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New Zealand Yearbook of New Zealand Jurisprudence |
Last Updated: 25 April 2015
Responding to the Economic Crisis: A Question of Law, Policy or Politics
Professor Margaret Wilson*
I. IntroductIon
I have been asked to consider the role of the law in the fallout from the
financial and economic crisis that by the end of 2007 had
become the problem but
turned into a crisis by the end of 2008. Governments were called on to rescue
financial institutions and to
try and to contain the flow on to the real
economy. With government intervention the question arose whether regulation of
the markets
was a necessary or desirable course of action. The debate around the
question seemed somewhat unreal in the face of the reality that
much of the
neo-liberal policy frameworks with their no or regulation ‘lite’
regimes were responsible at least in part
for the crisis the world faced. In
this address I argue that the question is not whether to regulate or not to
regulate, it is the
type and nature of the regulation that is the issue.
II. the econoMIc crISIS In neW ZeAlAnd: cAuSeS And reSPonSeS
The financial crisis that hit the world late in 2008 has quickly turned into
an economic crisis with effects even on New Zealand,
though compared with the
reaction of governments in other countries New Zealand’s response has been
rather laid back. Certainly
New Zealand through the Australian owned banks has
avoided the worst excesses of the sub prime debacle, but it is the knock on
effects
of the availability of credit that has affected the New Zealand economy
that is so dependent on trade. So far the government response
to the crisis has
been to address the short term effects but as yet no long term response to the
statutory framework that regulate
our financial system has been made. The
assumption appears to be that once this blip has passed there will be a return
to normal
business and no rethinking or policy change is required. This approach
is consistent with the general non-intervention approach of
the government to
public policy issues. This approach is indicative of the neo liberal policy
framework.
Such observations are coloured by the three months that I spent in the United
Kingdom in the early part of 2009, as a Visiting Fellow
at Cambridge University
Faculty of Law, along with an attempt to keep up with the various
* School of Law, The University of Waikato.
overseas analyses. During my time in the United Kingdom I was rather
surprised at the New Zealand assessment of the crisis that implied
if we all
just think positively it would not be so bad or all go away. While the power of
positive thinking has its place, this assessment
was somewhat fanciful and
displayed ignorance about what is a serious global situation from which New
Zealand will not be immune.
While there is much that can be said about the current economic crisis, I
agree with Stephen Green, Group Manager of HSBC Holdings
plc, who wrote there
are four key realities that will have to be taken into account in any new world
order. The first is that there
is no alternative to capitalism; the second is
that we cannot turn the clock back; third government oversight, regulation and
at
times intervention are essential; and fourth the global balance of power is
shifting from west to east and that the framework of
international institutions
needs to be redrawn to reflect the new realities of
globalisation.1
While the current crisis has been a fruitful source for analysis there is one core question that keeps arising and will need to be addressed both domestically and globally: that is whether there is a need for more regulation of the financial sector. The debate whether a successful economy is achieved through regulation or market is central to the ideology surrounding neo-liberalism that has dominated the policy settings not only in New Zealand but the United States, United Kingdom and to a lesser extent Europe and Asia over the past
30 years.
New Zealand became a casebook example during the 1980s and 1990s of the
policy of deregulation of the economy. The underlying rationale
for this policy
was that economic prosperity was best achieved through market mechanisms being
able to operate freely without the
constraints of statutory regulation. The
market policy paradigm was also applied to social as well as economic policy.
State intervention
was seen by the policy makers as a constraint on individual
freedom. Individuals were best able the theory argues to determine their
own
self interest. Notions of community and society were no longer drivers of public
policy.
While governments were able to implement neo-liberalism the legislative
process and the courts were not so easy to control. Allegations
of judicial
activism were raised however and became most obvious in the attacks on the
Employment Court in 1990s. The arguments were
usually framed in terms of the
superiority of the common law over legislation. Judges, or at least some judges,
were considered better
determiners of public policy than the Parliament
because they determined matters on a case-by-case basis, which avoided any
significant change to public policy. This environment was
considered to be
better for business because it provided greater certainty and stability.
This analysis ignored the fact that social and economic change was part of
the democratic process and when the courts failed to deliver
pressure was
exerted through the political process for such change. Arguably, it is not the
role of the courts to deliver economic
or social justice but to determine
individual disputes on the basis of the law, as it is known. By and large this
is what the courts
have done in New Zealand. They are not agents of economic or
social change. That has traditionally been the role of the Parliament.
Unfortunately the relationship between the courts and Parliament in the New
Zealand context has not been subjected to much evidenced-based
research with the
consequence that ideology has tended to prevail in the public debate.
The afore-mentioned issues are too broad and complex to be considered in any
great detail in this paper, the focus of which is the
current economic crisis.
With regards to the question of the role of the law in the economic crisis, it
is my opinion that the polarisation
of the issue into market versus regulation
is not helpful. Whatever the ideological rhetoric there has always been
regulation. It
is the nature and type of regulation that has been the focus of
debate. It is true that the neo-liberal policy paradigm has produced
a
‘regulation lite’ regime. Since 1984 statutory frameworks have been
constructed around the delivery of public and private
services that permit the
greater operation of market forces to determine outcomes. Any attempt to depart
from that framework has
been greeted with considerable criticism from lobbyists
and the media.
It is also true the Labour governments of the past nine years attempted to
introduce a more centre position with a better balance
between market forces and
state support. Arguably, however, a neo-liberal policy framework is still common
in the delivery of policy
advice. Notions of a small state with minimal state
intervention to correct the inequities in the contracting model, wherein
privatisation
is reinvented as public/private partnerships are still dominant in
public policy. In this respect New Zealand is again standing out
from the crowd.
Other countries, United Kingdom and the United States, are beginning to reassess
the balance between state and market
instruments of regulation. This
reassessment has come with the recognition that without the state to bail out
the financial sector,
states would be in a worst position than they are
currently in.
Whatever ideological position is taken in the market versus regulation
debate, the stark reality facing the world today is that a
‘regulation
lite’ statutory framework has contributed to the collapse of the financial
system. It has led to the need
for unprecedented state intervention to rescue
that system through
the use of taxpayers’ money, most of whom never benefited from the
rampant market forces that have produced this state of affairs.
‘Regulation lite’ is not the only cause, of course. The tendency to
human greed and the assumption that the banks’
own self-interest, itself a
tenet of the free market, would provide a corrective against disaster have also
contributed.2 In such circumstances it is not surprising answers are
being sought as to who is responsible for this mess and what actions should
be
taken to ensure it never happens again.
My time in the United Kingdom provided me, fortunately, with easy access to
much informed commentary on the current situation. There
was much soul searching
as to how this situation had been allow to occur, why people were not warned,
and who was to blame. Top bankers
appeared before select committees to
apologise. In my opinion, the ritualistic nature of such appearances rendered
that latter rather
unreal and the spin doctors had prepared the bankers well for
the onslaught of criticism. Bankers were followed by journalists as
inquiries
were made into the latter’s role and whether had they made a bad situation
worse. They defended themselves with the
normal justifications of we only report
the events, but also pointed out some of them had been warning those who would
listen that
all was not well in the financial sector. It is true also that
prophet academics and commentators had raised concerns, as had employees
of
financial institutions. Unfortunately nobody was interested in listening because
often what was done was ‘within the law’
and there was an assumption
‘they’ must know what they are doing.
Such hearings and musing may have had therapeutic value but they are not
necessarily helpful in finding a way forward in the framing
of a new statutory
framework. It is essential that a proper analysis of the causes of the collapse
is undertaken to ensure any new
framework addresses the causes and not the
ideology of the crisis. The most favourable approach is one that recognises
there is a
role for the market and a role for the state to regulate. An approach
which must also be favoured is one that acknowledges the reality
of the
technology that enables the transfers of capital between and amongst countries
quicker than most of us can open our computers.
In other words this is a global
issue, not just a domestic issue. Given the size of New Zealand and the recent
manner in which it
has retreated somewhat from internationalism, it is a
reasonably safe assumption that we will have little influence over whatever
regime emerges from current talks, in Europe and the United States and the G 20
whose objective is to redress what is seen as a global
crisis.
III. A WAy ForWArd: A PrIncIPleS-bASed APProAch
While citizens in New Zealand expect the law to protect them against
wrongdoing, including financial wrongdoing, the truth is it is
very difficult to
find rules based framework that will do this. The complexity of issues makes it
difficult for a rules based system
to cover every situation. Also the costs of
enforcement are prohibitive for most people. The institution that is meant to
protect
the consumer by ensuring there is competition is the marketplace, the
Commerce Commission, is under attack by market players who
know they have many
more resources than the Commission.
A rules based system also requires equality of information by the contesting
parties. It is interesting to observe that much of the
cost of litigation in
this area is caused by the costs of discovery as the parties seek to find
relevant information to help their
case. The problem of a lack of transparency
in the affairs of some companies has been highlighted by the plight of investors
in finance
companies that collapsed in 2008. For perfect markets to work there
must be perfect information. It is obvious a lack of relevant
information has
been detrimental to many New Zealand investors, particularly those who lost
their lifetime savings and saw their
pensions disappear in high profile
collapses of finance companies.
Good decision-making also requires no conflict of interest or for such
conflicts to be declared. While conflicts of interest are a
normal part of life
in a small country like New Zealand, we have not found the best way to ensure
transparency or avoidance of these
conflicts. A small cadre of people runs New
Zealand business so the appointment of a wider range of people to boards may be
something
that could at least be tried. In this regard, there is abundant
research that highlights the financial benefit to companies with
women on their
boards and how few women are considered competent or capable enough to serve on
private sector boards.
Therefore, when it comes to looking for appropriate regulatory regimes in
this area are principles, as opposed to rules, based, approach
is preferable.
This approach may make interpretation or enforcement more difficult and there
will be cries of uncertainty. The current
system can hardly be argued as an
example of great certainty, however. It has collapsed and this seems to have
come as a surprise
to most banks and the institutions that supported
them.
One starting point for a new approach is to acknowledge that it is
unrealistic to assume that the market can, or should be banned.
It is equally
unrealistic to argue for an unconstrained market. A democratic society requires
that individuals be free to exchange
goods and services and have their
value
determined by the market. Citizens, however, expect their market
relationships to be conducted in an ethical manner. This does not
mean risk is
not taken but the nature of the risk is what in dispute when it comes to policy.
It also means all participants in the
new framework must take responsibility for
the good management of the system.
Consideration should be given to the principles approach for a regulatory
framework put forward from come from Davis, Lukomnik, Pitt-Watson,3 and
research undertaken by the Institute for Public Policy Research.4
They studied the causes of the financial crisis in detail in an attempt to
find a more enduring future for capitalism. They argue
an effective economy is
like a political system that works effectively: it has checks and balances,
accountabilities and responsibilities,
information flows and cultures. The
bipolar thinking of regulation versus market does not provide the way forward.
The principles
which, they argue, should be incorporated in a regulatory
framework are:
• entities must be responsible for their actions;
• to have responsibility the entities must be accountable:
• to be accountable there must be relevant reliable
information;
• that information must be independently prepared (not by rating
companies paid by those they rate);
• and there must be vigilant oversight by all the market
participants.5
Although these principles may seem like commonsense they would require a
fundamental rethinking of our current financial system. A
holistic view of the
inter-connection between various actors and processes is required not only
domestically but globally. Whether
New Zealand undertakes a reform of its system
will depend both on the perception of whether reform is required, and whether
there
is sufficient political pressure from those adversely affected by
deficiencies in the financial sectors for such reform. This is
largely a matter
within our own control. Regulatory changes on a global level however
are
3 Stephen Davis, Jon Lukomnik, David Pitt-Watson, ‘The New Capitalists: How Citizen
Investors Are Reshaping the Corporate Agenda’, Harvard Business Press: Harvard,
2006.
4 Stephen Davis, Jon Lukomnik and David Pitt-Watson, Towards an Accountable Capitalism, Institute for Public Policy Research: London, March 2009, available at <www.ippr.org. uk/members/download.asp?f=%2Fecomm%2Ffiles%2Faccountable_capitalism.pdf> as viewed 5 January 2010.
5 Ibid, p 3.
largely outside our control. The construction of global regulatory framework
is task of considerable challenge for all parties, but
is actively being
discussed.
IV. concluSIon
There is a role for the law to regulate the market. That is not the issue. The issue is what is the nature and form of that regulation. Arguably, what would be helpful is if ideology was placed to one side while an evidenced based study of a new regulatory framework was undertaken. If this does not happen we are destined to a boom and bust mentality and to query why our economy continues to perform so badly. The basis of any effective political or economic system is the maintenance of a sufficient level of trust in those to whom we entrust to make decisions. A lack of trust may well be at the heart the issue. As trust has little financial value at the moment, it may take some time to affect a full recovery.
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