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Lawless Capitalism

Lawless Capitalism: The Subprime Crisis and the Case for an Economic Rule of Law

Steven A. Ramirez
Copyright Date: 2013
Published by: NYU Press
Pages: 304
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  • Book Info
    Lawless Capitalism
    Book Description:

    The subprime mortgage crisis has been blamed on many: the Bush Administration, Bernie Madoff, the financial industry, overzealous housing developers. Yet little scrutiny has been placed on the American legal system as a whole, even though parts of that system, such as the laws that regulate high-risk lending, have been dissected to bits and pieces. In this innovative and exhaustive study, Steven A. Ramirez posits that the subprime mortgage crisis, as well as the global macroeconomic catastrophe it spawned, is traceable to a gross failure of law.The rule of law must appropriately channel and constrain the exercise of economic and political power. Used effectively, it ensures that economic opportunity isn't limited to a small group of elites that enjoy growth at the expense of many, particularly those in vulnerable economic situations. In Lawless Capitalism, Ramirez calls for the rule of law to displace crony capitalism. Only through the rule of law, he argues, can capitalism be reconstructed.

    eISBN: 978-0-8147-7729-9
    Subjects: Law

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
    (pp. ix-x)
    (pp. xi-xviii)
    (pp. 1-16)

    Law plays a pivotal role in economic growth and stability. This book highlights the role of corrupted law and regulation in the financial crisis of 2007–9 (and its ongoing macroeconomic consequences) and articulates a legal framework that comprehends the links between law and macroeconomic stability and growth. The subprime mortgage crisis illustrates the costs of subverted legal and regulatory frameworks. Pervasive legal failure to control economic power and align the interests of corporate and financial elites with the interests of economic growth and stability caused the crisis. The U.S. cast aside sound regulation in favor of unconstrained elites. It...

  6. 1 A Revolution in Economics (but Not in Law)
    (pp. 17-46)

    Adam Smith long ago recognized that the extent of the marketplace drove ever-increasing specialization. Larger and deeper markets support a more developed division of labor, which enhances economic growth.¹ He further recognized the importance of financial regulation, to contain panics and system risk.² Smith evinced skepticism that governing elites would impose “just and equitable” laws upon themselves and expressed empathy for the plight of ordinary workers.³ Indeed, he doubted that any society could prosper if it permitted too much poverty: “No society can surely be flourishing and happy of which the greater part of the numbers are poor and miserable.”⁴...

  7. 2 The Corrupted Corporation
    (pp. 47-73)

    Legal infrastructure created the corporation, and it qualifies as one of the most economically powerful legal innovations in history. Yet governance issues plague the modern publicly held corporation, and sophisticated investors like John Bogle (founder of one of the largest mutual fund families—the Vanguard family of mutual funds) see the dementia.² Increasingly, corporations exist to serve the interests of managers instead of shareholders. One study found, for example, that between 1993 and 2003 the compensation paid to senior executives doubled as a percentage of profits.³ The publicly held corporation in America today fails to operate in accordance with its...

  8. 3 Animal Spirits and Financial Regulation
    (pp. 74-104)

    So long as free capital markets permit all holders of assets to sell at once, a risk of panic looms. For example, an exogenous shock such as the terrorist attacks of 9/11 can deter all buyers and cause financial markets to crash. Human psychology (or “animal spirits”) influences investment decisions and as such injects inherent instability into the financial system. Financial markets consequently suffer from cycles of boom and bust. Booms encourage corporate and financial elite complacency, regulatory laxity, and public dormancy.² Further, with respect to financial regulation, corporate elites seemingly always oppose regulation without regard to its macroeconomic benefits....

  9. 4 Rigged Globalization
    (pp. 105-130)

    Globalization is a rigged game. The present construction operates to maximize elite power to lower wages and to free elites from regulatory restraint.² The legal framework governing globalization encourages a race to the bottom whereby nation-states compete for transnational corporate patronage in exchange for diluted regulatory infrastructure.³ It fails to adequately mitigate poverty and secure robust macroeconomic growth.⁴ It fails to stem chronic financial instability.⁵ According to Joseph Stiglitz, former Chief Economist of the World Bank, the course of globalization responded to “what seemed a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling...

  10. 5 The Costs of Economic Oppression
    (pp. 131-158)

    Throughout the world today, economic oppression exacts a painful economic toll on national economies and the global economy. Stripping an individual of the ability to reach his or her economic potential retards the extent of the market available to support maximum innovation and specialized knowledge for everyone. Stripping large groups of individuals of their ability to reach their economic potential leads to grossly underdeveloped markets. Here, Dr. King echoes Adam Smith: No person can reach his or her full economic potential if others are economically disempowered because markets must be retarded if participants are irrationally excluded, or if their participation...

  11. 6 The Crisis in Crisis Management
    (pp. 159-183)

    The history of capitalism proves that financial crises can be eliminated only with superior legal and regulatory infrastructure, if then. The MIT economist Charles Kindleberger, in his classicManias, Panics and Crashes, shows that aside from a thirty-year period of stability, from 1945 through 1975, “speculative excess,” such as manias or panics, is “if not inevitable, at least historically common.”² Professor Hyman Minsky takes Kindleberger’s argument a step further: “turbulence—especially financial instability—is normal in a capitalist economy.” Minsky’s key insight relates to the centrality of the financial sector to growth and the optimism engendered by stability and growth....

  12. 7 The Potential for an Economic Rule of Law
    (pp. 184-216)

    This book argues that those with economic “might” subverted law and regulation in the years leading up to the financial meltdown of the fall of 2008. They rigged law to loot the American economy with impunity.² Between 1986 and 2008, constraints on economic power ranging from liability under the federal securities laws to the duty of care for directors of public firms to the limits on the size of financial institutions vanished, freeing corporate and financial elites to pocket huge windfalls for economically pernicious misconduct. Further, new activities and frameworks fundamentally left elites with the power to impose massive costs...

  13. EPILOGUE: Optimized Legal Infrastructure and the End of Scarcity
    (pp. 217-220)

    The economist Paul Romer theorized in 1993 that, given the number of elements in the universe, the possibilities for innovation by putting things together in new ways may be finite but are definitely enormous.¹ The key to exploiting this fundamental reality is to create as many innovators as possible—that is, to create institutions through law to support the creation of more ideas.² In particular, Romer suggests that investment in children will be the key driver to explosive growth.³ John Maynard Keynes wrote in 1930 that the fundamental problem with the global economy in 1930 arose from too much productive...

  14. NOTES
    (pp. 221-276)
  15. INDEX
    (pp. 277-285)
    (pp. 286-286)