The Future in Law and Finance (32) (Erasmus Law Lectures)

Finance is all about the future. The success of a capitalist economy rests upon the ability of finance to sustain potentially infinite growth, based on funding today the output of tomorrow. Finance, however, needs rules. The aim of the law and finance scholarship is precisely to identify the best regulation of finance to support economic growth. Traditionally, law and finance is concerned with investor protection. This would be sufficient if the future was predictable. However, because the future is in fact uncertain, the prices of financial assets are flawed and, in the short run, they may result in serious mistakes, if not widespread crises. Although these mistakes are corrected in the long run, a lot of harm may occur in the meantime. Drawing on the experience from the global financial crisis, in this lecture, it is argued that financial law should be concerned not only with investor protection, but also with mitigating the temporary excesses of markets in allowing or restricting access to finance. The challenge of this goal is to remedy market malfunctioning without undermining market discipline. However imperfect, prices remain the best instrument of discipline and growth in a market economy. Several policy implications may be derived from this approach. The lecture focuses on the unique role of central banks in regulating liquidity and on how corporate governance can fill in the gaps of banking regulation in the face of uncertainty.