Fear and Social Capitalism: The Law and Macroeconomics of Investor Confidence
Steven A. Ramirez
Loyola University of Chicago School of Law
Washburn Law Journal, Vol. 42, pg. 31, 2002
On July 9, 2002, President George W. Bush delivered a speech intended to revive investor confidence, in order to quell a rapidly declining stock market that was widely viewed as the by-product of a string of scandals in the business sector.
This article argues that in a modern economic system, law must take fear as a given. The issue in financial regulation is not whether fear is rational or irrational, but whether the financial system can be protected from fear (rational or not) and whether investor psychology can be managed in a way that allows markets to allocate investment capital in a more macro-economically beneficial way. Indeed, fear management is a central value of the role law plays in securing a more stable and powerful macroeconomy. This article seeks to articulate a comprehensive vision of how law can protect investor confidence in a way that unleashes the power of free markets to the maximum extent possible, and to show the shortcomings in our current law in this regard.
Part I of this article will illustrate the debilitating effects of fear on macroeconomic performance and the potential benefits available to a society that uses law to secure long term investor confidence. Part II will highlight areas where the law has lagged economic theory in creating a system designed to achieve ideal investor confidence and attempt to articulate a comprehensive system of law and macroeconomics insofar as fear management is concerned. In the end, this article attempts to show that far more important than the question of whether fear is rational or irrational, is the question of how a modern economy deals with fear that is admittedly irrational. This question is one of the bedrock principles of law and macroeconomics, and one of enduring importance.
Number of Pages in PDF File: 48
Keywords: fear, capitalism, investor confidence
JEL Classification: D81, G00, P26Accepted Paper Series
Date posted: March 19, 2009
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