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A Failure of Research: Posner on Law Professors and the Financial Crisis

posted by Adam Levitin
I just came across a Richard Posner piece in the Atlantic that claims that law professors "have not made a contribution to the understanding and resolution of the current economic crisis, even thought it bristles with legal questions."   

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."


What are the economics of publishing "top down" analysis versus "bottom up" analysis for someone in the legal profession?

The benefits, in terms of recognition, reputation, tenure, etc. are all in publishing in the macro areas, not books or articles about the nitty-gritty legal details of commercial, consumer and property laws.

If there are any best sellers on subjects like comparative state foreclosure deficiency statutes, or CDS contract langauge, or the ethical and legal obligations of mortgage brokers, then the New York Times best seller lists have been holding out on me.

On the other hand, grandios statements about broader topics get a lot more press. Like this public contention about a failure of the legal profession by Judge Posner, versus a legal opinion he may write on, say, the finer points of a federal regulation, or the Uniform Commercial Code.

Would I like to see more analysis of the overall problem? Absolutely. And, yes, Professor Levitin, I think a bottom-up approach would be much more revealing of the overall issues. Unfortunately, and I say this fully realizing the company in which I say it, I'm not 100% sure that an ACADEMIC perspective and analysis, as opposed to, say, an objective "Lewie Raneri" perspective and analysis, would reveal as much as anyone would hope it did. I simply don't know...

Of course, then I get hung up on the **financial motivations** of servicers and I'd MUCH prefer that someone dig out each and every method and provision that servicers use to profit from their portfolios. Late fees, force placed insurance, the 24 +/- days worth of "float" that they usually get to pocket, pmi claims, note insurance claims, CDS plays against the very tranches of loans they service, shorting the ABX as, I believe Ocwen, was doing at one point, etc...

Oh, btw, nice quote in yesterday's NYT Professor Lawless ;)

Judges’ Frustration Grows With Mortgage Servicers

"“The judges are seeing more and more of a pattern of indifference to record-keeping and good business practices,” said Robert Lawless, a law professor at the University of Illinois who specializes in bankruptcy law."

Not to be a cynical girl or anything, but perhaps there is a perfectly good reason that academics don’t dare research and write about one particular aspect of the financial crisis -- student loans -- since to do so might put their own paychecks at risk. When one’s livelihood relies on the edudebt industry, how can academics be expected to call everyone’s attention to the subject?

The truth is, our current financial crisis is about more than mortgages, derivatives and GM. Creditslips covers these topics quite well. The student loan bubble, however, is a crisis that spans all generations and has a lot more to do with bankruptcy than does someone who is behind on their house payments. Homeborrowers (I have a hard time calling them “Homeowners” with a $200k mortgage) can walk away and start fresh without ever having set foot in a bankruptcy court. Houses today are a dime-a-dozen, and the fresh start that these borrowers get by packing a suitcase is priceless.

Student loan debt, like a diamond, lasts forever and is cutting to shreds the lives of thousands upon thousands of student loan debtors who thought getting an education was their ticket to middle class, when in fact it has become a ticket to a second class life of indentured servitude for themselves, their children, and their parent-grandparent cosigners.

Not since May 10, 2008, when Judge Gene Wedoff weighed in brilliantly on the subject, has Creditslips given space to the subject of student loans. Onerous student loan debt is a heavy burden carried by many attorneys who are not immune from default and collection tactics that Elizabeth Warren said “would make a mobster envious.”

For many people -- young, old, and in-between -- restoring bankruptcy dischargeability to student loans would help resolve their economic crisis.

Roz: you're right. We don't have a lot to say on the blog about student loans. I know Katie has an article in progress about education levels and student loan debt in bankruptcy, and Elizabeth has written about it in the Two-Income Trap, but as a group we've focused much more heavily on mortgages and credit cards both in our own research and in our blogging.

Why this is the case, I'm not sure. I don't think it's because we're worried about our paychecks; to the contrary, I think we're very concerned that we're teaching students who are paying a lot of money for uncertain job prospects and/or feeling that they have to take a high-paying job that they don't love because of student loan burdens. Our blogging often reflects where our scholarship is focused, so the real question is why isn't student debt a major focus of our work. I think that's a very personal question. For some of us, it just isn't an area that's caught our interest. For others, it's because we haven't gotten to it yet (I've got a belly full just with credit cards and mortgages). I think there's certainly some research to be done about the impact of BAPCPA on student loan rates--did they drop because of the protection given to private lenders? I've got my guess, but it'd be a very interesting study to do if there's data available.

Writing a law review article about the financial crisis isn't the same thing as "[making] a contribution to the understanding and resolution of" the financial crisis. The majority of articles by law professors about the financial crisis are nauseatingly theoretical, and almost always laughably wrong about crucial details. But they're read -- and praised -- by other law professors who are equally as ignorant of the day-to-day realities (and complexities) of financial markets. Repeat as necessary.

Professor Levitin….I wasn’t suggesting that more studies be done. Countless studies about crippling student loan debt are already out there. I was hinting more about your rebuttal to Judge Posner’s Atlantic article, where you say that Creditslips bloggers “have been …. drafting legislation (if only the good judge knew just how many pieces of legislation had drafting input from authors of this blog alone...)”.

This is where your talent is most needed right now, drafting legislation that will restore student loan dischargeability. Start with the wild west anything goes unregulated private student loan industry that sorely needs slapped down. Please read “Drowning in Debt” published by Education Sector, an independent think tank based in Washington, D.C.

I appreciate your honest response to my previous post, but saying that this issue just may not have caught the interest of the group, or if there is an interest, that it just hasn’t been gotten around to yet, is rather like suggesting that Creditslips bloggers think mortgages and credit cards are more important than the quite urgent needs of their very own customers. For if a student loan debtor who has mortgaged his or her future to obtain an education in your classroom doesn’t deserve a law professor’s protection and legislative advocacy, I don’t know who does.

Credit card debtors and mortgage debtors have ample protections under the law. Student loan debtors do not.

Roz, I do think that mortgages are a more important issue presently than education debt. Credit cards perhaps not, but the country is in a financial crisis because of mortgages, not because of student loans. Student loans were part of the package of consumers getting overleveraged, and there are certainly abusive practices in the student loan industry, but I think a lot of the problems with student loans are not due to the products themselves or abusive lender practices, but rather to a system in which the costs of education are skyrocketing and in which consumers often make very poor judgments about their ability to handle educational debt (or put another way, consumers misprice the value of education). Just to take law schools, there is a bimodal distribution of income of law school graduates. Some make quite a bit of money out of law school (say $160K/year), but others make much less (say $40K). The distribution tends to map onto prestige of the school. The question we have to ask is why so many students are willing to incur $100-$200K in educational debt to get a degree from a law school where the average graduate earns $40K. This is a problem I saw first hand as a graduate student in history. Some students had fellowships that covered their tuition and living expenses, but others were going deeply into debt for a degree with dubious job prospects and low earnings potential even for those who did get jobs. Student lender practices might have exacerbated their problems, but the cause of the overleverage was a very questionable consumption choice.

"...but the cause of the overleverage was a very questionable consumption choice."

That's the mortgage crisis in a nutshell.

Dr. Levitin,

I agree strongly with Roz's comments.

I have been focusing seriously on the student loan issue since 2004. I believed that the injustices resulting from the removal of nearly every standard consumer protection from these loans, once shown to Congress, would be quickly fixed.

I have been sorely disappointed to this point, however. The issue has largely been confined to the political realm, where well funded interests have been extremely effective in stopping meaningful, socratically honest debate on the subject.

Sadly, the student loan interests, and those of the universities are so entwined, that the legislation they lobby together for has almost always tended to hurt borrowers (and non-borrowers too, for that matter!), instead of helping.

It is actually a very interestring academic problem, I would think: student loans are the ONLY type of loans in our nation's histry, to my knowledge, to be specifically exempted from standard protections such as bankruptcy, statutes of limitations, refinancing rights, Truth in lending laws, state usury laws, and even Fair Debt Collection Practices. I would think that scholars would be interested in looking at the various outcomes (intended an unintended) that arise from such an action.

Of course, our interest is far more pressing. There are millions of people in the country whose lives have been effectively ruined as a result of this system, yet Congress has not moved an inch towards returning any protections. Obviously, something more is needed.

Despite the legitimate fear of bias due to financial considerations, I believe that legal scholars would do a rigorous and fair job of analysis on this problem, and the prescriptions that come from this would be extremely helpful in cutting through the noise that currently dominates the conversation, and causing a just solution at long last.


Alan Collinge

I think the real issue is that Judge Posner simply does not like the conclusions that the majority of law review articles have made---namely that the free market failed and better regulation is necessary.

The pendulum is starting to swing as the rise of game theory and "emotional" branches of economic theory challenge his belief that an efficient market can be achieved if government does not interfere.

I Agree with Dr. Levitin that the most pressing issue of the day is subprime home mortgages. The student loan problem, however, is far more dire than I think most of the people reading this realize. Consider:

1. We owe in excess of $730 Billion in student loan debt (they barely existed 30-40 years ago).

2. Student loan Debt comprises roughly 1/4 of the nations consumer debt (excluding real estate).

3. Defaults jumped by 40$ this past year, and I estimate that roughly 1 in 3 borrowers were ultimately finding themselves in default. This is a default rate far, far higher than the rate for subprime loans.

4. Unlike Home Mortgages, where there is an asset to hold most of the value in the case of default, there is no such asset for student loans, so we have far greater losses per loan.

So while the nation's student loan portfolio only a fraction of the home mortgage holdings in this country, the potential liability to guarantors on the loans is much, much higher, percentage wise.

So academia is in a position to be ahead of this crisis, where they are accused of being behind on home mortgages.

Sigh. I always find it demoralizing when people bemoan the lack of scholarly attention to the student loan issue in bankruptcy. Et tu, Credit Slips?


I have found some of Judge Posner's books and articles interesting and thought provoking. Some I did not. I do believe there is complexity and near impossible predictions when one relies strictly on macroeconomic data. My impression of his article about the role of law schools in the recovery from the current depression goes a bit beyond the role of an academic law professor. Arguments of point are important but so are differences of views. I only wish our elected representatives would listen to all of them before voting.

We have covered student loans a bit here. Maybe Espinosa might play a bit if it goes "our" way Ros. Really student loans are one of the only priority debts you can't pay through a 13 or discharge in a 7. (I like the old 7 year test!) We can thank our legislators for taking decision making away from BK judges. I don't think we would have seen the boom in student loan lending in recent years with the old 7 year test though.

I like this subject.

As for este' way Posner.. Top down analysis is like "Mountain Topping" mining. You don't notice until after that all the trees and animals are gone.

Patches…..You’re right about one of the causes for the boom in student loans. With no moral hazard, lenders are insulated from risk since student loans have been stripped of consumer protections and the right to bankruptcy discharge.

You mention the 7-year test, but the good old days of student loan discharges were not good at all. What was really happening pre-1998 was that, even though student loans were legally dischargeable, most were found to be non-dischargeable due solely to the underhanded method that lenders used to systematically apply retroactive forebearances and deferments so they could protect the loans from discharge down the road. Judges allowed lenders to game the system by letting them add back in the time these loans were in forebearance/deferment -- even when forebearances and deferments had not been requested by the borrower. Lenders cried to the courts about how they should not be penalized for "helping" borrowers. Judges agreed. Recall that right here on Creditslips, Bankruptcy Judge Gene Wedoff called the treatment of student loans in bankruptcy, "punitive…despite the absence of wrongful conduct by the debtor."

Thus debtors were charged with finding five (or seven) repayment years -- An impossibility when records of legitimate forebearances and deferments had long ago been misplaced or lost. Just as today, most borrowers had multiple loans with multiple lenders, so this was an unimaginably daunting task. Similar shenanigans by lenders continue to this day. Consider that a former Sallie Mae employee filed a whistleblower complaint in Indiana, stating that telephone agents working for Sallie Mae on behalf of USA Funds routinely falsified borrower requests for forbearances, often just dialing a borrower's telephone number and letting the line sit open for a few minutes, so that the company's computers would record an apparent conversation. The agent would then list the borrower as having approved a forebearance, when no such approval occurred. The law requires the lender to send a written confirmation to the borrower by mail, but it doesn't require any proof that the letter was received. Why would they do this? Two reasons: To keep the loan alive on the books so that Sallie Mae investors would think student loans were a low risk investment;, and, to pave the way for the day when another “time in repayment” amendment finds its way into the bankruptcy code. They’ll be ready, all right. Bottom line -- the 7-year test left debtors in pro-se adversary petition hell.

I’m glad you like the topic, but no reason to wait for the Espinosa decision to again raise the subject of student loans. Creditslips could be on the front lines of this crisis by drafting legislation that isn’t full of loopholes that Sallie Mae and others are poised to use to their full advantage.

"Judge Posner simply does not like the conclusions that the majority of law review articles have made---namely that the free market failed."

Mr. Irlenad, I have to direct your attention to "A Failure of Capitalism" Judge Posner's most recent book.

IF you want an solution to a medical delimma, go to the Medical School; for engineering, an Engineering School; but for law --- who really goes to the law schools? No one.

Yo Ros,

You see the crappy dec. In Re: Knecht? Montana Chapter 13. It was "discrimination" to propose to pay a non-dischargable Student loan in 13 over unsecured debts....:( boooo!

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