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US remains a credible debtor in the eyes of its creditors, it will be able to refinance is debt: Katharina Pistor

Project Syndicate: The United States Business Roundtable, which comprises the CEOs of some of America’s largest corporations, recently called for an end to putting shareholders first, in favor of a governance model that accounts for workers, communities, and other stakeholders. If US CEOs are serious about abandoning the shareholder-primacy model, you recently wrote, they should support fairly comprehensive legal reforms. What changes are most urgent, and how likely do you think the US is to implement them?

Katharina Pistor: It is not for the CEOs of corporations to declare whom they wish to serve, because they are agents, not principals. The fact that they have openly done so underscores the weaknesses of the existing corporate governance framework. If shareholders – who are widely regarded as principals – cannot keep their agents in check, who can?

Like shareholder governance, stakeholder governance requires accountability. Giving some stakeholders minority seats on the board will not be enough. Consider the challenge for employee-stakeholders: as long as they can be fired at will, how can they ensure that their interests are protected? And without organizations, such as unions, they will not be able to overcome their collective action problems.

The accountability challenge also arises with regard to environmental issues. It is not enough for individual companies to promise to reduce their emissions, because that will undermine their competitiveness vis-à-vis companies that don’t. Market pressures are likely to drive them to renege on their promises. That is why company-based governance regimes must be complemented by clear – and effectively enforced – regulatory targets.

PS: In 2013, you observed that “commitments never to raise taxes have left the [United States] dependent on debt finance – and, more frightening, on those who are ready to veto refinancing it.” Six years later, another round of tax cuts has pushed the projected budget deficit into record territory. At the same time, relations with China, the largest single foreign holder of US debt, have soured. How serious are America’s financing risks now?

KP: As a lawyer, I would argue that managing debt finance, including the refinancing of past debt, is fundamentally a matter of credibility. As long as the US remains a credible debtor in the eyes of its creditors, it will be able to refinance is debt. That credibility depends not only on the cost of debt finance, but also on the politics around sustaining a large deficit.

The spectacle that US policymakers have repeatedly created as they debate whether or not to raise the debt ceiling does not contribute positively to perceptions of US credibility. To be sure, it would take a major event to reverse this perception, given the longstanding status of US debt as a safe asset. But it is worth noting that it is easier to destroy credibility than it is to build it.

PS: In your book, The Code of Capital, you explain how “capital is created behind closed doors in the offices of private attorneys,” arguing that this is one of the biggest reasons for the widening wealth gap between holders of capital and everyone else. What changes to the “code” would do the most to address rising inequality?

KP: I argue in my book that capital is coded in law. The holders of capital assets enjoy certain legal privileges: priority in cases of competing claims; durability, which allows capital to grow; convertibility, which enables past gains to be locked in; and universality, which ensures that all of the other privileges are retained globally. These privileges are guaranteed by the institutions of private law, including collateral, trust, corporate governance, bankruptcy, contracts, and property rights.

Allowing private parties to use these institutions in a rather flexible manner is part and parcel of a market economy. The problem arises when the private use of law undermines its purpose as a public good. After all, law is the means by which democracies govern themselves.

Yet that is exactly what has been happening in recent decades, as governments lean toward allowing private parties and their lawyers to choose whichever legal system best suits their interests. Curtailing private actors’ ability to opt out of legal systems is vital to ensure that societies retain their capacity for collective self-governance.

PS: While you acknowledge the potential advantages of more diversified monetary systems, which include various privately issued digital currencies, you warn that a digital currency like Libra, which aims to take advantage of Facebook’s 2.7 billion monthly active users, could take down the entire global economy. You want governments to stop the venture altogether. Assuming they don’t, are there steps regulators could take to mitigate the risks?

KP: My concerns about Libra should not be misinterpreted as an aversion to technological progress. On the contrary, new digital technologies offer a lot of benefits. In an ideal world, we would harness them to create a more efficient, resilient, and inclusive payment system. But I do not believe that Libra will accomplish any of this, because of the governance structure its creators have chosen.

If regulators cannot stop Facebook from realizing the current vision of Libra, they should focus on ensuring that the currency does not free ride on the existing safety net for assets (for example, deposit insurance). They must also prevent the amount of Libra in circulation from being expanded unilaterally, with a private actor changing the meaning of “safe assets,” at the expense of the public safety net.
By the Way…

PS: From US judges blocking the Trump administration’s policies toward migrant children to the UK Supreme Court striking down Prime Minister Boris Johnson’s suspension of Parliament, democracy’s least accountable institutions nowadays often seem to be its last line of defense. How sustainable is that, particularly in countries where judicial independence is not so firmly rooted in the political culture?

KP:I am not sure that I would describe the judiciary as one of our least accountable institutions. Judges are independent, but they are accountable to the law and must be impartial. The reasoning for court rulings must be strong enough to withstand scrutiny not only by higher courts, but also by the “court of public opinion,” which includes the media and legal experts.

The greatest threat to upholding the law is the politicization of courts and judges. Clearly, not all countries ensure judicial independence; in the US, for one, it is currently under attack. But it is difficult to think of an effective alternative as an arbiter of power and a guardian against the abuse of that power.

PS: What should law schools be teaching students that they aren’t teaching them – or are teaching them inadequately – now?

KP: I am and have always been an advocate of teaching lawyers about multiple legal systems – not so they can pick and choose the solutions that best serve their clients’ interests, but so they can compare how different societies address similar challenges, and understand what normative choices shape these approaches.

Comparative law is all the more valuable in a globalized world, because lawyers from various legal systems must engage with one another. They might not speak another legal language per se, but they should understand that different legal systems have different grammatical structures.

PS: On Twitter, you encouraged a finance and economics commentator, Frances Coppola, to “[k]eep writing! We need critical independent voices – and in finance every voice in the upper register matters!” Which other “independent voices” – especially “in the upper register” – should we be listening to?

KP: The bass and baritone registers – that is, male voices – dominate finance. But diversity is critical to avoid cognitive silos, as Gillian Tett from the Financial Times has emphasized since the global financial crisis. Fortunately, more women are participating in debates about finance, including Coppola (who “sings a bit,” according to her Twitter page), Tett, Izabella Kaminska, Isabell Schnabel, Daniela Gabor, Mehrsa Baradan, Kate Judge, and many more.

PS: You’re a music lover. What’s on your playlist right now?

KP: There are two playlists: the recorded and the self-made. Last night, my husband and I tested out our new speakers with a spectacular recording of Shostakovich’s Fourth Symphony by the Boston Symphony Orchestra, with Andres Nelsons. We play baroque music ourselves – I play the harpsichord, and he the viola gamba. We closed our evening playing Johann Schoop and Carlo Farina, two lesser-known but excellent seventeenth-century composers.

Published Date: Tuesday, October 15th, 2019 | 09:37 PM

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