[Music]

I'm Ezra Klein this is the Ezra Concho

[Music]

hey everyone as you'll notice there's a

different voice behind the microphone

today

for those of you who don't know me my

name is Roger and I'm the senior editor

for the other client show

Ezra is out this week for a

well-deserved vacation so he asked me to

step in and host an episode in his place

we've been doing a lot of shows recently

on the current economic situation

but I wanted to make some space at the

beginning of this year for a

conversation that takes a step back and

really tries to understand the deeper

foundations of the economy we have

so as background one of the most basic

rules of Economics is that output is a

product of capital and labor

labor is the one we're often more

familiar with it's people and the work

they do but if you're interested in

wealth creation then capital is really

where the action is

Capital can be a whole range of things a

piece of land a machine or a factory a

share of a company it's the stuff you

need to produce any kind of economic

value and for that reason economists

generally agree that capital is the

foundation of a society's wealth

and that's what brings me to today's

guest

Katarina pistor is a professor of

comparative law and the director of the

center on global legal transformation at

Columbia University

and her most recent book which is called

the code of capital

completely reimagines how we think about

this base layer of our economy

pistor's argument is that Capital

doesn't just exist out in the world for

us to use

it's something that we actively

construct through the tools of law

and so for Pasteur economic value isn't

just captured by markets it's actively

created by the legal system

and that's where things get really

interesting

because it means that our current

economy is built on top of what Pastor

calls a feudal calculus

she shows how the same legal tools

developed hundreds of years ago in

England to protect the rights of

landlords over commoners have been

applied to more and more kinds of assets

over time to the point where they now

undergird our entire economic system in

ways that are often invisible to most of

us even as they shape so much of our

lives

so we begin this conversation where

pistoric begins with land but we end up

covering the Law's role in everything

from corporations to the financial

system to climate change and more

one warning before we begin this

conversation can get a bit heady at

times and that's not an accident

the systems we're talking about here are

often intentionally designed to be

complex and opaque

but stick with it I got a lot out of

this conversation and I think you will

too

[Music]

Katarina pistor welcome to the Ezra

Klein show thank you very much for

having me

so your book begins with a pretty

fundamental redefinition of what

economists refer to as capital

so I think that's the best place to

start what is capital in your view and

how does it differ from the classic

Economist definition yeah so classically

we Define Capital as one of the two

factors of production we have capital

and we have Labor and both combined to

produce some Goods that are then sold on

Market so that's the simple story and

I'm basically stepping back a little bit

and say well how can some actors control

stuff and decide what goes on to the

production process so they must own

something so that's where property

rights come in so you already have

basically illegal precondition a right

to something that has to define capital

now the second question is what

distinguishes capital from other stuff

right there's a lot of stuff around

there can be land that can be plows that

can be cars that can be machine so what

is capital here is it just any object

out there and I'm basically arguing that

capital is an asset that has certain

types of qualities or attributes and

these attribute allow the holders of

these assets to generate wealth over

time or to protect wealth that they have

already produced in the past

and I offer four attributes of capital

which I then also link to specific types

of legal institutions that help create

Capital assets and the four attributes

are priority which means that if there

are competing claims to the same stuff

some have better rights than others and

so the law ranks rights and claims to

certain types of assets so having

priority gives you a head start over

everybody else

the second is durability durability is a

legal technique to protect assets

against too many different claimants you

don't want to have too many creditors

trying to get at your stuff so if you

can use the law to separate some of your

stuff out so that your personal

creditors can't get it or your tax

creditors can't get it then you might

have a better chance at incubating

wealth over time than if you didn't have

that opportunity so priority durability

the third is convertibility and

convertibility is really the way in

which financial assets attain something

like durability it's not just that you

can trade Financial assets or assign

them but that you have an option to

convert them into something safer when

things get a little rough so ideally you

want to have an option to convert your

privately issued privately made assets

into State money in terms of Crisis

because State money is safer and then

you hold on to that and once the crisis

subsides you can again invest in the

future so convertibility allows you in

fact to log in past gains by converting

them into something boring but safe and

then you go back into the more

profitable assets once the crisis is

over and then last but not least that's

really where you know the state really

comes in is universality that's the

fourth attribute which says that all

these legal techniques that we use to

create priority convertibility and

durability all these claims will be

enforced by the State against the world

the key is really that it's not only

that you have a contractual claim with

somebody else in a bilateral

relationship but that you can count on

the state helping you to protect these

rights against anybody who may not have

been at the table when we cut the deal

and may not even know that I have better

title but if I pull out the document

that says I have better title I get my

priority right

so we're going to explore that answer

and more full throughout this

conversation because uh there's so much

sort of complexity built within it

but let's talk through to ground this a

little bit an example of how that

process happens how an ordinary thing is

turned into capital and I want to start

with the most basic which is how does

the law turn a piece of land into

capital

yeah so land and property rights are

very often conflated everybody thinks

that you know when you talk about land

that yes of course somebody owns it but

just go back a little bit in history and

think about all the Open Fields that had

not been allocated to specific owners

that has been true in Europe and many

other parts of the world and of course

also North America right before the

settlers came this was open space many

people used it animals used it and of

course indigenous people used plan but

land is just basically a piece of dirt

you can make use of it but it's just out

there and and plans grow and and animals

use it and you can maybe Harvest some

fruit and produce from it Etc now when

we want to monetize the land then we

need something else we need to allocate

the right to use the land and to exclude

others from that land so that the owner

can reap the benefits from his or her

own investments in the land right so the

enclosure movement in England which

started a already in the 16th century if

not earlier and took about 200 years to

exclude the commoners As a matter of

right from the land I mean many still

were out there and plowing the land and

doing their work but they didn't own the

land anymore it just gave title to the

landlords prior to the enclosure

movement there was no clear titling

system in fact England established a

register for land to really look up the

titles only in the 1920s

but in the 16th and 17th centuries

courts mostly decided in disputes

between landlords and commoners that the

landlords had the better rights that

they had priority so once you allocate

priority somebody can say it's mine it's

not yours I can exclude you I will not

allow you to graze your cattle I will

use this now to grow cash crops for the

cities or I want to Grace actually sheep

so I can take the wool and bring it into

the textile factories and I get the

returns and I will not share them with

you

so turning land into Capital requires a

process of legal titling of recognizing

priority rights to the land and

investing these rights with some agent

and then the state saying and I will

back that right if you now go to onto

the land it's trespassing and you will

be prosecuted

so my initial response to hearing that

is isn't land like inherently valuable I

mean

as you were saying property rights are a

fairly recent invention

but land has been providing food and

shelter and resources for Humanity for

the entirety of our history

and so I think the question is like what

is the law actually add here and I think

it gets to the the word you just used

which is monetization so you can you

talk about how the law enables someone

to monetize plan like when we say they

have these priority rights they have

this ability to use the land to create

economic value like what exactly are we

saying

so many objects have intrinsic value we

might also value them because you know

we have we're bearing our ancestors

there that's also another function of

line so land has a lot of value for many

people but for capitalism the key is

always money making money out of the

asset that you have and so the legal

coding is about ensuring that some can

make money off it and excluding others

from getting their share of that money

right so what the law really does it

allows some as I said to exercise

priority rights over the land and then

the next step of course is well actually

now we can even get more money by for

example either selling the land I can

alienate it now so as long as you have

Commons nobody alienates the land that's

not what you do you just all share the

use of the land and you have to make

sure that you have some rules in place

so that nobody over uses the land but

but these mechanisms existed and still

exist in many communities today but if

you want to really make profit from the

land you have to be able to sell it you

have to be able to mortgage it right so

that's not selling the land outright but

giving somebody else a right to take the

land away from you if you can't pay back

the loan that you got right so a

mortgage allows you to get more cash on

your hands right now and say am I going

to take this and go into Commerce and

make money you know by trading

internationally or domestically or I'm

building a factory with that money and I

offer the land as a as a mortgage you

can't do this unless you have title to

the land and whoever the Creditor that

gives you the money can make sure that

they can put their hands on that land or

on your house if you are unable to pay

your loan

so if you talk to any Economist there

are a host of factors that they argue

are really fundamental to a wealth

creation and distribution

so on the wealth creation side if you

look at an agricultural economy versus

an industrialized economy versus like a

service-based economy those are all very

different for a lot of reasons that have

very little to do with law right it has

more to do with technology with labor

force skills and education and you can

also say that that's true on the sort of

distribution side right Thomas piketti

in his most recent book makes a very

convincing argument that the so-called

you know great compression of wealth in

Western democracies during the 20th

century was a product of the rise of

progressive taxation and the welfare

state so in this broader story of wealth

creation of wealth redistribution

where does this process of coding

Capital fit in how does it relate to

these other factors and what about it is

distinct

the real distinction is between whether

we're talking about redistribution at

the back end or the creation of wealth

at the front end and I'm interested in

the front end I want to show first how

Wild is being created and then also

think about whether the typical policy

advice like taxation is actually an

effective tool to deal with the wealth

creation at the front end so economists

because they believe that ultimately

it's the markets and better skills and

better know-how and better resource

management is what produces well they're

less concerned with a pre-distribution

and I'm basically saying the creation of

wealth itself is already a process by

which some harness the legal system

which is actually not a private good but

a social resource to produce their

private wealth

so what they're creating already has

basically the DNA of a social structure

built into that and I really like to

think about the coding of capital as the

code being something akin to the DNA the

genetic code or akin to a software code

that's really how the stuff is made the

law is the source from which capital is

cut if you understand this then you have

to say Okay at the back end we want to

do some redistribution I'm all for

redistribution also especially given the

amount of inequality we have today but

unless we think about the creation of

wealth and how inequality is being

created through law in my argument we

will never get ahead of the game we

might do some redistribution now as

we've done in the Golden Age of the

1960s 70s when the state actually did

tax and then taxation will be pushed

back again and inequality will come back

and we haven't still figured out how to

really deal with the inequality at the

front end so I'm basically saying let's

just start looking at how well is

created and then we can decide what

policy tools do we want to use to

minimize inequality or at least keep

some check on it and whether

redistribution is the best means to

achieve that

I think that's a really helpful

distinction

so let's talk about what that structure

that DNA actually looks like we've

already spoken a bit about land and

property rights but give me a sense of

the range of legal structures we're

talking about here and how those

structures help create wealth

so I basically call the means by which

we turn simple assets into Capital

assets modules right so I talked already

about the attributes that law confers on

assets but the way it's done we need

some legal institutions we basically

need property rights we need collateral

law mortgages we need some contract law

on top of that we very often also use

the common law trust or corporate law

and to some extent other areas of the

law such as bankruptcy can be used as

well but what is really interesting when

you look at the creation of capital from

starting with land all the way today to

the most complex Financial assets when

you look at the legal DNA it's all the

same stuff so you said before you know

agriculture economies are different from

service economies are different from you

know industrial economies

post-industrial economies Etc yes that's

true that's the outer appearance of

these systems but when you look at the

making of the DNA the structures that

create wealth it's always the same stuff

it's property rights priority that's the

attribute that you confer with it it's

the use of corporate law trust law to

create durability for some assets that

you separate out from others and you

create basically a separate legal vessel

that many people cannot penetrate to say

these assets can incubate over time so

they create wealth right so that's the

durability or you give some an option to

convert their assets into save money

when the sailing gets rough and on the

back end of it the state says whatever

you do however you code Capital with the

legal tool set that you have I will lend

you the coercive powers of the state and

you can you know go to court and enforce

your claims and we can call in the

bailiffs and the police if necessary to

enforce these claims without that

enforcement capacity you wouldn't be

able to have large-scale markets why

should I take any empty promise from a

person I've never met at the other end

of the world working a different time

zone that he or she will actually live

up to the commitments to the promise to

pay in the future I want to have an

enforceable rights otherwise I'm not

trading and so these are the things that

we never make explicit when we talk

about the system that we have is how we

create these commitment devices that

economists like to talk about but they

don't look into the legal structures

that really create them and what I'm

trying to do is to dissect you know I'm

just always thinking like it's an

Institutional autopsy I'm going inside

these assets and looking at the legal

structures and trying to bring them to

the fore for people to understand how

the staff is really made

so I want to talk about one of the

stories that you you mentioned there and

that you trace throughout the book which

is you argue that these same basic

mechanisms that were first used to turn

land into Capital have over time been

applied to more and more kinds of assets

oftentimes increasingly abstract assets

and that that process has really given

us the economy we have today and we're

going to dig into the some of the

specific pieces of that but could you

just walk me through that story at a

high level

yeah so we started off with land because

land actually was the most important

source of wealth in the industrialized

countries until the very end of the 19th

century sometimes even bleeding into the

20th century so it all started with land

but even as land was turned into Capital

assets as property rights were created

and it was mortgaged to raise credit

Etc already other assets were being

turned into capital for example

intellectual property rights right so

with intellectual property rights I

think it should be self-evident that

even the stuff itself the asset itself

actually a creature of the law there is

no intellectual property right unless we

say we recognize a certain invention as

patentable and then you have to patent

it otherwise you can't tell others you

can't use this I was first and I now

have a monopoly for the next 20 years or

so to use this invention so intellectual

property rights have to be created

patterns copyrights trademarks are legal

inventions

Financial assets as well are intangible

they are creatures of the law every

financial asset is an IOU an enforceable

IOU if it shall have value so it's a

contract and then we dress it up with

collateral and we turn what used to be

like a contractual claim for future

payment we treat it as if it was an

asset as if it was a property right and

with these additional attributes we're

creating something that is actually

valuable in monetary terms that you can

sell for a lot of money and you can reap

the profit I'm not really telling a

story that is just a sequential story

first came land and then came this then

came that I think it's sort of there are

a lot of parallels you can go back to

Venice in the 15th century and you have

the first statue that protects patents

so you get get this relatively early on

or Queen Elizabeth you know allocating

Monopoly rights to the inventors or

certain new machines so you get that in

parallel to the enclosure movement of

land but the technique once it was

discovered that this is what you can do

you can take a lot and to give people

priority rights over everybody else you

allow them to separate assets you create

the first trading companies then you

know people mimic this and they use it

for different assets capitalism is all

about expansion finding new resources

and the resources don't have to be in

nature the beauty of the law is actually

you can just make it up and then you can

make a lot more of this and I think we

shouldn't be surprised that you know

Financial capitalism like caps the

centuries-old evolution of capitalism

because you know that's you know you

just make that through contracts through

legal techniques and you have a new

capital assets that you try to Market

there must be a demand for it but

without the attributes there wouldn't be

a demand for it at all and then you have

another source for wealth creation yeah

and this really gets to

Paradox or a contradiction that I think

really exists throughout your work which

is this idea that the law is both this

really this sort of Miracle right it's

allowed us to your point to like through

these legal fictions scale up Society

from the level of you know smaller

tribes these big complex economies but

at the same time

these legal fictions are one you know

when it comes to the enclosure movement

and you know the ethnic cleansing of

Native Americans are built on some

really horrific injustices

and also are responsible for a lot of

the inequality we have today so I just

want to flag it I think that is a

paradox that we're going to come back to

throughout this conversation and I want

to I want to start with you know some

specific examples of this you mentioned

IP law you mentioned Financial assets

and we're going to get into those but I

actually want to begin with corporations

so tell me about limited liability what

is it first of all and what purpose did

it originally serve and maybe you can

even start with the way that that law

creates corporations in the first place

because that's not always intuitive to

people yeah you know just like with land

I said before you can think of land as a

piece of dirt but it becomes a capital

asset only once you add property right

so you for for me you always have to

distinguish between the simple thing the

stuff that we can look at or think about

and then the legal coding and the same

is true with the firm you can just run a

little you know Mom and Pop shop a

little startup with a couple of friends

and you don't even have to go anywhere

and register it you just have your

little you know your little firm the law

might treat you in a certain way if you

do something for profit but that's

another story

if however you want to create a separate

legal entity that owns its own assets

and contracts and its own name and can

sue and be sued in its own name then you

need to be more you can't just invent

this it has to be recognized by the law

which means you have to at least

register it

so when you think of a corporation you

have to think of a couple of things

first you create a separate legal person

we call them legal persons they are

treated very often like natural persons

but they're creatures of the law they

can't exist outside the law there are

you know legal fictions as you call it

but I think it's just not that

fictitious we have lots of cooperations

that dominate our lives so you really

have to take them very seriously but

it's an important fiction to say it's

separate from you it's separate from the

founders it's separate from the owners

it's separate from the management indeed

today corporations typically have an

infinite lifespan they live much longer

than any of us any of their managers any

of their employees any of their

financial investors right that sort of

gives them staying power that's

durability in my classification so

limited liability was a technique that

was invented and of course investors

wanted it the state says actually if you

comply with some Basic Ground rules you

can set up the corporation that is

separate from you and gives you as a

default provision limited liability

which means that if the company goes

Belly Up nobody can get to your personal

assets right so you can say this is risk

diversification it also allows you to

broaden access to Capital because small

households and small Savers would never

put their money into a company if the

creditors of the company could put their

hands on their own personal assets right

that's too risky for them so if you want

to have many people just blindly putting

their money into a corporate sector you

have to give them limited liability and

by doing so you're basically giving the

investors the shareholders a license to

internal externalize the risk because

they can invest in the company no matter

what it does to others but they can't

lose ever more than the money they put

into the company you can lose your money

that you use to buy your share but

nobody can go after your own personal

assets and that sort of changes the game

of course for firms and and Investments

and risk taking in capitalist economies

I think something that really stands out

from that answer is that when these

mechanisms like limited liability are

created and you can say a similar thing

about the corporate form itself

sort of makes sense limited liability as

you're talking about

incentivizes at least in some cases or

maybe at least originally a healthy

level of risk-taking imagine how

daunting it would be to start a business

or be an early investor in one if you

knew that if the business failed you

would lose your house you could lose

your car your retirement savings I mean

it's hard to imagine a lot of people

would want to do that unless you have

this sort of legal tool and so you can

understand why it would actually be

really important to get economies off

the ground

but an argument you make in the book is

that in recent decades especially

limited liability has sort of morphed

into a mechanism through which already

wealthy shareholders can shift their

losses on to other actors

so can you talk to me and maybe we can

talk you can talk through some specific

examples of how limited liability is

often used in that way to sort of shift

losses onto others yeah so I think in

general this is already what this device

is all about right I don't have to face

the losses so somebody else has to what

this means in fact is that if the

company goes belly up there will always

be losers the workers will lose their

job and especially the creditors who

might have also put money into the

company they don't get anything if the

company has no assets Left Right very

often in a corporate bankruptcy

creditors get a couple of cents on the

dollar that they had put into the

company and they can't go back to the

shareholders right it's a redistribution

of risk in a way you're shifting it to

the creditors just by the invention of

limited liability

but then you can also start to become

more adventurous right especially once

most legal systems allowed corporations

to procreate so if a corporation can

create another Corporation so I'm a

parent company I just set a couple of

subsidiaries or daughter companies in

the US it was highly disputed throughout

the 19th century and only towards the

end of the 19th century did states allow

in their corporate laws corporations to

create other corporations once you do

this we say oh this is great I can know

I'm the parent company I raise money on

Capital markets that's that Finance for

me but now I have cash on hand with

which I can capitalize

another entity of limited liability

company I keep 100 of the stock this

company you know has some assets

and then they use the assets to borrow

against by raising again capital on

markets and the beauty is if this

subsidiary goes under well I have a

Legal Shield between me and the

subsidiary because the subsidiary is

another independent legal person and the

creditors of that independent legal

person can't come back and try to get my

ass

the example that I used in the book to

make this visible is Lehman Brothers

the beauty of a bankruptcy and of course

Lehman went under in 2008 the beauty of

a bankruptcy is that all of a sudden we

can log inside right we get all the

documentation from the bankruptcy

receiver all the details that might have

been difficult to assemble while the

company was still in motion we get this

once you have it on the autopsy table in

your dissection room

and if you look at Lehman when it failed

it had hundreds if not thousands of

different legal entities for sure that

could be documented over 200 separate

legal entities

60 of them alone in Delaware where the

parent company was incorporated as well

30 or so in the UK another 34 in the

Cayman Islands some in France Germany

Japan so hundreds of these subsidiaries

and so we have to ask yourself why do

they use that right and it's not because

they have to create separate

subsidiaries in different jurisdictions

they want to otherwise he wouldn't have

16 a single jurisdiction and I think the

logic behind that is that they use the

technique I just described they're

basically saying we can probably raise

more debt Finance as a group if we

separated out between different entities

and play a couple of additional tricks

so one thing they did and that is a

risky exercise but they did it and maybe

also it's one of the reasons why the

company failed they said okay we create

a parent company then we have all these

you know other family members these

children that we create the subsidiaries

they all go out and raise funds for

their specific investment project for

their specific new financial asset or

activity that they want to conduct

meanwhile the shareholders of the parent

companies the ultimate investors at the

top of the entire group

they're getting every penny of profit

that the group generates they're getting

this paid out in either in the form of

dividends or they just engage in

repurchase programs of shares so

companies have done this for a long time

Financial intermediaries even for longer

that they repurchase their own stock

which is a way to give their

shareholders their money back and then

the shareholders can decide whether they

want to re-buy shares in this company or

somewhere else

shareholders at the top they of course

benefit from limited liability they get

all the cash that comes in

they will not be exposed to any losses

if anything fails and now you get a

change in the market conditions in the

housing markets and Global Financial

markets and all of a sudden one

subsidiary starts to get a little wobbly

and another get a little wobbly and

creditors of these subsiders are saying

okay where do I get my money that

subsidy will not pay so let me go to the

parent what are the assets the parent

has well it shares on the subsidiaries

and so you see at the end of the day you

have a house of cards

um you have that which created enormous

amounts of profits for shareholders over

time they took off about Millions if not

billions of dollars but when push came

to Chef when you look to bankruptcy not

all that much was left at the end of the

day but looking at the structure I think

you can also see why not that much had

been left at the end of the day

I find this example to be just

infuriating

to put some numbers to this you point

out in the book that in the time period

from when the housing market began its

downturn in 2006 until its collapsed in

2008. Lehman Brothers paid 631 million

dollars to its shareholders

and that was the low end Wells Fargo

paid 10 million JPMorgan 11 billion

Citigroup close to 16 billion and when

you think about the incentive system at

work here it's just shocking right like

all of this money is being paid out at

the same time that the economy is

beginning to fall apart in a serious way

and so at the same time these Banks most

need to be building up a financial

cushion to absorb potential losses they

are doing the opposite

and I think that's such an important

point for

understanding why 2008 got as bad as it

did

you hear all the time in the context of

that crisis about the banks being quote

unquote too big to fail as if it was

some inevitability

but it seems like one reason they were

so over leveraged in the first place is

because of this bizarre incentive system

you just described

and so I guess my question is when the

financial crisis did hit

what actually happened to that money

and who ended up paying the bill at the

end of the day when many of those Banks

either plummeted or outright collapsed

I mean the money that you just mentioned

was of course paid out to the

shareholders which are investors these

can be Pension funds these can be other

institutional investors and maybe also

some private investors but this is a

whole range of investors they of course

cash the money they probably reinvested

it in into other Ventures

so that money is basically being you

know circulated in in the economy now

the problem is if the entire Market

starts wobbling policy makers face a

stark Choice many economists and you

know some more libertarian politicians

also were saying at the time let the

market just crash they need to learn

their lesson and we'll just you know

have to go through this and the market

will allocate the losses where it falls

that's of course a proposition that

risks tanking the entire Financial

system which is the nervous system of

our entire economy so if the financial

system collapses you won't be able to

pay your employers the next day most

people won't have access to their own

savings easily there might be runs not

only on asset markets as we have seen

there might also be more runs on banks

there were a couple of major run Bank

runs in in the UK and other countries

even if there were not physical Bank

runs in in this country where there were

runs on assets now if you know policy

makers say we'll just you know allow for

self-correction of markets this risk

basically and in major collapse of the

financial system and the economic system

on a scale that we've seen last during

the Great Depression in the United

States or and in other countries like in

my own home country in Germany it was

one of the causes for fascism to rise so

it's also politically risky proposition

to allow the economy to tank and so what

do you do if you don't want to allow to

tank you have to try to stabilize the

economy and so you're throwing money at

the system what money no State money as

I said before State money is safe

because the state stands behind it and

basically promises the future

productivity of the country to say you

know we we stand behind that money we

issue it and we give it we give

liquidity boosts to the core

institutions in the system without which

the system as it currently stands cannot

operate so they tend to rescue the

system at the top at the Apex or the

core of the system because that's where

the real risk is that it might collapse

they're basically throwing money at the

same institutions that created the risks

in the first place that cost the

financial collapse but they almost don't

have a choice one can debate of course

whether they could have saved the

homeowners and then you know indirectly

through them the banks but what they did

they just threw the money at the banks

and that other critical institutions

such such as AIG many people will

remember the AIG bailout that followed

after aluminum Brothers collapsed and in

this way you can you know I think it

becomes visible how Central the state is

for maintaining the kind of financial

system we have today because without

that backstopping function it would have

very likely collapsed

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foreign

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I want to talk about a related example

here which is the way that the same

legal tools that were originally used to

turn land into Capital that we've been

talking about you know creating legal

persons in the form of Corporations how

those same tools have been used more

recently to turn debt itself into

capital

can you sort of walk me through how that

happened

yeah I mean a debt claim is when you

start with a just a simple promise by

the data to the Creditor to make a

payment in the future

so for the Creditor this it could just

be like a relationship of trust I give

you some money you promised me to pay

back and that's it

but for the credit again to make money

with this the promise of the data has to

be tradable

because then they can cash it in now

they can sell it and so they can have

their own liquidity to invest again in

other things and the entire business of

banking is based on the idea that we can

you know give credit and basically

create that for some and make money on

that and so our entire Financial system

is a system that has created legal

devices to

basically this large Financial relations

from the basic interpersonal trust

relation to give them the legal backing

so that lots of people take you know

promises and start doing other things

with them so you on the basis of that

promised money you make your own

Investments right it's a house of cards

if you want but it works as long as most

people believe that most people will

eventually pay back their loans and as

long as that is true the financial

system remains stable once this is no

longer true then it becomes a very risky

proposition

so let's walk through an example here

the mortgage-backed security

you call the the mortgage-backed

security quote the quintessential legal

steroid end quote so first of all what

is a mortgage-backed security at a high

level and how does the law construct

them

so a mortgage started with this before

we securitize it a mortgage is basically

the offering of an additional asset to

back the promise to repay so I buy a

house I don't have enough cash on hand

to pay the price I need a loan the bank

gives me a loan or a broker or organizes

a loan for me

if I offer the house as collateral I

give them a mortgage right so that's the

simple story

now in the past until the 1970s early

1970s in this country and many other

countries as well most banks would

basically lend to local homeowners and

then they would sit on these mortgages

for up to 30 years and hoping that the

homeowner will actually pay month by

month the money that is owed which is

basically the principal plus interest

and if it doesn't pay then we go and

evict and seize the house right that's

the mechanism now the idea was born and

that was actually a political idea that

were you know sort of private law and

Creations prior to that but it was a

decision by Congress to say in the late

1960s why don't we allow

the big mortgage companies Fannie Mae in

particular which was a government

owned companies first later privatized

by government sponsored company why

don't we allow them to start

securitizing mortgages because it allows

us to broaden the Creditor base and it

will bring down the cost of credit and

so more people can buy houses

which is a great idea right so you're

basically saying okay

the private Banks the private Brokers

originate mortgages as before they give

a loan they take a collateral in return

and then they do this over and over and

over again they take an entire package

of loans backed by mortgages and they

sell the whole stuff to Fannie Mae or

Jenny May one of the government

sponsored or government-owned entities

and then they securitize it so they just

pack it up and what do they do is they

throw it behind

the veal of a trust which is basically

creating a separate legal asset pool and

then sell interest in this asset pool to

investors

so now these investors don't own a

specific mortgage

or the loan you know the cash flow that

comes from the loan backed by a mortgage

but they own a cross-section of the

entire pool and in the beginning this is

what it was it was basically a

cross-section of the entire pool in a

particular trust structure that had all

these securitized mortgages in them so

the securitization basically means you

are flipping a claim to Future pay into

a financial asset that you can trade so

you're selling these interests in the

pool to different investors who can also

resell them if they want so they can

always diversify their portfolio re

um configure it as they please and so

many more investors will join the market

that was the original model and I think

it was a very good model now then this

model of course morphed as well because

at some point the government also felt

that maybe the private sector can take

over securitization

so you started having

um collaborative securitization projects

and eventually the private sector took

over but then they also took the system

for a ride they basically said this is

ingenious right you basically you take

promises to Future pay any kind of

receivables you package them up in

behind a trust structure and you can

just you know trust you can just easily

create it doesn't even need a governance

structure just needs a trustee to make

some decisions on behalf of the

beneficiaries which are the investors

and you can thereby always get cheaper

credit because so many more investors

will jump at that because it's just a

portion of the risk that they take and

so they will give you money and you can

just build the entire system

and so you have if you look at the

modules of the code of capital that I

mentioned before you need property

rights you need trust you need corporate

law you need collateral law you need

contract law you have all of that built

up into these systems you know a

mortgage is of course based on property

rights and collateral law for

securitization you need trust because

you separate the mortgages and the loans

of a certain pool of homeowners into one

vehicle and then you sell interest into

that vehicle two or all kinds of

different investors

and then on top of that the legislature

also created both tax incentives and

priority rules and bankruptcy that made

it even more attractive for investors to

go into these kind of securitized loans

rather than into Direct Loans that

didn't have similar benefits so you're

basically creating a legal structure

that makes it apparently less risky to

be in these kind of assets rather than

in anything else the problem is if you

overdo it if everybody just then starts

humming out more and more secure test

mortgages the question is what is the

quality of the houses what is the

quality of the borrowers can they

actually really pay back and as you know

you know many books have been written

about this about the mortgage crisis the

Brokers that originated the loans were

no longer looking at whether people had

actually a job were able to pay their

loans but didn't matter because you just

generate the fees you create these new

structures they're investors who want to

buy it it's all fine

until it's no longer fine because people

realize that actually the cash flow is

not coming and then everybody's starting

to say okay where are my rights what

rights do I have can I actually seize

the house can I get cash flow from this

house to put it back into the structures

and paid to the investors and if

investors feeling actually this is no

longer working they're going to sell

that's exit and if too many accidents

you just drive down the price of these

assets

and so in a way would it be fair to say

that part of what these legal

coding devices like the mortgage-backed

security or at least how it's used today

part of what these devices are doing

it's not necessarily guaranteeing

convertibility it's giving the illusion

of convertibility it's creating sort of

what you can think of as like a

liquidity illusion these legal

structures the mortgage-backed

Securities the the cdos that were built

out of them it seems like what you're

describing is that they promise a level

of stability a level of convertibility

ability to cash out that they can't

ultimately keep that at the end of the

day there's no guarantee you can cash

out but these structures are dressed up

to make it seem like if you can

and because these assets appear way

safer than they are that causes more

money to enter the system than it can

handle and you get a bubble is that a

fair way of describing it yes that's

exactly right I fully agree and so I

think this brings us to one of the the

central arguments of the book which is

you know we can sort of sit here and

rehash the 2008 financial crisis all day

but what I think you're offering here is

actually a much broader theory of

financial crises uh almost legal theory

of financial crises could you just talk

me through sort of your theory of how

and why Financial crises happen

yes and I actually did publish a paper

which is called illegal theory of

Finance which was in response to the

global financial crisis of 2008 because

I had a very strong feeling during the

crisis and afterwards is that nobody

really had a good theory on offer of how

the financial system works why it

crashed um and I don't think anybody can

predict when it will crash but just at

having a coherent explanation for both

how it expands

and why it so frequently crashed so

becomes highly unstable

my feeling was neither modern Finance

Theory nor many sociological accounts

could really give us a fuller picture

and the legal fear of Finance was really

a product of a collaborative research

project with

sociologists and political scientists

and economists and some lawyers as well

and the lessons that I got from this

research project where we looked into

different types of financial markets in

the decade running up to the global

financial crisis and said let's just say

SEC what happened let's look at existing

theories and see what they explain and

when the explanation collapses and then

let's try to learn from that that's how

I basically try to or learned myself in

the end how important the role of law is

and when I look at the financial system

I'm basically saying you know it's

deeply legally structured which others

have said as well it's just maybe a

little bit more fine-tuned in the way

that I say it so you can't have scale

highly scaled Financial system without

the law you can have have local promises

among people who know each other we know

of in the Middle Ages we had trade in

the Mediterranean but it was held

together by a group of ethnically

homogeneous middlemen and the scope of

the financial Market was limited by that

network if you didn't have you know clan

members of these middlemen somewhere in

a port at the edge of the Mediterranean

you wouldn't trade there because you had

to rely on this middlemen now the beauty

of the law when you basically create

authority of the law backed by state

power you can actually create a Global

Financial system as long as you create

the contractual and property rights

devices such that claims will be

enforceable not only in a single court

of law maybe actually in multiple courts

of law but you create this additional

backstopping mechanism so to have

National markets

especially financial markets to have

Global Financial markets you need the

law to scale it

the problem is that once you have

created all these credible commitments

and they're credible because they're in

principle legally enforceable you dress

them up with collateral you say have a

really really good asset and nothing can

happen because it's not only the promise

it's also the asset that backs it

but at the end of the day if everybody

tries to enforce their rights at the

same time

then the system necessarily collapses

because it always creates more promises

that it can keep that's the very idea of

credit I'm saying you get this in the

future once I get my return I'm making a

promise on the future hoping that the

future will turn out better than the

present currently is even if everything

else just stays the same we're trying to

enforce all the rights at the same time

the system must collapse that's the very

source of the system is promises that

are in part empty and when you get

changes in circumstances such as you

know changes in housing markets changes

in the volatility of financial markets

and the stability of financial

intermediaries then everybody will start

looking a little closer and so the law

and finance Paradox basically says you

need law to build financial markets but

the log will also destroy financial

markets because if you actually enforce

all these commitments you will

self-destride the system because there

is not enough there are not enough

assets to back all the promises that you

made now at this point

you have to step out of the legal system

to avoid the crisis and that's basically

you go offline if you want you offer

support to the financial system whereas

there's actually no legal claim there's

no right to have this liquidity at the

discretion of the central bank or the

treasury or other policy institutions to

say we actually put liquidity where no

liquidity was owed into the system to

stabilize the system as such

and now you have the question actually

can we go back to the status quo and can

we go back to the beginning it's

actually law is such a great credible

commitment device because now you know

that actually if you enforce all legal

commitments then we need actually a

backstopping mechanism without it

doesn't work and I think we have reached

the stage in financial Market

development where most sophisticated

players know of course that the system

is inherently volatile and will collapse

if all promises were enforced at the

same time you just go for another ride

you're trying to safeguard your claims a

little bit better than what your

competitors might be able to do in in

the last instance you just have to pray

that the FED will step in if things go

wrong

and that really connects something for

me about your work because

another way of telling the story of

increased Financial Risk taking over the

past few decades is that it was

precipitated not by law but by the fed's

conditioning of markets so in 2008 there

was a belief that the banks were too big

to fail that if everything collapsed the

FED would have to bail them out and

partly as a result it did

but what you're saying is that part of

the reason the system was too big to

fail in the first place that the FED had

to step in and condition markets in this

way was because of the way that law has

constructed a system that is over

leveraged that invites more risk-taking

that is this house of cards that could

easily collapse on itself I'm just

wondering how you if that's correct and

how you think about how those if that's

how you think about how those two

stories interact

yes I think you know there is clearly an

interaction because I think the more the

market understands that the FED will

have to step in the greater the risks

will be that the markets will take but

blaming the fed or any Central Bank for

that

um I think puts the card before the

horse because you have to think about

first how the how the risk in the system

is being built up it's I think again

it's like we talked about earlier about

what is pre-distribution and

redistribution where does this all come

from and I want to First understand the

sources of the instability the inherent

instability of finance and then think

about what is the the role of a Central

Bank in the system and what I would

argue is that we've actually used the

legal tools not only to make

sophisticated banking or make banking

more sophisticated over the last couple

of decades remember that an entire

Shadow banking system was created in

that period which even today

Rivals the regulated banking system so

you know when when credit markets first

demonstrate that they can destabilize

entire Financial system

countries England the United States many

other countries started to regulate

Banks and they thought okay now we

regulate Banks now the system is safe

and of course competitive markets will

try to find Avenues where they can do

the same stuff that Banks do in ways

that they will not face the cost of

Regulation so they engage in Regulatory

and legal Arbitrage and Shadow banking

is that system and the system of

mortgage-backed Securities that I

described early as part of the Shadow

banking system you have to add a couple

of additional elements to it so you have

these assets mortgage-backed Securities

or other securitized assets you have

intermediaries that originate them you

have intermediaries that manage them you

have some investors who buy them like

our Pension funds you have money market

funds that offer liquidity to them in

Good Times so you have an entire Ecology

of no institutions that come out and

they do functionally exactly what banks

do but they were not regulated at s

Banks now as long as you allow this to

morph and I think you know Congress can

be blamed to some extent also the fed

and The Regulators can be blamed to

allow the system to morph and to scale

up

when then a financial crisis appears as

it as it must at some point because

you're making promise this on a future

with the expectation that the future

will always look better than the present

and that is just not going to happen

right so at some point the system will

start to unravel and then the question

is yeah can we allow it to crash if it

is too big the political social economic

cost of allowing it to crash can be

enormous and are unpredictable it's at

this moment that I think it's very hard

to argue that the fed or other central

banks that had the capacity to try to

rescue the system shouldn't have done

that it's the build up of the system the

inability to control the unwillingness

to control the Builder because we're

saying oh that's the market everything

the markets are doing is just fine

um that I think prevents us from trying

to monitor what's going on maybe

intervening earlier before the build is

too big for not intervening I think one

of the possibly frightening

questions that that raises is whether

we're in one of those buildups or one of

those crashes right now a lot of

economists and you know economic

historians have been talking about the

way that we're living through this

moment of particular Financial fragility

we've had a couple of them on the show

people can listen to our episodes of

Adam twos and Mohamed El Aryan

the point that they've been making is

that our financial system has been built

on top of an assumption of low interest

rates of cheap debt financing of

quantitative easing for a while now and

now that that's being taken away

it's going to create breakages in the

system it's going to reveal some of

these cracks in the system as we saw

with the UK guilt markets a few months

ago

so I'm just wondering as someone who has

studied these systems closely do you

think we're in one of those you know

pre-2008 moments right now and are there

any parts of the economy or financial

markets that you're particularly worried

about

I do think that we are in a moment where

things become relatively volatile

dangerous and to some extent

unpredictable I think the one thing that

one could predict is that it's crisis

prone and the reason is I think the

buildup of Leverage in the system which

I think has been sort of controlled with

the banks at least the official story

although recent news reports have

suggested that banks have reached

similar uh leverage levels that they had

last before the 2008 crisis so that's

not a good sign on top of that we've

seen many of the practices for creating

the mortgage-backed Securities markets

for creating Shadow banking we have seen

many of these practices also morphed to

the non-financial sector so we're using

similar techniques to find debt Finance

for large corporations that are in

trouble and you're just building exactly

the same kind of mechanisms that I

described earlier for Lehman Brothers so

that many of the ordinary corporations

in these countries are also levered up

now they might not be as systemically

volatile as Financial intermediers but

it's important to keep this in mind

because they might be affected just as

the car companies had been in 2008 there

might be more more other non-financial

companies that might be affected so I

think building up you know of Leverage

in the in the economy is always a sign

of potential trouble in in the future

especially when you can't locate it very

easily and when many different entities

are involved in the production of credit

might be exposed to the risk that will

unfold and that's basically a question

of time I don't think you can predict

exactly when it's going to happen

necessarily not where exactly it's going

to happen you can pinpoint some of the

most volatile sectors and mostly I think

it will always be in relatively small

entity on the periphery of the system

that is cut off all of a sudden from

refinancing and then then the risk will

spread because more and more will then

look a little closer at what's going to

happen and the system then builds

typically from the periphery to the core

so I think we are in a moment that we

have to watch closely and I think the

central banks right now are in a bind

because on the one hand they're trying

to control inflation and and trying to

raise interest rates on the other hand

by raising interest rates they will have

an impact on a financial system that has

been built around low interest rates as

you suggested is largely unpredictable

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so far we've mainly been discussing the

way these legal coding devices have been

applied to different assets over time

but another Trend you track in the book

is the way that as our economy has

globalized

corporations have increasingly been able

to functionally choose which country's

domestic law that they want to follow

and for me one of the most unsettling

but also revealing examples of what

incentives begin to take shape when this

happens is the Rascals program operating

out of Lehman Brothers

so can you talk about what Rascals was

and the purpose that it served

yes this is one of the you know little

anecdotes that I like to tell because it

gives you I think so much Insight in how

the system really operates and also

maybe the mindset of the people who are

doing it so Rascal stands for regulation

administration of safe custody and local

settlement if you think about this it

doesn't really translate easily into the

acronym Rascal so so let me stick that a

little bit

Lehman Brothers as I said before it's an

American Investment Bank it has hundreds

of subsidiaries one of the most

important subsidiaries was one of the

entities working out of London which did

most of the trading in Securities for

the entire group

at some point the European Union came in

and decided that it had to make

financial markets a little bit more

stable by requiring all intermediaries

not just bank but also investment Banks

like Lehman to hold sufficient Capital

Equity Capital against lending against

basically it's being exposed to

borrowers who might not be able to pay

back in time so that put the Lehman

Brothers business model at risk because

it became more expensive to do their job

because they couldn't now borrow or we

sort of basically raise that Finance on

markets and engines use this for their

trading lending Etc activities but they

always had to keep some back if you wish

that to make sure that there was enough

equity backing of their activities and

so they thought how can we lower the

regulatory costs of these new measures

they can't just wiggle out of this

unless they want to get out of London

which of course they don't want to

because London is the Hub where they

want to be so what did they do they set

up and entity in a jurisdiction that was

not governed by the EU rules Switzerland

no they didn't have to move to Zurich

they could just set up in London in the

same office and run by the same people a

separate legal entity that was governed

by Swiss law

and Switzerland of course has access to

EU markets but it's not regulated by the

same regulatory principles now the key

was to make sure that legally speaking

the exposure the risk exposure that

their EU regulation was trying to get it

would always rest with a Swiss entity

not with a London one because that way

you could basically get around to a

requirement to hold additional Capital

against this exposure

and so they set up this repurchase

program so repos is just a device to say

I sell you something and you sell it

back to me tomorrow at a higher price

right so what they did they set up an

automated system that these repo

transactions would never close so we

opened a lag you get the payment back

immediately you open another lag and you

shift the asset back to the Swiss entity

so that the appearance was created that

non-stop the Swiss entity would have the

exposure not the London entity and so

you wouldn't have to take the capital

charges at the London entity it was an

automated system it had the big irony

was that after a lemonade filed for

bankruptcy and all the other Lehman

entities also filed for bankruptcy

nobody had bothered to switch off the

system so it was still running until

some employee without asking just switch

it off

and then there were 50 million where

there was a legal dispute who gets it

who gets that money is it does it belong

to the London entity to the Swiss entity

and of course now both are in bankruptcy

so that the creditors of these entities

want to call back the money wherever

they can find it so they get anything

back um from the money they put into

these entities and so they've they

fought the receivers in bankruptcy

fought over who should get this money in

the end the London entity won for

reasons I don't find entirely persuasive

but that's what the chancellor in

England decided

this example

is just so maddening

because earlier when we were talking

about these dynamics of financial crises

we were talking about what you would

ideally want is for the state to step in

with some form of Regulation to be able

to prevent these kinds of Dynamics from

building up in the system to the first

place

and in many ways that's what the EU did

or at least tried to do they try to

create these Capital requirements and

instead of following them Lehman was

able to just completely circumvent them

and keep going almost as if normal

and so I guess the question is one how

is this legal

and two if this is legal if this is

something that companies can just do

then what does that imply for the

possibility of regulation in a sort of

globalized world

yeah I think these are a really

important question so so is it legal

well that that's of course the artwork

that lawyers have to provide they have

to make sure it's legal otherwise it

doesn't work right one of the lawyers I

very often invite to co-teach a class

with me sort of a leading partner in the

city and she describes to my students

always that you have to think about the

regulatory regime as the scaffolding and

in order to create a new asset that

works you have to find a gap within the

scaffolding because if you hit one of

the scaffolds it's void you can't

enforce it it doesn't do any good for

you so you have to design something that

is at least formally legal and if it is

challenged sometimes in the future maybe

somebody will say Well it violates the

purpose of the law but that's you know

just down the line we don't even know

whether anybody will ever be challenged

so I think what is important to

understand here is we have we have

actually two legal systems folded into

one we have a system of private law

which is designed to give private

parties a lot of autonomy and

flexibility to design their own legal

arrangements to take a contract and

refashion it to create a cooperation and

do things with it that help them you

know Advance their specific interest

it's a highly malleable system but it is

has the blanket guarantee that if you do

this roughly within the parameters set

by the law and there are few mandatory

rules in private law it's all

dispositive people can do a lot of stuff

with that it will be backed by the state

and then you have the regulatory system

that comes in from time to time it says

actually maybe they've gone a little far

we have to put some stop gaps in here

and again a competitive system people

start thinking about well how can I get

around that because it can be more

competitive if I don't have to basically

face the cost of this new regulation so

they will you know hire lawyers and they

will try to get around it and the more

complex it becomes the more complex the

solution have to be and so this is also

why you know lawyers actually make quite

a bit of money to try to get around

these rules there was an entire team

working on this and the chancellor

himself and presiding over the case we

just discussed was kind of perplexed

that you would have like a top

investment bank and top lawyer as

basically creating something that is a

scam it's not real it's just sort of to

try to get around the regulations I'm

saying this you know as a law professor

these are many of my former students who

are doing this or students I will

produce in the future and which of

course creates also a bit of a dilemma

for me because I'm part of a system that

I'm criticizing let me just be frank

about that but they have the incentive

structures in these firms to do this

um the point I would make is that in a

highly complex system in a system that

is deeply regulated by law especially

Finance is also deeply regulated

much of the competition today is not

about something outside the law it's the

law itself it's basically using the law

to get a head start over others by

reducing regulatory costs by creating

somewhat stronger attributes for Capital

so it's basically playing with the rules

of the game rather than just playing the

game that's what the system has become

to some extent it's unpreventable

because all rules are necessarily

incomplete right they're all somewhat

open-ended subject to interpretation and

if you start there and you carve out a

niche for your own client to make a head

start over others and everybody else

follows you can imagine how how many

different and also interesting sometimes

ingenious sort of devices you can create

but it makes it very hard for a

regulator to regulate because of course

regulation 2 is incomplete

and regulations always partial and if

you can refashion something so that it

looks a little different than what the

regulator you know seem to have

regulated you're getting out you're

wiggling out of the regulatory framework

and then lastly as you suggest

um globalization means that well I just

if necessary to shift my accounts from

London to New York right if New York has

easier rules I'm not going to stay in

London or vice versa right to the extent

that I can pick and choose my rules by

simply re-incorporating elsewhere or

shifting my accounts to a different

jurisdiction the less likely it is for

any state to actually

um regulate effectively because it's

always a partial regulation and there's

always another option

I want to just hold on this point

because I think it's so important and I

want to go back to the actual quote from

the judge who presided over the Rascals

case because I think it's extremely

revealing so the quote from this judge

is quote

it is at least at First Sight

counter-intuitive to think that one of

the largest and most sophisticated

Investment Banking institutions in the

world

staffed by some of the foremost experts

in the business and advised by the most

eminent law firms should have spent more

than a decade solemnly entering into

countless thousands of mutual

transactions which were either

completely unnecessary completely

ineffective or both

the suspension of disbelief called for

by the party's primary cases has not

been easy

now first of all I just think that is

probably one of the best lines

paragraphs in a legal ruling ever

but I also think it's a perfect

encapsulation of what's at stake here

with what you're talking about

because in a capitalist system this kind

of thing isn't supposed to happen

the entire social contract that

underwrites capitalism right going back

to Adam Smith and The Wealth of Nations

is that the pursuit of individual

interest should produce some kind of

social benefit that by trying to make

yourself richer you will ultimately make

everyone else richer

and you know we may have to tolerate

some inequality here and there but

ultimately we'll all be better off

and I think Rascals and sort of this

process you're describing because

Rascals is not the only version of this

this is this kind of regulatory and

legal Arbitrage is happening all the

time

it's completely undermines the social

contract

and even Beyond just Arbitrage I mean

this is sort of something that we can I

think apply to like everything we've

been talking about here right

shareholders using limited liability to

squeeze as much profit out of a company

as they can

Banks creating Financial products that

end up crashing the global economy

earlier you mentioned IP law and we

didn't get to talk about it as much but

there it's companies using patents to

sort of destroy competition over things

like DNA sequences that can hardly be

considered Innovations

and in all of these cases it's these

actors pursuing their own interests at

the expense of everyone else and I think

that just brings us to one of the most

radical implications of your book which

is

it really feels like we've built a legal

structure

in a way that we've seemingly broken or

at least damaged the core mechanism by

which capitalism is supposed to deliver

for society

I'm just wondering how you think about

that because that seems like a pretty

profound change or implication at least

so I agree with your analysis basically

what I always say like you use the

social resource the legal system it

works only because most people actually

believe in the authority of the law it's

also a system that allows you to scale

relations and the more you can you know

use it in ways to create your own

private wealth the more of course also

the interests are in using it exactly

for this purpose and for not any other

purpose for which it has been created I

also agree that actually this has been

turbocharged over time and I think the

regulatory competition amongst countries

you know opening basically your borders

for Capital flows and recognizing the

laws from different jurisdictions has

given those who hold capital and their

lawyers really a menu of option to pick

and choose the law by which they wish to

be governed if everyone could just pick

and choose the rules by which she wishes

to be governed we couldn't have anything

like a social contract there wouldn't be

a social contract we just pick and

choose what we like best and then we

make our money on that and you know

forget what everybody else has or may

not may not have and it's certainly true

that it has become worse I would

actually however argue that it has been

at the very core of capitalism that is

what capitalism is all about

and you know I think Adam Smith when he

talks about the invisible hand in his

famous book he has an entire section

where he explains how the Invisible Hand

Works why is it that Merchants who

Venture abroad will still nonetheless

share something with their fellow

citizens at home because inevitably

Smith's thought that the merchant will

have to come home to repack but also

because at home he knows his

institutions so you always come home

because that's where he knows the

institutions and I would say these are

of course also the legal institutions

and by coming home and sharing some of

the goods and his experience Etc he will

share with his fellow citizens now we

have created through a host of different

rules and regulations and choice of law

rules a global system where nobody has

to come back home you can stay in the

Cayman Island and still actually you

operate here in the US right that's why

you make the money but legally you might

be in the Cayman Islands or legally you

might be in London so you pick and

choose the laws that govern you but

without making a commitment really to

the people with whom you know you share

everything else in around you and of

course legal creatures are a separate

story here as well so I think there is

something that is innate to using the

law and this way in capitalism and I

think there have been periods when

states have been able to cabin the

excesses of capitalism for a while

but when you look closer even after

major catastrophes such as the Great

Depression in the 1930s World War II and

then the attempt after World War II to

create a better global system and to

stabilize domestic systems again through

rules and regulations it didn't take all

that long to unravel the safeguards I

mean it starts already globally in the

50s and 60s to try to get around Capital

controls once the US gets off the gold

standard and and capital controls are

beginning to be removed you know that's

when when things become wild again and

we're seeing sort of the the use of

these mechanisms to create these

competitive examples and then within two