Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-25T13:49:02.876Z Has data issue: false hasContentIssue false
  • English
  • Français

Law’s Elasticity An Inquiry into the Relation of Law and Power in Finance

Published online by Cambridge University Press:  11 October 2021

Katharina Pistor
Katharina Pistor*
Affiliation:
Columbia Law School, Columbia University, New York [kpisto@law.columbia.edu].
Get access

Abstract

Law is a powerful commitment device. By entering into a binding contract, a contracting party can invoke the coercive law enforcement powers of states to compel another party to perform. Many, if not most, contracts are carried out without ever invoking these coercive powers; they operate in the shadow of the law. Less attention has been paid to the flip side of law’s shadow: the possibility of relaxing or suspending the full force of the law, or making law elastic. While this may seem anathema to the “rule of law”, it is not an infrequent occurrence, especially in times of crisis. The elasticity of law should be distinguished from the incompleteness of law, that is, the inherent limitation lawmakers face in trying to anticipate all future contingencies. In this paper I will offer two tales of the American Insurance Group (AIG) to illustrate the elasticity of contracts as well as of law.

Résumé

Résumé

La loi est un puissant dispositif d’engagement. En concluant un contrat contraignant, une partie contractante peut invoquer les pouvoirs coercitifs d’application de la loi des États pour contraindre une autre partie à s’exécuter. Beaucoup de contrats, sinon la plupart, sont exécutés sans jamais invoquer ces pouvoirs coercitifs ; ils opèrent dans l’ombre de la loi. Moins d’attention a été accordée à l’autre côté de l’ombre de la loi: la possibilité d’assouplir ou de suspendre toute la force de la loi, ou de la rendre élastique. Si cela peut sembler anathème pour « l’état de droit », ce n’est pas rare, surtout en temps de crise. L’élasticité du droit doit être distinguée du caractère incomplet du droit, c’est-à-dire la limitation inhérente aux législateurs lorsqu’ils essaient d’anticiper toutes les éventualités futures. Dans cet article, je proposerai deux histoires autour de l’assureur AIG pour illustrer l’élasticité des contrats ainsi que celle du droit.

Zusammenfassung

Zusammenfassung

Das Gesetz stellt ein starkes, bindendes Mittel dar. Beim Abschluss eines verbindlichen Vertrags kann sich eine Vertragspartei auf staatliche Zwangsvollstreckungsbefugnisse berufen, um eine andere Partei zur Vertragserfüllung zu zwingen. Viele, wenn nicht sogar die meisten Verträge werden durchgesetzt, ohne dass diese Zwangsbefugnisse jemals in Anspruch genommen werden; sie handeln im Schatten des Gesetzes. Weniger Aufmerksamkeit wurde der anderen Seite des Schattens des Gesetzes gewidmet: der Fähigkeit, die volle Kraft des Gesetzes zu lockern oder auszusetzen, oder das Gesetz elastisch zu machen. Dies mag dem “Rechtsstaat” ein Gräuel sein, ist aber nicht ungewöhnlich, besonders in Krisenzeiten. Die Elastizität des Gesetzes muss von der Unvollständigkeit des Gesetzes unterschieden werden, d.h. von der inhärenten Beschränkung des Gesetzgebers bei dem Versuch, alle zukünftigen Eventualitäten zu antizipieren. In diesem Artikel biete ich zwei Geschichten rund um den Versicherer AIG an, um die Elastizität von Verträgen wie auch von Gesetzen zu veranschaulichen.

Keywords

LawFinanceElasticity lawIncompleteness of lawFinancial crisisDroitFinanceBanques centralesThéorie des contratsIncertitudeRechtFinanzenZentralbankenVertragstheorieUngewissheit
Type
Research Article
Information
European Journal of Sociology / Archives Européennes de Sociologie , Volume 62 , Issue 2 , August 2021 , pp. 249 - 273
Copyright
© European Journal of Sociology 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

BIBLIOGRAPHY

Aldasor, Inaki and Elers, Torston, 2018. “The Credit Default Swap Market: What a Difference A Decade Makes,” BIS Quarterly Review, June 2018.Google Scholar
Beck, Ulrich, 1992. Risk Society: Towards a New Modernity (London, Sage).Google Scholar
Bernanke, Ben S., 2015. The Courage to Act: A Memoir of a Crisis and its Aftermath (New York NY, Norton Publishers).Google Scholar
Braithwaite, Joanne, 2012. “Standard Form Contracts as Transnational Law: Evidence from the Derivatives Markets,” Modern Law Review, 75 (5): 779–805.CrossRefGoogle Scholar
Carruthers, Bruce, 2013. “Diverging Derivatives: Law, Governance, and Modern Financial Markets,” Journal of Comparative Economics, 41 (2): 386–400.CrossRefGoogle Scholar
Carruthers, Bruce and Stinchcombe, Arthur L., 1999. “The Social Structure of Liquidity: Flexibility, Markets, and States,” Theory and Society, 28 (3): 353–382.CrossRefGoogle Scholar
Cohen, Morris R., 1927. “Property and Sovereignty,” Cornell Law Quarterly, 13 (1): 8–30.Google Scholar
Conti-Braun, Peter and Skeel, David A., 2020. “Using the Federal Reserve’s Discount Window for Debtor-in-Possession Financing During the Covid-19 Bankruptcy Crisis,” Report, Brookings Institution, Hutchins Center for Fiscal and Monetary Policy, July 29 2020. Google Scholar
COP [Congressional Oversight Panel], 2010. The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy (Washington DC, Congressional Oversight Panel).Google Scholar
Dagan, Hanoch, 2013. “Lawmaking for Legal Realists,” The Theory and Practice of Legislation 1 (1): 187–204.Google Scholar
Diamond, Douglas W. and Dybvig, Philip H., 1983. “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, 91 (3): 401–419.CrossRefGoogle Scholar
Eisenberg, Melvin Aron, 1988. The Nature of the Common Law (Cambridge MA, Harvard University Press).Google Scholar
Fuller, Don, 1938. The Morality of Law (New Haven, Yale University Press).Google Scholar
Gilson, Ronald and Kraakman, Reinier, 1984. “The Mechanisms of Market Efficiency,” Virginia Law Review, 70 (4): 549–644.CrossRefGoogle Scholar
Gorton, Gary and Metrick, Andrew, 2012. “Securitized banking and the run on repo,” Journal of Financial Economics, 104 (3): 425–451 [doi: 10.1016/j.jfineco.2011.03.016].CrossRefGoogle Scholar
Green, Leslie, 1987. “The Political Content of Legal Theory,” Philosophy of the Social Sciences, 17: 1–20.CrossRefGoogle Scholar
Gullifer, Louise, 2012. “What Should We Do about Financial Collateral?,” Current Legal Problems, 65 (1): 377–410.CrossRefGoogle Scholar
Haldane, Andrew, 2012. “The Dog and the Frisbee,” Federal Reserve Bank of Kansas (Speech). Google Scholar
Hart, Oliver and Moore, John, 1999. “Foundations of Incomplete Contracts,” Review of Economic Studies, 66 (1): 115–138.CrossRefGoogle Scholar
Harvey, Rachel, 2013. “The Legal Construction of Global Foreign Exchange Markets,” Journal of Comparative Economics, 41 (2): 343–354.CrossRefGoogle Scholar
Hazen, Thomas Lee, 2009. “Filling a Regulatory Gap: It is Time to Regulate Over-the-Counter Derivatives,” North Carolina Banking Institute, 13 (123).Google Scholar
Hohfeld, Wesley Newcomb, 1913. “Some Fundamental Legal Concepts as Applied to Judicial Reasoning,” The Yale Law Journal, 23: 16–59.CrossRefGoogle Scholar
Kaplow, Louis, 1992. “Rules versus Standards: An Economic Analysis,” Duke Law Journal, 42: 557–629.CrossRefGoogle Scholar
Knight Frank, H., 1921. Risk, Uncertainty and Profit (Boston, Houghton Mifflin).Google Scholar
Majone, Giandomenico, 1994. “The Rise of the Regulatory State in Europe,” West European Politics, 17 (3): 77–101.CrossRefGoogle Scholar
Mehrling, Perry, 2011. The New Lombard Street: How the Fed Became the Dealer of Last Resort (Princeton, Princeton University Press).CrossRefGoogle Scholar
Mehrling, Perry, 2012. “The Inherent Hierarchy of Money,” in Taylor, Lance, Rezai, Armon, and Michl, Thomas, Social Fairness and Economics (New York NY, Routledge).Google Scholar
Menand, Lev, 2020. “The Federal Reserve and the 2020 Economic and Financial Crisis,” Stanford Journal of Law, Business & Finance, 26: 295–360.Google Scholar
Minsky Hyman, P., 1986. Stabilizing an Unstable Economy (New Haven, CT, Yale University Press).Google Scholar
Morgan, Glenn, 2008. “Market Formation and Governance in International Financial Markets: The Case of OTC Derivatives,” Human Relations 61 (5): 637–660 [doi: 10.1177/0018726708091766].CrossRefGoogle Scholar
Morrison Edward, R. and Riegel, Joerg, 2005. “Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judge,” American Bankruptcy Institute Law Review, 13 (2): 641–664.Google Scholar
Papadia, Francesco and Välimäki, Tuomas, 2011. “Functioning of the Eurosystem Framework,” in Mercier, Paul and Papadia, Francesco, eds, The Concrete Euro (Oxford, Oxford University Press).Google Scholar
Partnoy, Frank, 2002. “ISDA, NASD, CFMA and SDNY: The Four Horsemen of Derivatives Regulation,” USD School of Law Working Paper, 39: 1–52.Google Scholar
Pistor, Katharina, 2013. “A Legal Theory of Finance,” Journal of Comparative Economics, 41 (2): 315–330.CrossRefGoogle Scholar
Pistor, Katharina, 2020. “The Value of Law,” Theory and Society, 49: 165–186.CrossRefGoogle Scholar
Pistor, Katharina and Xu, Chenggang, 2003. “Incomplete Law,” Journal of International Law and Politics, 35 (4): 931–1013.Google Scholar
Scott, Robert, 2006. “The Law and Economics of Incomplete Contracts,” Annual Review of Law and Social Science, 2: 279–297.CrossRefGoogle Scholar
Stout, Lynn A., 2011. “Derivatives and the Legal Origin of the 2008 Credit Crisis,” Harvard Business Law Review, 1 (1): 1-38.Google Scholar
Weber, Max, [1921] 1968. Economy and Society; An Outline of Interpretive Sociology, Roth, Guenher and Wittich, Klaus, eds (Oakland, California, University of Califoronia Press).Google Scholar
Weber, Max, [1927] 1981. “General Economic History,” [with a new introduction from I. J. Cohen] Social Science Classics Series (New Brunswick NJ, Transaction Books).Google Scholar