Don’t Cry for Me Argentina: Economic Crises and the Restructuring of Financial Property

Abstract

It is widely accepted that property rights are a prerequisite for economic growth. In fact, economists and legal scholars stress the ability of property rights to solve collective action problems, such as the tragedy of the commons and the tragedy of the anticommons. More direct contributions have also been noted. For instance, it has been argued that formal land ownership plays a central role in economic development, and that formal property titles are correlated with an increase in social well-being. When assessing the economic functions of property, it is generally assumed that financial property is as beneficial for economic growth as property over tangible assets. The public policy recipe in this respect would then be to respect property claims over financial assets to the greatest possible extent. However, it is evident that perfect compliance with financial property raises special problems. While natural catastrophes (such as floods, earthquakes, or tsunamis) can damage land holdings and real estate, the working of a market economy by itself cannot annul or reshape real property. By contrast, financial property is subject to the vagaries of economic and political markets. In fact, the respect for financial property can become impossible in the event of a microeconomic crisis (insolvency, bankruptcy, etc.), or a macro-economic one (bank run, crash of stock markets, financial fallout, etc.). In this essay I will discuss five paradigms that can be used in order to restructure financial property under economic crises, particularly those affecting emerging market economies: the emergency paradigm, the monetary paradigm, the valorist paradigm, the social justice paradigm, and the bankruptcy paradigm. The former two have been heavily influenced by decisions of the U.S. Supreme Court. The valorist paradigm is of German origin, and the social justice paradigm can be regarded as an application of the doctrine that private property has a social function, espoused by socialist and Catholic social thought. The last paradigm is a theoretical construct, and has never been used. I will expose the inadequacies of the first four paradigms, both in light of doctrinal analysis and political economy. Finally, I will argue that the bankruptcy paradigm coheres with rule of law principles and minimizes costs in terms of long-term economic growth. More specifically, I will claim that the bankruptcy paradigm can maintain a separation of powers, reduce rent-seeking by small interest groups, and mitigate the overall damage to the financial system caused by the crisis. This paradigm is especially helpful to respond to bank runs in countries that have a currency board or formal dollarization.

Keywords: financial property