Whoa! This statement is really insulting to the large cadre of legal scholars (including many Slipsters) who have been focusing their energies on financial regulation and the crisis for far longer than Judge Posner, whose arrival to the debate is welcome, if recent.
Whatever one thinks of the quality of the work of law professors on financial regulation and the crisis, its existence cannot be denied, as Kenneth Anderson notes on Volokh Conspiracy. Off the top of my head, I can count at least three dozen law professors who are active in this area, and can think of at least half-dozen symposia that have already occurred and a few crisis-themed law review volumes. We have been writing articles and policy papers, speaking at legal and non-legal conferences, testifying for years on Capitol Hill, drafting legislation (if only the good judge knew just how many pieces of legislation had drafting input from authors of this blog alone...), and actively serving in government: Daniel Tarullo as Fed governor, Michael Barr as Assistant Treasury Secretary for Financial Institutions, Peter Swire with the NEC, Cass Sunstein at OIRA, and Elizabeth Warren as Congressional Oversight Panel Chair. Posner might not be bothered to read our work, but we exist.
[9.4.09--comments are now open]
I want to be fair to Posner, though. It's possible that I'm too quick to take offense. Maybe I'm misreading what he says and that he bites his thumb, but not at me. So let me walk through some alternative readings of his rant. I don't do this merely as a pedantic exercise. Rather, I think it raises some interesting questions about the relationship of law to macroeconomics and different narratives of the crisis.
(1) Maybe Posner is criticizing the legal professoriate for either failing to develop a comprehensive explanation of the crisis and/or not putting it in book form. It is true that law professors have not yet developed a comprehensive (and book-length) explanation of the crisis. But the three exceptions Posner cites (Lucien Bebchuk, Ed Morrison, and Steven Schwarcz) haven't written book length pieces, and only Schwarcz has approached what could be called a comprehensive explanation.
(2) Alternatively, maybe Posner's real beef is his claim that law professors don't do macro and don't make practical proposals about the crisis:
"training and research of academic lawyers have not been oriented toward macroeconomic issues or even issues of financial structure. There are many able professors of bankruptcy law, secured transactions law, and the legal regulation of securities (including futures contracts and other derivatives), but very few who study financial intermediation as a whole, and almost none who combine a deep knowledge of the financial system with an understanding of the economics of the business cycle, important as the financial system is to the cycle, as we now know."
It's true that as a whole, law professors don't focus on macroeconomic issues. But Posner's trio of exceptions don't all focus or even touch on macroeconomic or macroprudential issues.
But does Posner really believe that the value-added of legal scholarship would ever be in the macro area? Legal scholars (Posner included) are unlikely to say something that dedicated macroeconomists haven't said before. At best, if we freelance in the area, we can produce a clearly written, popularized, but not especially original version of what macroeconomists have been saying for a while.
It's also true that few legal scholars (and not all of Posner's trio) look at financial intermediation as a whole (securities reg is separate from banking reg is separate from corporate finance is separate from secured credit is separate from consumer finance is separate from housing finance). There's an epistemological limit in large part because the material is simply too voluminous to master. Just the US Code (much less the regulations) for Titles 11, 12, 15, and 26 would fill a couple library carts. Also, it's not as if economists have a great mastery of this area; almost no one--economist or attorney--understands the intricacies of bank capital regulation, for example.
(3) Perhaps the Posner's true complaint is that law professors aren't making practical contributions to addressing the crisis. As Posner writes: "To these limitations of knowledge must be added a career structure in academic law today that is inimical to research oriented to practical solutions to current problems."
This complaint show that Posner simply hasn't bothered to read the legal literature. It's filled with practical (and impractical) solutions: e.g., create a Consumer Financial Protection Agency, allow bankruptcy cramdown, strengthen assignee liability in securitization, impose usury caps, incentivize mortgage servicers to do mods, require ownership of the reference asset for CDS, limit financial institutions' ability to switch charters and regulators, change credit rating agency compensation, get rid of rating agencies altogether, etc.
(4) There are specific urgent questions that the legal literature hasn't addressed. Posner gives six examples of legal topics to which he claims law professors should be answering, but haven't. He's correct that the some of the topics--the Fed's legal authority to act in the crisis or appeal to the impossibility defense to contracts--are things that law professors haven't covered. Coverage of the Fed is a major gap in financial institution regulation courses, but, in fairness, for decades there wasn't a lot of action on that front to warrant coverage. The impossibility defense due to economic crises is old hat: its parameters are pretty well established by classic cases like Eastern Airlines v. Gulf Oil (Arab Oil embargo), Transatlantic Financing Corp. v. US (Suez war of '56), and Paradine v. Jane (English Civil War). Maybe there's something fresh to say about it, but it hardly strikes me as an urgent issue for legal scholars to address.
For the other four topics, I'd say Credit Slips alone has it covered pretty darn well (in blog posts and articles), and other law professors have done yeoman work already:
2. Whether a bankruptcy judge should be permitted to cram down the mortgage on a primary residence (that is, reduce the mortgage to the current market value of the mortgage property)?
[See Lawless; Levitin; Porter; Scarberry; Zwyicki, e.g.]
3. In a bankruptcy, should government bailout loans be given priority over claims of secured creditors?
[See Lubben; Skell & Roe, e.g.]
4. Is there any constitutional limitation on the federal government's abrogating a private contract, for example a contractual obligation to pay bonuses to employee of AIG?
[See Dana; Gelpern & Levitin e.g.]
6. Should bankruptcy law be amended, with respect to the bankruptcy of financial institutions, to bring it closer to the "resolution" procedure by which the Federal Deposit Insurance Corporation winds up the affairs of banks that go broke. Were that done, would resolution still be a superior method of dealing with bankrupt financial institutions (not limited to banks)?
[See Ayotte & Skeel; Gelpern; Wilmarth, e.g.]
Again, it just seems that Posner hasn't bothered to read the literature.
So what is driving Posner then? I think his criticism of the legal scholarship--that we don't do macro in particular--is actually an indictment of Posner's style of scholarship and how it shapes his view of the crisis.Posner conceives of the crisis as a top-down macro-driven crisis that starts with monetary policy. The Fed drops rates too low for too long, and a story of easy money looking for trouble ensues. It's not a story that's original to Posner, and it's a story with limitations, but it's a reasonable narrative of the crisis. Critically, it fails to answer why the crisis manifested itself in the housing market and (with a couple exceptions--UK/Ireland/Spain) only in the United States. In other words, there's something peculiar about those housing markets that needs to be addressed, and Posner's top-down story doesn't do this.
A competing view of the crisis is that it was a bottom-up crisis. To paraphrase a blog post by our own John Pottow, the crisis was created due to an accretion of systemic risk on a consumer-by-consumer basis because of overleverage driven largely by mortgages, but also because of stagnant incomes, rising costs of living (medical, education, housing), and a turn to financial products (credit cards, debit overdraft, payday, etc.) to finance daily expenses (as well as some extravagances). There were lots of microstructures involved in this accretion of risk, some of which were driven by macro phenomenon and others by financial product innovation, but if you view the crisis as bottom-up, then there isn't a lot of reason to go deep into macro like Posner wants. Instead, we have a large and growing body of articles that closely examine the microstructres of the crisis, much like the well-established economics discipline of the microfoundations of macro. Not all of them see themselves as parts of a to-be-written bottom-up narrative, but these studies are the building blocks for such a meisterwerk when it appears.
I'm not sure whether Posner has given much thought to the competing possible narratives of the crisis (and of course, bottom-up and top-down are not exclusive of each other). He might simply reject the bottom-up approach; his view of the Consumer Financial Protection Agency proposal suggests that he doesn't think there is a serious problem in consumer finance. Given that he doesn't seem familiar with the literature beyond some of the behavioral economics work, however, it's hard to conclude that his view of the crisis is the result of a deeply considered analysis of the possible interpretations. Rather, I think it's likely a function of his style of scholarship.
A robust bottom-up interpretation of the crisis would require a great deal of learning about the messy details of consumer finance and financial institution regulation; there's a lot to learn to get up to speed. A bottom-up narrative just isn't conducive to a style of scholarship that swings big on lots of topics with a book every year or so, and the top-down approach would likely appeal to his sensibilities. All of which is a long way of saying that Posner's criticism that law professors don't due macro is really more a complaint that legal scholarship isn't in line with his view of the crisis.
So what are we to make then of Posner's Complaint? To borrow from the title of his latest book, it's simply "A Failure of Research."