No Freedom without Regulation: The Hidden Lesson of the Subprime Crisis - Hardcover

Singer, Joseph William

Hardcover

ISBN 10: 0300211678 ISBN 13: 9780300211672

Publisher: Yale University Press, 2015

Synopsis

A tour de force that corrects a misconception long embraced by both the left and the right about markets and regulation

Almost everyone who follows politics or economics agrees on one thing: more regulation means less freedom. Joseph William Singer, one of the world’s most respected experts on property law, explains why this understanding of regulation is simply wrong. While analysts as ideologically divided as Alan Greenspan and Joseph Stiglitz have framed regulatory questions as a matter of governments versus markets, Singer reminds us of what we’ve willfully forgotten: government is not inherently opposed to free markets or private property, but is, in fact, necessary to their very existence. Singer uses the recent subprime crisis to demonstrate: 

• Regulation’s essential importance for freedom and democracy
• Why consumer protection laws are a basic pillar of economic freedom
• How private property rests on a regulatory infrastructure
• Why liberals and conservatives actually agree on these relationships far more than they disagree

 This concise volume is essential reading for policy makers, philosophers, political theorists, economists, and financial professionals on both sides of the aisle.

About this title

About the Author

Joseph William Singer is Bussey Professor of Law at Harvard Law School. He lives in Cambridge, MA.

Excerpt. © Reprinted by permission. All rights reserved.

No Freedom Without Regulation

The Hidden Lesson of the Subprime Crisis

By Joseph William Singer

Yale UNIVERSITY PRESS

Copyright © 2015 Joseph William Singer
All rights reserved.

ISBN: 978-0-300-21167-2

Contents

1. The Subprime Challenge, 1, 
2. Why a Free and Democratic Society Needs Law, 26, 
3. Why Consumer Protection Promotes the Free Market, 58, 
4. Why Private Property Needs a Legal Infrastructure, 95, 
5. Why Conservatives Like Regulation and Liberals Like Markets, 157, 
6. Democratic Liberty, 177, 
Notes, 183, 
Acknowledgments, 205, 
Index, 209, 

CHAPTER 1

The Subprime Challenge

All that makes existence valuable to anyone depends on the enforcement of restraints upon the actions of other people.

JOHN STUART MILL

Sherlock Holmes and Dr. Watson go on a camping trip. They set up their tent, have a modest repast, and go to sleep. In the middle of the night, Holmes wakes Watson up and asks him, "What do you see?" Watson looks up and sees the night sky and tells Holmes so. "What does it mean?" Holmes asks. Pondering this deep question, Watson answers, "It means the universe is vast and mysterious and our knowledge limited. It means that we only understand what we can observe and that —" Holmes interrupts him. "No, you idiot," he says. "It means someone has stolen our tent."

Things That We Have Taken for Granted

Sometimes it is important to state the obvious, to confront truths so fundamental we have forgotten to see them. The subprime crisis has forced us to remember things that we have taken for granted. Here is the most important lesson from the subprime crisis: neither private property nor the free market can exist without law. Another word for "law" is "regulation." That means that neither private property nor the free market can exist without regulation. Markets are defined by a legal framework that sets minimum standards for social and economic relationships. Private property is possible because law allocates property and defines the rights of owners; property law also ensures that property rights are not exercised in ways that harm the property or personal rights of others or that undermine the fabric of social life or economic prosperity.

These things are true but they are not well understood. Consider this puzzle. The subprime crisis happened because of inadequate regulation of financial transactions. Yet the main political movement that emerged from the crisis was the Tea Party — a group hell-bent on reducing the size of government. Why did a crisis brought on by inadequate regulation result in a political movement that abhors government? The answer is that Americans are trapped by an ideology that sees government as the enemy of freedom, and regulation as an interference with both the free market and private property. Both conservatives and liberals conceptualize regulation as a limitation of market freedoms and as an infringement on the rights of owners. But this idea, pervasive though it may be, is incoherent and pernicious. The truth is that we would have neither markets nor private property nor freedom without law. And "regulation" is simply another word for "the rule of law."

The Tea Party revolt of 2013 shut down the federal government and nearly caused the United States to default on its debt payments. The shutdown began as an attempt to overturn the Affordable Care Act (or "Obamacare"), but the underlying message was one of general contempt for "government." The rhetoric was overheated and intense; according to Senator Ted Cruz, we were facing a grand battle between those who hate government and love freedom on the one hand and those who love government and hate freedom on the other. Obamacare, he said, was an example of "force and coercion from government" and he was against it because "I value my freedom." He explained that "the free market works and government regulation does not." Senator Cruz did not argue for the abolition of government. Yet his rhetoric suggested that any regulation by government is inherently bad both because it interferes with freedom and because it imposes costs on the private sector that impede job creation and prosperity.

Libertarians like Senator Cruz strike a chord with many Americans because we do value liberty and no one likes being told what to do. And "regulations" do seem to interfere with our freedom to act as we please. But libertarians are not anarchists; they do not want the complete abolition of government. What they oppose is regulation. What do they mean by this? Libertarians of a philosophic bent argue that law should be limited to preventing force and fraud, enforcing contracts, and protecting the rights of property owners. The problem is that it is not easy to define what it means to do these things and no more.

The subprime crisis teaches us this lesson. Were subprime mortgages freely negotiated contracts or were they procured by fraud and deception? How should we interpret what their terms actually were? Did those agreements constitute an exercise of property rights or a deprivation of them? Or both? The subprime crisis reminds us that, even if we adopt a libertarian value framework and seek to minimize government regulation of both markets and property, we would still need a great deal of "regulation" to do the work a supposedly minimal state requires. Allocating and defining the rights of owners is not a simple task, nor is determining when a contract has been formed and what its terms are.

Regulation turns out to be essential both to markets and to property. This is true whether one is a libertarian or a liberal. The question is not whether to rely on the free market or on government regulation; that is a false choice. The question is, what legal framework for property and markets best enables us to exercise our liberties in a manner consistent with the values of a free and democratic society that treats each person with equal concern and respect and works to promote our legitimate interests?

It is hard to remember these basic truths because most Americans are stuck in a paradigm that treats markets and regulations as mortal enemies. Alan Greenspan, for example, had long argued that markets work well without regulation and that regulations designed to fix market imperfections inevitably fail. In the midst of the subprime debacle, when Greenspan testified before Congress on October 23, 2008, Representative Henry Waxman noted that this was the reason Greenspan had refused to act to "prevent irresponsible lending practices that led to the subprime crisis" even though Greenspan had had the authority to do so. Greenspan admitted that there was a "flaw" in the model that he had long used to define "how the world works," and that he now understood that free markets have limitations and that regulations might be needed to prevent catastrophic market failures.

Libertarians like Greenspan are not the only ones who contrast markets and regulations. Even a liberal economist like Joseph Stiglitz frames the issue this way. In writing about the subprime crisis, for example, Stiglitz wrote that "markets do not work well on their own," that "[g]overnment needs to play a role ... in regulating markets," and that "[e]conomies need a balance between the role of markets and the role of government."

Framing the issue as the correct balance between "the free market" and "government regulation" distorts our understanding of both concepts. For one thing, this way of framing the issue wrongly suggests that markets can exist without a legal framework. For another thing, it wrongly suggests that all regulations interfere with both liberty and property rights. But Greenspan's pre-subprime worldview was flawed not because markets can be imperfect and not because government regulations sometimes succeed in ameliorating those imperfections. It was flawed because neither markets nor private property can exist at all without regulation.

The freedoms markets enable to flourish exist because regulations make markets possible. Similarly, private property exists because law structures and protects the rights of owners. The free market is not anarchy; it is a regulatory structure that requires detailed laws to set the rules of the game. And property owners are not warlords; they do not have despotic power over those who enter their property. The law protects and limits the rights of owners to ensure that property rights are compatible with individual freedoms, including market freedom.

The foreign minister of Czechoslovakia, Jiri Dienstbier, commented in 1990, "[i]t was easier to make a revolution than to write 600 to 800 laws to create a market economy." If anything, this is a vast understatement. Both markets and property are enabled by law; without law, they do not exist. And creating a viable legal structure for both is a complicated business. Rules are needed not only to establish general principles; the legal system must develop ways to deal with hard cases, and those are far more numerous than non-lawyers may imagine. The specifics matter; when it comes to the law governing the market economy, God is indeed in the details.

The notion that markets and regulations are antithetical is a deeply incoherent idea. Similarly, the idea that regulations necessarily impair the rights of owners cannot withstand scrutiny. Indeed, it is impossible to protect owners without regulations that stop others from interfering with those owners' rights, and that requires laws that define what the rights of owners are — a much harder thing to do than we may assume.

The idea that markets and regulation are opposites is a remarkably tenacious one, despite many pieces of evidence to the contrary. The Great Depression convinced nearly everyone that government regulation was necessary to enable markets to work, not just well, but at all. When the subprime crisis hit, it was apparent that the rules of the game governing the market needed to be fixed. It was also obvious that property rights are vulnerable if they are not protected by appropriate regulations.

Nevertheless, we continually hear claims that the government should not interfere with market mechanisms. Like Senator Cruz, presidential candidate Mitt Romney argued in 2011 that "[t]he right course is to let markets work ... We need to get government out of the way." The idea that "regulation" interferes with "the free market" is like a phoenix that cannot die. It keeps getting reborn. Why is that?

Freedom and Law

The answer has to do with the way Americans conceptualize what it means to be free. Regulatory laws often prevent us from doing things we might want to do; they interfere with our freedom to act as we please. Conservatives and liberals alike believe that we each have the right to "pursue happiness." This means that (within limits) we should be free to choose how to live our lives. Markets are one way we promote and exercise this kind of freedom. But freedom of action without limits is not liberty. Regulations may seem to deny us freedom, but regulation is just another word for "the rule of law." Conservatives revere freedom, and one of their champions is John Locke. But it was Locke who taught us that "where there is no Law, there is no Freedom." What does it mean to say that law promotes freedom? It means that markets are not a war zone. Rather, they are defined by laws that establish rules of the game. Conservatives cannot be against regulation and for markets because markets do not exist without law.

Market enthusiasts sometimes forget the benefits of law. In their enthusiasm for liberty, they take law for granted. Conservatives use the word "regulation" to mean "bad laws." They are indeed right that some laws are either counterproductive or downright harmful. But that means we need to identify which laws are bad. When that is the case, then the question is not whether to regulate markets at all, but how to figure out which laws are needed to support legitimate market structures. When we treat markets and regulations as opposites, it is hard to see the ways in which appropriate regulations enable markets to work. If we understood this relationship, it might be easier to find more common ground between liberals and conservatives.

Our current polarized political rhetoric makes it hard for us to see that liberals and conservatives agree upon a lot more than we may think they do. If we remember that conservatives value law, we will see that conservatives believe in regulation as much as liberals do. Conversely, if we remember that liberals value free choice as much as conservatives do, we will see that liberals believe in markets as much as conservatives do. Both liberals and conservatives believe in free markets and private property, and both agree that freedom of action must be constrained by law. The deeper truth is that laws designed to allow us to live together in harmony do not take away our liberty; they are what make us free. Regulations needed to define market structures and property rights are not intrusions on private liberties; they are the rules of the game that enable both to exist and to work both well and fairly, and they are therefore protectors of our freedom.

Liberty, it turns out, is a complex concept. It embraces the notion of freedom of action, but it also is shaped by the values of security and equality. We are not free to live our own lives on our own terms unless we are secure from being harmed by others. I am not free to walk the streets if I am afraid of being assaulted or killed. That means that our individual freedom of action must be limited by laws protecting our security and ensuring our safety from harmful actions of others. Liberty is promoted both by laws allowing freedom of action and by laws limiting free actions to promote security. And because we live in a free and democratic society premised on the belief that all human beings are created equal, we cannot deny others the ability to exercise the same freedoms we demand for ourselves. That means we must curtail our actions to the extent necessary to enable others to exercise equal freedoms.

Just as liberals value freedom of action, conservatives value both security and equality. Liberty entails the right to self-determination and to be free from domination by others. Democracies are premised on the commitment to treat each human being with equal concern and respect. Equality is not only a liberal value. Conservatives fiercely champion the right of each person to enjoy liberty. That means that liberty is not just an individual concept but a social and political one. If we demand freedom and security for ourselves, we cannot deny it to others if we believe that each person is entitled to equal concern and respect. Because a free and democratic society guarantees freedom for each person, it limits the ability of individuals to act in ways that deny others equal liberty and security.

Liberty therefore requires laws that limit our freedom of action; such laws ensure that each person has an equal opportunity to pursue happiness. To shape such laws, we must attend to the ways in which the exercise of liberty by one person may infringe on the rights and liberties of others. Laws establish background rules to enable the liberty of each to be compatible with the liberty of all. Laws may limit our natural freedom to act at will but they promote political liberty — the freedom to pursue happiness in a manner that enables others to do likewise.

The fact that law promotes freedom does not mean that all laws are good; some laws indeed take away our "freedom" as we conceive it. Nor does it mean that liberals and conservatives agree on which laws are necessary to promote liberty. What it does mean is that promoting liberty requires a strategy other than "getting rid of government regulation." Freedom requires appropriate regulations that promote the way of life that allows us to enjoy our core liberties. The rule of law is not an excuse for oppressive or counterproductive rules; it is a recipe for reasonable regulations that protect our legitimate interests and basic values. Such regulations do not deny freedom; they promote it. Regulation (if it is both sensible and appropriate) supports, rather than undermines, the liberties cherished by conservatives and liberals alike.

(Continues...)

Excerpted from No Freedom Without Regulation by Joseph William Singer. Copyright © 2015 Joseph William Singer. Excerpted by permission of Yale UNIVERSITY PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Yale University Press
• Publication date: 2015
• Language: English
• ISBN 10: 0300211678
• ISBN 13: 9780300211672
• Binding: Hardcover
• Edition number: 1
• Number of pages: 224