From Form to Reform in Law and Finance: Tammy Lothian

Robert Hockett –

As with most topics having to do with our primary modes of production and distribution – “microeconomics,” “macroeconomics,” “industrial economics,” “labor economics,” … – so with “financial economics” there is a well-entrenched orthodoxy that seems to enjoy pride of place in the academy and on the hustings. Indeed, one often hears “the financial markets” described as that site of economic activity which most closely approximates, in respect of its principal players, constitutive features, and felicitous outcomes, the received Smithian wisdom on decentralized market economies and their virtues.

Financial market participants lack market power, we are told, and the trading mechanism quickly impounds privately held value-pertinent information into publicly observable securities prices. Hence the financial markets can generally be relied upon smoothly to channel investment capital toward its “most valued uses” on a real-time basis. Continuous buying and selling produce informational efficiency, that’s to say, while informational efficiency produces allocative efficiency. Et voila, we are all of us left better off, producing more of what’s most valued and less of what’s least valued than could otherwise be reasonably expected. All thanks to our financial system – like our healthcare system, “the envy of the world.”

If there is any realm, then, in which public intervention should be “light touch” and minimal, orthodoxy tells us that it is the realm of finance. Sure, many a self-styled progressive economist will concede, there are market failures aplenty in some spheres that warrant public intervention. There is “the labor market,” for example, where monopsony power on the part of employers must be counterbalanced by state-sanctioned monopoly power on the part of employees. Or there is “the environment,” in connection with which pollution externalities are an ever-present source of inefficiency that must be made to be re-internalized. But the financial markets are one place where nature is best left to take its beneficent, Scottish Enlightenment course.

It is almost as if the vaunted “Fundamental Theorems” of welfare economics were conceived and derived with the financial markets as their “intended interpretation.”  And maybe they were: note the work done by futures markets, for example, in Hicks’s foundational Value and Capital – work of which Hicks’s intellectual descendants Ken Arrow, Gérard Debreu, and others made similar, and seminal, use later. Surely, then, the financial markets are our most market-like markets – they are markets at their just and efficient best, they are markets par excellence.

Now to anyone who has been paying attention to “real world” economic or even political developments over the past decade or so, the foregoing remarks must ring facetious. Isn’t “Wall Street” the seedbed of all that went wrong in the American and global economies during the lead-up to 2008 and its aftermath? Isn’t Wall Street itself what was accordingly “occupied” once it grew clear that neither Congress nor President Obama were going to do much beyond Dodd-Frank to put things right? And didn’t bank-bashing figure prominently, even if cynically, in certain “AstroTurfed,” pseudo-populist rightwing political movements in 2010 and 2016?

The answer to all of these questions, of course, is yes. And it isn’t hard to see why. The suggestion that all financial market participants are price-takers grows comical once you notice how many of what I call systemically important prices – prices that constitute other prices – are set by small coteries of big players. The suggestion that informational efficiency carries straightforwardly over to allocative efficiency grows equally amusing when you notice how much critically important price-pertinent information – e.g., when endogenously generated credit will run dry – simply isn’t available to impound into prices. And the idea that secondary market trading volume, which massively dwarfs primary market investment volume, is about changing perceptions of underlying value rather than simply betting on short-term price volatility is one that secondary market traders themselves would laugh you out of the room for suggesting.

Observations like these are quite basic and lie ready to hand. And this is not even to mention the profound role that income and wealth inequality play in both generating and being worsened by secondary financial market volatility. Thus there has been a great burgeoning, over the past decade or so, of orthodox, heterodox, and would-be heterodox literature purporting to diagnose what has gone wrong in the financial system particularly and, in some cases, in the American economy more generally. Much of this literature is helpful and occasionally insightful, even while more of it is absurd and sensational. But little of it, in any case, is what one would call “deep” or “foundational.”

There is a tendency at best to blame one or two more or less narrowly defined, newly emergent dysfunctions for our troubles – e.g., the moral hazard embedded in the “originate to distribute” model that now prevails in the mortgage markets, or the run-risk of “shadow banks” whose business model replicates the maturity mismatch of traditional bank balance sheets while evading the liquidity regulation to which traditional banks are subject. And there is a tendency at worst simply to sensationalize, and thereby effectively fetishize, certain newfangled financial practices and instruments bearing vaguely obscene or exotic names like “naked short-selling” or “collateralized debt obligation,” without ever getting around to explaining just what those practices or instruments amount to, why they’ve emerged, or how they work mischief.

And then of course there are the money-cranks, who proliferate opportunistically after a crash much as infections will spread in a surgical ward. It’s all thanks to “fiat money,” they’ll tell us – lynch Ben Bernanke, bring back the gold, end the Fed. It isn’t just bumpkin-savants like the Pauls or Larouches, or anarcho-“cypherpunk” bitcoin and blockchain enthusiasts who speak in this manner. You’ll find much the same stuff at more “reputable” bookstores and parlor gatherings, any time you see or hear tell of “Taylor Rules,” “unsustainable deficits” or “currency wars” and “the death of money.”

In view of this state of the discourse where finance is concerned, I began offering years back a seminar that I call “Financial Reform. The scare-quotes are actually part of the title, as the latter is meant to be taken ironically. The signal I mean for this title to send is that most “reform” proposals are quite modestly incremental or surface-scratching at best, seldom grappling with more elementary questions such as what finance is or is for, why we have or whether we need “financial markets,” how and where finance should engage with the nonfinancial – or “real” – economy, and so forth. Unless and until we do that, I believe, we know little to nothing of the “form” we purport to “reform.” And reform we must, for the roots of what happened in 2008 are still spreading, as much scholarly work including my own aims to show.

My seminar titling, however, must be too subtle, for few seem to notice the scare-quotes, and those who do generally inquire why rather than surmising why I employ them. A conspicuous exception to this rule was Tammy Lothian, whose untimely death less than two years ago left her family and close friends almost unspeakably bereft.

Tammy was a lawyer and investment banker who taught as an adjunct at Columbia Law School and practiced project finance both States’-side and in Latin America. That practical experience lent Tammy a rich understanding of how “actually existing” finance actually operates and how both financial practices and financial instruments are legally constituted and contoured. This latter understanding, in turn, both nourished and was itself nourished by a detailed institutional imagination, wherein and whereby Tammy continually disassembled and reassembled multiple “possible worlds” of finance with a view to achieving ends most of us, on reflection, would agree finance ought to achieve. And why not?, Tammy would ask. We make finance; we can make it anew. It is not Law-given, it’s law-given – given by our law, which we’re free to refashion as suits us.

Tammy had accordingly developed, by the time of her death, a rich repertoire of reform ideas where finance is concerned. All of these were suffused with conviction concerning what finance is for – viz., democratizing productive opportunity – while being grounded in intimate knowledge of what finance is: the actual forms that we live with, as well the forms we have lived with – for Tammy was also well versed in financial and economic history. And this is why Tammy broke into that one part ironic, one part conspiratorial, and one-part sheer mirthful grin that so many of us cherished when first I told her the title of my then-brand-new seminar.

As a personality, Tammy was in a certain familiar sense “larger than life.” The impressions she left were indelible, and only a small part were what one would call “academic” or even “intellectual” in character. She was brilliant, lively, and formidable, to be sure, yet all while somehow simultaneously being profoundly nurturing, caring, and affectionate. Within weeks of first meeting her I felt as if I had been given the “big sister” I’d often wished I could learn from and lean on. She already knew all the truths of finance you were “discovering,” and always both egged you on and awaited you patiently as you strove to catch up. And all the while, she inquired with motherly strictness whether you were eating, sleeping, and indeed even living enough.

None of these attributes, alas, seem to be capturable or retainable by anything but the memories and devotions of the many who loved her. There is some consolation, however, in the fact that Tammy left behind her a great corpus of written work. There were essays and articles circulating in various renditions at the time of her death. Some of these inspired what since has emerged as a veritable “school of thought” where the study of law and finance is concerned. There were also two uncompleted book manuscripts. Some of us who were Tammy’s close friends and interlocutors have accordingly been assisting her spouse, Roberto Mangabeira Unger, in bringing those works to completion and publication.

The first of Tammy’s books, Law and the Wealth of Nations: Finance, Prosperity, and Democracy, is now at last published and available. Several weeks back, Harvard Law School marked the occasion with a book celebration at which several of Tammy’s close friends and colleagues – Mark Barenberg, Chris Desan, Duncan Kennedy, Sanjay Reddy, and I – spoke of both Tammy and her work. Happily this event was recorded. All who would like to learn more about what finance is or, as importantly, what it can be will find nourishment both in Tammy’s written work and, a bit more obliquely perhaps, in this recording. She is not to be missed or forgotten; she’s to be sought out and learned from, via all the available media.

Robert Hockett is Edward Cornell Professor of Law at Cornell Law School.