Beyond Macroprudential Regulation: Three ways of Thinking about Financial Crisis, Regulation and Reform

This paper considers the debate about the ‘macroprudential regulation’ of finance in the context of a broader view of the relation of finance to the real economy. Five ideas are central to the argument. The first idea is that the two dominant families of ideas about finance and its regulation share a failure of institutional imagination. Neoclassical economists blame localized market and regulatory failures for the troubles of finance. Keynesians invoke the way in which the money economy may amplify cycles of despondency and euphoria. Neither current of thought recognizes that the institutions of finance in particular, and of the market economy in general, can take different forms, with different consequences for the organization of production and exchange as well as for distribution. The second idea is that, under present arrangements, finance readily becomes the master rather than the servant of the real economy and lays itself open to recurrent booms and busts. The third idea is that present arrangements can be reformed in ways that more effectively put finance at the service of the productive agenda of society. The fourth idea is that the regulation of finance, including what we now call macroprudential regulation, can and should be designed as initial moves in such an institutional reshaping. The fifth idea is that neoclassical and Keynesian conceptions are inadequate guides to the execution of this task. We can find in law and legal thought many of the intellectual and practical tools that we need.

Macroprudential regulation should be seen as the first step in the institutional reshaping of the financial system. The central principle of macroprudential regulation should be to hold finance to its central task of serving the productive agenda of society.
Regulatory reform, operating at both the national and the supranational level, should incorporate the following elements: (1) repudiation of regulatory dualism; (2) heightened scrutiny of certain classes of financial transactions lacking in any plausible relation to the expansion of GDP and the enhancement of productivity; and (3) a series of international and multilateral rules giving pride of place to all forms of investment in the real economy, and providing restrictive treatment for short term portfolio capital.
Comparative law and legal analysis, viewed as the study of actual and potential institutional set ups for different areas of social practice, including the area of finance, has a crucial role to play in expanding our understanding and imagination of alternative institutional strategies of reform.