Distribution and the Law of Financial Markets
By Johan Horst
Building on Dimitris excellent post on the panel Redistribution through institutional design I want to highlight some lessons, I think we can learn from the Academy with respect to distributional issues in the law of financial markets. In my view, analyzing the distributional effects of transnational financial markets law is one of the most pressing issues for critical legal scholarship in international economic law. For, these effects are massive, global and yet often overlooked in political discourses on just and fair distribution.
In her discussion on monetary policy of the ECB Brigitte Young highlighted a first important aspect for the study of financial markets law. She noted that the question whether quantitative easing (the purchase of government bonds and other financial instruments by the ECB) falls within the mandate of the ECB has been discussed at length among scholars of European Law (see for good overview Matthias Goldmann, 2017; for an economic perspective see Heiner Flassbeck, 2017). However, the distributional aspects of quantitative easing have been largely overlooked. Here, Brigitte Young points (inter alia with reference to Piketty) to the asset bias of the ECB’s monetary policy: owners of large financial assets have profited from the current type of quantitative easing at the expense of those parts of the population whose main income is generated by wages. Thereby, Young emphasizes that distributional effects are not limited to explicit distributional interventions by the state. Rather regulatory frameworks do always have an inherent distributional dimension in that they set entitlements (Duncan Kennedy 1981) and produce winners and losers.
While the discussion about quantitative easing exemplifies the massive distributional implications of monetary policies Yuefen Li underlined the decisive role of private actors on financial markets such as vulture funds. Yet, the role of private actors and private law in particular has often been overlooked with respect to financial markets. According to a very common understanding of private and public law private law is characterized as distributionally neutral in the sense that private law only facilitates the free interplay of economic forces. Whereas public law is thought of as the law a government may use to correct certain unwanted economic effects. A good example for this view on public and private law is the common notion among law and economics scholars that private law should not be altered to redistribute wealth. Redistribution, they argue, is better accomplished via taxation.
However, drawing inter alia on critical legal scholarship, we can show that private law rules play a decisive role for distributional effects of financial markets. The effects of insolvency safe harbors, such as close-out netting, are a case in point. Those insolvency safe harbors do not create a level playing field for economic exchange on the market. They materially alter the economics of the market by shifting financial risk from the market to other creditors and the public. Thus, a distributive perspective on financial markets law cannot be limited to a public law rationale. Rather it needs to take into account the private law dimension of distribution on financial markets.
Finally, the deep entanglement of law and distribution on financial markets goes back to the legal construction of money itself. Recently Isabel Feichtner argued that money needs to be understood as credit rather than as an exchange commodity (Feichtner 2016). Analyzing the history of money Feichtner further reveals the set of political choices inherent in the legal construction of money. Against this background she demonstrates that notions such as the distinction of fiscal and monetary policy originate in a specific legal design of money. Thus, money (Feichtner), markets (recently inter alia Zumbansen, 2013 at p. 123.) and finance (Pistor, 2013) are always legally constructed. As a consequence, these entities are not neutral with respect to distribution. The specific design of these institutions reflects instead a set of inherent distributional choices and a specific setting of entitlements (Duncan Kennedy 1981).
When we want to study the distributional issues in the legal construction of financial markets, we therefore need to identify the distributional choices and consequences inherent in financial markets law. Doing so, we need to take into account public and private law as well as background rules constructing money, markets, and finance. In this respect we need to repoliticize the distributional choices engrained in these legal infrastructures. For only when elements of the legal infrastructure are exposed as specific distributional choices, they can be scandalized and ultimately altered in democratic and participatory processes.
Johan Horst is a research assistant at the Center for European Law and Politics (Zentrum für Europäische Rechtspolitik) at the University of Bremen, and participated in our Transregional Academy “Redistribution and the Law in an Antagonistic World”.