Morality and High Finance

By Wade Lee Hudson

One of the best analysts of the financial industry is James Kwak, co-author with Simon Johnson of The Baseline Scenario blog. On February 14, he posted “The Social Value of Finance,” which was a comment on a long paper by Sabeel Rahman, a Harvard Law fellow, on the moral implications of the financial crisis and the question of how to deal with banks that are “too-big-to-fail” (TBTF).

Kwak reported that Rahman “draws a contrast between a managerial approach to financial regulation, which relies on supposedly depoliticized, expert regulators, and a structural approach, which imposes hard constraints on financial firms.” Partly because this distinction resonated with the critique of traditional liberalism that I articulated in “Growing Compassionate Populism,” I read Rahman’s article and was very impressed with his analysis. I particularly appreciated his affirmation of the need for “moral judgments.”

When he granted me permission to quote from his paper, I was working on the submission to Netroots Nation for a panel presentation at their 2014 conference. So I asked him if he would participate on that panel. He said yes, and offered the following description of himself and what he would say:

Rahman (Harvard Law School and the Roosevelt Institute) studies the history of the Progressive movement, and the normative, legal, and organizing dimensions of economic reform. An effective movement for full employment requires a compelling moral narrative of economic progress. Rahman will outline how early twentieth-century progressive reformers faced a similar situation of widening inequality, upheaval, and political dysfunction. These reformers developed a moral view of the economy that catalyzed major progressive reforms in labor, consumer rights, and economic regulation. But progressive discourse in recent decades has largely moved away from this moral vision of the economy. Rahman will build on this historical account to suggest an account of economic freedom for our current moment—one that is distinctly progressive, and which can serve as the foundation for a more broad-based push for full employment, living wages, and an economy that realizes the full potential of all citizens.

Following is the abstract, table of contents, and conclusion of his (draft) paper, which is titled, “Managerialism, Structuralism, and Moral Judgment: Law, Reform Discourse, and the Pathologies of Financial Reform in Historical Perspective.”


Five years after the financial crisis, it remains unclear the degree to which regulatory reforms have succeeded in addressing the root causes of the financial crisis. This paper argues that ongoing policy debates about financial reform are undermined by a tension not between pro- and anti-regulatory views, but rather a deeper tension within reform discourse between two rival conceptual frameworks of how financial regulation should operate. The predominant approach to financial regulation in the United States, especially on matters of systemic risk and financial stability has revolved around a “managerial” approach that relies heavily on the ability of insulated expert regulators to optimize and manage the vicissitudes of the financial system. Although this approach may seem logical, it is nevertheless at odds with a rival reform discourse present today, and historically. In this rival approach, the emphasis is less on expert macroeconomic management, and more on “structural” regulations: reforms that impose strict constraints on the size and powers of financial firms, potentially at greater cost to industry but also more easily implemented.

This paper identifies this disjuncture between managerial and structural approaches in financial regulation discourse today (Part I). It then traces historically how the managerial ethic comes to dominate financial reform law and policy over the last century (Part II). In short, I argue that the gravitation towards managerialism stems from an underlying unease with making moral judgments about the social value of finance, and an overeager deference to financial innovation as an unqualified good. This avoidance of moral judgment in turn has created pathologies in the law of financial regulation, displacing a fundamentally moral and substantive judgment about the value of various financial firms and activities into proxy debates over, for example, agency jurisdiction, centralization, or the quality of regulatory expertise (Part III). These pathologies continue to constrain the effective implementation of financial reform in the United States. The paper then returns to some of the major financial regulation debates today to suggest that addressing issues like “too-big-to-fail” or new financial instruments necessarily requires making a moral judgment about the social value of finance — and that such judgments, once embraced, open up a range of more structural, rather than managerial, approaches to financial reform (Part IV).


I. The Discourse and Limits of Financial Reform
II. From Critique to Deference: A Brief History of Financial Regulation
Populists, Progressives, and the social control of finance
The New Deal Financial Regulation
From Consumer Protection to Financialization: Postwar Regulation
Setting the stage: deregulation
Moral judgment and the social value of finance
III. The Costs of Avoidance: Pathologies in Financial Regulation Law
From moral judgment to technocratic deference
Displacing the moral into the jurisdictionalFinancial regulation as an expertise-forcing inquiry
Financial reform in the courts
IV. Moral Judgment and Structural Financial Regulation
Too-big-to-fail as a moral category
“Speculation” and financial innovation
Finance as a public utility
V. Conclusion



In both the recent history of financial regulation and the post-crisis debates since 2008, there is a common tendency to turn to technocratic institutions as a preferred way to address controversial questions about what kinds of financial firms and activities we as a society ought to permit. But these are not purely technical issues to be resolved by neutral expertise. They fundamentally implicate moral judgments about what kind of economy we desire, and what kind of activities we value as a society. Furthermore, by transmuting these moral questions into technocratic ones to be judged by expert regulators, we do not resolve them. Instead, substantive concerns reappear through proxy debates over the scope of regulatory authority and expertise, creating an additional layer of formalism and contributing to some of the regulatory pathologies that helped fuel the 2008 crisis itself.

In the effort to avoid these moral controversies, policymakers and judges have routinely turned to centralized, national, expert-led organizations. By contrast, a more moralized engagement with the substantive issues of economic regulation calls for a different institutional structure, raising the possibility of more structural, rather than managerial, responses to the problem of TBTF: placing structural limits on the size and powers of financial firms; narrowing the scope for new financial innovations; or, in the extreme, regulating finance as a public utility. The above discussion does not suggest a precise answer to the problems of modern financial regulation—adjudicating between these more structural approaches is a task for another inquiry—but it does suggest three important implications.

First, in financial regulation as in other domains of economic regulation, ideas matter. Our responses to these policy problems depends as much on our normative and conceptual construction of the problems themselves as it does on the state of our technical knowledge.

Second, in engaging complex and controversial policy issues like TBTF, the allure of a purely technical, neutral managerial approach is largely illusory. Regardless of the state of expert knowledge or technocratic institutions, these issues will necessarily require moral judgment. Indeed, the effort to sterilize these questions of their moral controversy is ultimately counterproductive, for it creates problematic policies and institutional structures, and narrows the menu of available policy options.

Third, engaging the moral dimension of these issues more openly points us towards a very different institutional decision-making structure. If a technical understanding of TBTF suggests the need to prioritize and optimize technocratic policymaking bodies like insulated, expertise-based regulatory bodies, a more moralized view of finance suggests something different. Once engaged, such moral debate must be channeled through institutions where all affected interests can engage to voice their concerns, where there is a legitimate procedure through which these moral debates can be argued, judged, and revisited. A moralized understanding of economic regulation thus goes hand-in-hand with a more democratic structure for deciding these moral questions. This democratic structure reverses the features of technocratic governance described above. Instead of centralized, expert-led bodies, this democratic approach points us towards collective decision-making that is based on moral, as well as technical, reasons; that is participatory and representative, rather than expert-led; and that therefore may involve a more decentralized and politicized institutional form, rather than the centralized and insulated technocratic model.

These democratic institutional forms are therefore the other side of the coin of engaging the moral dimension of these policy debates. The ability to have this moral debate is in part a product the kind of moral vision that we as citizens are willing to entertain when we engage these kinds of issues, and partly a result of the institutional structure of policymaking. The purpose of these democratic structures is to make possible a productive, effective—but still moral and substantive—debate over the good economy and the good life. Ultimately, issues like TBTF require us to engage head-on a political project of reforming our democratic institutions—and constructing new ones—as a way to address the substantive concerns more fully.

Rahman, K. Sabeel, Managerialism, Structuralism, and Moral Judgment: Law, Reform Discourse, and the Pathologies of Financial Reform in Historical Perspective (December 16, 2013). Prepared for presentation at the Joint Program of the Financial Institutions and European Law Sections, AALS Annual Meeting, New York City, January 3, 2014, for the panel: “Taking Stock of Post-Crisis Reforms: Local, Global, and Comparative Perspectives on Financial Sector Regulation”. Available at SSRN: or


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