Wedding Carlson and Schwartz: Understanding Secured Credit as a Fuzzy System
16 Pages Posted: 2 Jul 2015
Date Written: 1994
Using economic analysis, legal academics have challenged themselves to posit a rational explanation for a debtor's willingness to issue secured debt. These academics have questioned why a debtor would grant a creditor a security interest in collateral, given that the debtor's unsecured creditors, recognizing that “the pool of assets available to satisfy their claims has shrunk,” will increase the price of credit they provide by an amount that precisely corresponds to the secured creditor's reduction in price. Economic theorists contend that, because the debtor's overall position is not obviously improved by the issuance of secured debt, the existence of secured debt is a puzzle.
Professor David Gray Carlson attempts to “solve” the secured debt puzzle by denying that there really is a puzzle. Using price theory, Carlson contends that, because security interests lower the cost of debt service by “shifting power from the debtor to the creditor,” they actually reduce risk and therefore the interest compensation the creditor requires. This reduction in risk, Carlson asserts, “is large enough to make available credit that otherwise would not be extended.” And, if no future unsecured creditors arise, “the risk dissipated by the security interest vanishes entirely.”
The fundamental problem with Carlson's article is its remarkable inconsistency with his prior work. For years he has argued that efficiency alone fails to explain everything (or much of anything) about secured credit. Carlson has seen more clearly than anyone else writing in commercial law that “there is no single correct explanation [of law].” Rather, “[t]here are infinite correct explanations, each co-existing with the other at different levels of generality.” This Carlson, the true Carlson, is insightfully right. Through his full body of work, Carlson has tried admirably to broaden the debate and make it more inclusive, less rigid, and more democratic. In doing so, he has essentially argued for a multivalent analysis of law, which is the central idea of this Commentary.
Keywords: Secured Credit, Fuzzy System
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