2023-06-10 19:15:39
BarcelonaKatharina Pistor (Freiburg, Germany, 1963), professor of comparative law at Columbia University, is one of the world’s leading experts on how law and law affect the economy. The lawyer has published her latest book in Catalan, The capital code (Edicions Saldonar in collaboration with the Irla Foundation), in which he analyzes how the financial system is supported by a handful of legal institutions that give it shape, but which at the same time make it possible for crises to be repeated and inequalities to be perpetuated .
What did you want to achieve with this book?
— After the global financial crisis, I had the feeling that we had to understand the inner workings of the financial system. We had to open the belly of the beast to see how it works. You can’t predict the timing of a crisis, but you should be able to predict a crisis of that magnitude. I discovered that you can strip down complex financial instruments and what you end up with are simple, small legal institutions: contracts, property rights, guarantees, corporate law.
When are these legal institutions created?
— We can go back as far as the Romans, but it is at the end of the Middle Ages that we see the confluence of different institutions, public and private. And you can see a trend that the law is becoming more and more abstract and there are people who are starting to play with the law.
The wealthiest layers of society are the ones who take advantage of the loopholes in the law.
— It is very easy to think that the bourgeoisie captured the Parliaments. There are wolves, for sure, but if we take the Spanish Civil Code, with all the general principles of contractual property law, and together with the Commercial Code, it can be seen that at some point someone thought “How can I better protect my rights ?”, because with better rights you win. And that’s when the law that already exists is used. Changes are not legislated, existing law is used and transactions, licenses are bought and done in a very detailed manner. It may happen that someone later says that what you did is illegal, but whoever says so will have to take you to court. Who will do it? How much money will you have earned in the meantime? So there is a second phase, when people directly play with the law. They find all kinds of holes in it until the lawmakers change it again. Going back to the 2008 crisis, the history of finance is the history of financial crises, which is the history of legal innovation. Because in the end there is always a crisis. Because? Because too many people push the system too hard. They borrow too much, make a pile of money and take more risks until the system collapses.
In the end there is always a crisis. Because? Because too many people squeeze the system too hard”
Why is the system squeezed?
— Financial assets work only because there is legal compliance. If I now promise to pay you a million dollars, you cannot sell that asset. But if I’m a company that issues a million euro bond, you look at the prospectus, which is written like a contract, and you think you can enforce it. There are many more possibilities to resell the bond. But if everyone issues financial instruments at the same time and you try to meet them all, you get bank panics. That’s when the state intervenes, because it doesn’t want there to be financial crises, because finance is too important for the economy. And that’s when they regulate by making banks only able to issue certain types of credit or that they have to comply with certain standards, but this is not the solution, as the system becomes more and more complex. The first financial regulations are from 1866. Now we have millions of regulations, but it continues to collapse. Regulation is imperfect because it can never be perfect.
Can states limit the complexity of regulations?
— What’s scary is that it’s getting more complex, faster. The state will never be able to get ahead, it’s an illusion. The private sector wants to make money and uses the laws. It also negotiates with regulators, who are by definition more limited, because no one wants to give them too much power. And above it is the Parliament, which is a slow creature that has to go through many procedures. Therefore, to make the financial system more stable, we need to trim it and prevent it from taking too many risks.
The system does not work?
— What works in our system is that you don’t have to have an army to protect your things, you can trust the state. It comes at a cost, but it’s much cheaper than if you had to do it yourself. But what you have to do is make sure you can litigate aggressively. Nowadays most things happen in big law firms. And besides, we live in a globalized system where there is no single state law, you have different countries. It’s easier to codify your assets under English or New York law, and you can ensure that those are the laws that apply by establishing an intermediate jurisdiction. And all of a sudden you’ve moved outside of Spain without leaving Spain. Some flexibility is important in a transnational system, but it has gone too far.
To make the financial system more stable, we need to trim it and prevent it from taking too many risks”
How does this affect potential right-wing populist regimes or governments? Can they change the system?
— It could be even worse, everyone plays this game. They play the populist card with the electorate, but then they get rich. Donald Trump didn’t change the system, nor Boris Johnson, and Le Pen I don’t know if he will. They talk a lot, but I can’t see it. When we think of fascism in Germany in the 1930s, big business was all for it. The problem is that the capitalist system allows finance to erode democracy and this is a disaster, because of the instability and precariousness that people feel in their lives. So they vote for increasingly extreme parties.
And left-wing populism?
— I think he has too much faith that the state can save us. And in the system I’ve described, the state has limited capacity. It is through the state that citizens must act, but it is not enough to regulate and impose taxes, it is necessary to go deeper.
Com?
— There are ways to make the system more stable. Debt subsidies need to be cut: they are not a good idea because then everyone is too dependent on them. In addition, it would require a system of redistribution with taxes and would make it more difficult to choose jurisdictions. We should think more deeply about questions that were already asked at the beginning of capitalism. Should companies be able to control other companies? Should investors who invest in assets that destroy the environment be allowed limited liability? We have to be able to say at some point “We don’t do this anymore”. For example, we must allow bank failures. In the end the financial system is basically socialist, but if we socialize it, let’s really socialize it. Maybe we don’t want everything to be public, but we do make one reset to the rules The current system, which socializes risks but allows private gains, cannot be justified in moral, political, democratic or economic efficiency terms. It doesn’t make any sense.
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