence (2009), a documentary telling the story of Convicted Women Against Abuse. Don't forget that Pace Law Library patrons may check out movies for up to five days and it is FREE. 
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