YALE LAW SCHOOL WORKSHOP ON COMPARATIVE ADMINISTRATIVE LAW MAY 7-9, 2009 Giulio Napolitano Professor of Public Law Roma Tre University Department of Public Institutions, Economics and Society [email protected] THE ROLE OF THE STATE IN (AND AFTER) THE FINANCIAL CRISIS: NEW CHALLENGES FOR ADMINISTRATIVE LAW (draft 09.05.04) 1Giulio Napolitano The role of the State in (and after) the financial crisis: New challenges for administrative law Contents: 1. The economic institutions of the crisis and the two sides of administrative law. – 2. Changing patterns. – 2.1. The rediscovery of market failures. – 2.2. The new economic role of the State. – 3. How governments respond. 3.1. - The bailout programs. - 3.2. The stimulus packages. – 3.3. The regulatory reforms. – 4. The economic emergency Constitution. – 4.1. The delegation game in the economic emergency. – 4.2. Building-up a public law framework: the political accountability model. – 4.3. The administrative procedure model. – 5. New challenges for administrative law after the financial crisis. 1. The economic institutions of the crisis and the two sides of administrative law Any relevant financial and economic crisis has a deep impact on administrative law rules and institutions. This is exactly what happened at the time of Wall Street crash in 1929. All over the world, the result was the rise of the biggest systems of administrative law history ever experienced. In the United States, the New Deal represented an extraordinary chance for the expansion of the Regulatory State, both in economic and social dimension. In European countries, the government response to the crisis was the nationalization of banks and utilities and the establishment of a planned economy in many markets. On both sides of the Atlantic, the economic institutions of the crisis lasted for almost fifty years, till the deregulation and privatization programs of the 1980s and the 1990s. The Great Depression of the 1930s had a deep and long-lasting impact on both sides of administrative law. The first one concerns the role of the State and its prerogatives. On this side, the crisis gave legitimacy to a wide command and control system and to the direct public provision of goods and services. The second one concerns the codes of conduct of administrative agencies and the guarantees of citizens. Even when the Great Depression was overpassed, the economic institutions built up to deal with it were not dismantled, because they were eradicated in the society. At the 2same time, the claim for an expanded role of the State was at the origin of a new administrative law framework, both institutional and procedural. The approval of U.S. Administrative Procedure Act in 1946, as a countervailing measure against the expanded role of administrative agencies, is the most well-known example. In this paper I discuss whether the 2008 financial crisis too is going to change radically the existing administrative law systems and whether they will move towards progressive convergence or even rising divergence across countries. As a matter of fact, in face of a worsening financial and economic crisis, many States have passed acts and statutes in order to stabilize financial institutions and restore trust in the market. The most important effort is the one coming out from U.S., where the Congress passed two acts, one at the end of Bush administration, the other at the beginning of Obama administration. In the meantime, also European countries adopted bill, plans and laws to face the economic and financial crisis. All over the world, the legislation marks the end of a long period of confidence in the market’s capacity to regulate itself (see Section 2 of this article); enables public bodies to adopt a number of measures aimed at addressing the liquidity crisis of financial intermediaries (see Section 3 below); creates a complex political and institutional infrastructure geared towards guaranteeing the legitimacy and accountability of the State in the bail-out operations (see Section 4 below). All these transformations challenge existing systems of administrative law both in national and in global perspective (see Section 5 below). 2. Changing patterns Every political, economic or social crisis may have a ‘silver lining’. It becomes a learning experience, changing the existing patterns of economic and legal analysis. From this point of view, the 2008 financial crisis reveals the existence of market failures that were ignored or forgotten and advocates for a new economic role of the State. 2.1. The rediscovery of market failures All around the world, the last two decades were dominated by the retreat of the 3State and the deregulation process1. The main stream of the law and economics movement strongly argued in favour of the free market primacy2. State failures were considered even worse than market ones. More generally it prevailed a widespread feeling of confidence in the capacity of markets to self-regulate3. On the contrary, the financial crisis of 2008 is, first of all, the consequence of a market failure. The system based on the conversion of debts into financial products traded on the market (securitization) produced many benefits. This contributed to the achievement of high levels of growth both in the United States and in developing countries. It also provided investors with more security, increased risk tolerance and, as a consequence, widened the field of those who could benefit from low-cost credit otherwise confined to the more well-off or to large companies4. However, the risks created by these new financial instruments, gradually emerged as being more substantial5. Indeed, debt securities were issued based on actuarial criteria and not on real security. A key role was then played by merchant banks and credit institutions engaged in innovative off-balance sheet activities, rather than by commercial banks sustained by traditional forms of savings collection. Insurance companies, who had underwritten the increased risks of insolvency thereby generated, were also implicated. Even one of the founding fathers of the Chicago school of economic analysis of law has pointed out that the basic causes of the crisis can be attributed to as many as six factors, all intrinsic to the functioning of the markets. The first is the abundant 1 On the topic, D. Swann, The Retreat of the State: Deregulation and Privatisation in the UK and Us,