The last three years have accumulated a mountain of writing, thinking and generally intellectual effort on the role of banks in society. The focus, perhaps ultimately fruitless and without avail (judging by this), is on how the role of banks goes beyond individual capitalistic actors in a marketplace. Banks serve as indispensable intermediaries in the capital markets, transferring savings to entrepreneurs (to super-simplify it). And therefore the failure of a bank – as a commercial matter – is more than just the ordinary creative destruction of capitalism. It represents a systemic breakdown, especially if the bank is “big”.
I appreciate this focus and there is no need for me to draw further attention to it.
What I would like to call attention to is the bank’s role in the legal system and the framework of property rights. My basic premise is that when the going gets tough, banks carry out in practice what we all assume to underpin the system and make it work (including capitalism here): property rights, bankruptcy, limited liability of corporations, and probably more.
But once the authorities have taken the position that the banks are TBTF, must be bailed out at any cost, the prevailing doctrine becomes, by default, that their “health” trumps all other considerations. Including the integrity of the legal system.
– The litany of bailouts is well-detailed in Washington’s Blog here. With this much being done, how could anyone think anything else is important?
– The view that our system of property rights causes pesky lawyers to use “technical” maneuvers to undermine the banks chosen process of clearing the housing market is well received in the center of power. See here – naked capitalism follows this very closely and effectively.
– There are people exploring the ways in which the banks and the securitization industry played fast and loose with property rights to build a fee-producing machine that foisted the risk, often without proper risk disclosure or just fraudulent disclosure, on investors. But litigating the flaws in the packaging and transfer of these mortgages and the attendant foreclosure rights is presented by many as mere technical obstruction. Some, instead, view the securitization process potentially as having a systemic legal flaw that may cause the relevant securities not to be “mortgage-backed.”
Obviously there’s much more, but let’s post.
falconsgyre 