Intermediary Influence in Action: Focusing on the Core

Is “intermediary influence” all that unique? Can it be isolated? And how much harm really results? These are among the questions Professor Lawrence Cunningham poses in his thoughtful essay and recent post responding to my work on how intermediaries alter institutional arrangements in self-serving and socially costly ways. In the essay, Professor Cunningham also examines the acquisition market to provide additional evidence of intermediary influence while simultaneously introducing the question of how competition limits intermediary influence and the welfare losses that emanate from it.

Professor Cunningham concludes that “far from constituting criticism of Judge’s work, [the] questions [he raises] warrant … Read more


Was Bernanke Courageous?

As reflected in the title of the new memoir by Former Federal Reserve Chairman Ben Bernanke, The Courage to Act: A Memoir of a Crisis and Its Aftermath, Bernanke clearly believes that he and other Fed policymakers demonstrated exceptional courage in their handling of the 2007-2009 financial crisis.[1] In a new paper forthcoming in Columbia Law Review and available here, I suggest otherwise. I agree with Bernanke that if one narrows the lens to the Fed’s actions after Lehman Brothers failed in September 2008, the Fed and other financial regulators often displayed great courage and creativity and … Read more


A Different Take on the AIG Case: The Dangers of Invoking 19th Century Principles to solve 21st Century Problems

Bagehot, as in Walter Bagehot, was mentioned no less than seven times in the decision splitting the baby in the AIG trial.[1]   A nineteenth century British commentator, Bagehot was among the first to recognize that too little liquidity could wreak havoc on a financial system. [2]  In a series of admonitions, known today as Bagehot’s dictum, he admonished central banks to lend freely to any solvent institution with good collateral, but at a penalty rate to minimize the attendant moral hazard.[3] In invoking Bagehot, Judge Wheeler was in good company.   Ben Bernanke and other leading policymakers regularly invoked … Read more


Just How Scary is the Fed?

“There is an old saw that the Fed chair is the second most powerful person in government. In the aftermath of the financial crisis, that may actually be an understatement.” Nicholas Lemann, The New Yorker:

America has a long and conflicted relationship with central banking. The controversial actions taken by the Federal Reserve during and since the 2007-2009 financial crisis reignited longstanding concerns about vesting so much authority in the hands of a few unelected officials. The Fed’s creative and aggressive use of its authority likely helped to reduce the size of the financial crisis and the magnitude of … Read more


The Long Arm of Financial Intermediaries

Why haven’t the significant financial and technological innovations of the past thirty years substantially decreased the cost of financial intermediation?  What explains the ever-increasing complexity of financial products and markets?  Why do so many investors hold actively managed mutual funds despite evidence that their costs typically exceed their benefits? How is it that real estate brokers remain able to charge such high fees despite the rise of the Internet and the increasing capacity of buyers and sellers to connect without their services?  These are just a few of the questions that I address in a new article forthcoming in the … Read more


The Crisis: The More We Know, The Less We Understand

With the stock market regularly surpassing record highs, housing prices surging 13.6 percent in 2013 alone, and unemployment down to 6.7 percent, it is easy to forget just how dire the economic outlook appeared just five years ago. It is also tempting to assume that we have figured out what went wrong and have made the changes necessary to address the fragilities the crisis revealed. After all, academics, policymakers, and other commentators have produced seemingly endless articles and books about the crisis. Congress also passed the Dodd-Frank Act, the most sweeping financial reform bill since the 1930s. A closer look … Read more


The Fed’s Competition: The Real Lenders of Last Resort

It is well known that the Fed injected massive amounts of liquidity into the financial system during the 2007-2009 financial crisis.   Far less well known is that the Fed was not the only place banks obtained government-backed liquidity when market sources first ran dry.  Moreover, during the early stages of the Crisis, the Fed was not even the primary source of government-backed liquidity.  As I reveal in a new paper forthcoming in the Cornell Law Review, and available here, instead of going to the Fed’s discount window, banks increased their reliance on two other forms of government-backed liquidity.  … Read more

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Systemic Stability and Fairness: An Analysis of Pistor’s Legal Theory of Finance

In A Legal Theory of Finance, Katharina Pistor introduces a provocative new theory about the relationship between law and finance and the role of law in producing and addressing financial instability.   Pistor shows that law plays a constitutive role in the financial system; yet, because of irreducible uncertainty and uneven liquidity, legal obligations, fully enforced, “would inevitably bring down the financial system.”  Hence, the law-finance paradox.  Collapse is avoided, and predictably so, by the relaxation or suspension of legal obligations, revealing law to be inherently elastic.  Significantly, however, law’s elasticity is not uniform.  “Law tends to be relatively elastic … Read more

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Editor's Tweet: Prof. Kathryn Judge of Columbia Law School Evaluates Prof. Katharina Pistor's Legal Theory of Finance
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Market Discipline: The Next Generation

My forthcoming article, Interbank Discipline, draws attention to the important role that banks play monitoring and disciplining other banks.  To understand the significance of interbank discipline, the Article proposes a new way of thinking about market discipline more generally.  In the first wave, advocates of market discipline viewed it as a basis for deregulation.  Why expend government resources duplicating the efforts of market participants, the rationale went, particularly considering that regulation can discourage market discipline and markets are often more effective than regulators?  The 2007-2009 financial crisis, and numerous scandals preceding it, largely brought an end to such reasoning.  … Read more

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Editor's Tweet: Professor Kathryn Judge of Columbia Law School discusses the next generation of market discipline.