What Financial Regulation and the Israel-Palestine Conflict Have In Common

Gaza City (credit: NYT)

Gaza City (credit: NYT)

I wrote yesterday about the misguided boycott of SodaStream from a corporate law perspective, but today—with Hamas firing rockets at Tel Aviv and Jerusalem and the Israeli military firing missiles at targets in Gaza—brings a grim opportunity to make a more general point about the management of crises.

As financial regulation scholar Anna Gelpern details in Financial Crisis Containment, it’s essential to distinguish between containing an existing crisis on the one hand and preventing a crisis or resolving the problems that led to it on the other. She was writing about financial crises but I see no reason her argument need be limited to that circumstance, which is hardly unique in its requirement of distasteful policy decisions in service of the greater good.

The distinctions Gelpern draws are important to understanding any crisis (my emphasis):

First, containment is distinct from . . . regulation, crisis prevention and resolution. Containment is brief; it targets the immediate term. It involves claims of emergency, rule-breaking, time inconsistency and moral hazard. In contrast, regulation, prevention and resolution seek to establish sound incentives for the long term. Second, containment decisions deviate from non-crisis norms in predictable ways, and are consistent across diverse countries and crises. . . Third, containment measures are costly, but so is failure to distinguish containment from other tasks.

As this thoughtful post at 972 Mag (“They Left Us No Choice”: On Military Escalation and its Israeli Rationale) argues persuasively, it is both true that Israel had no choice to respond to the crisis of rockets but with military force and that during the run-up to the crisis it wasn’t doing enough to prevent it or to resolve the underlying issues.

Gelpern’s observation that crisis and pre-crisis are different animals and require different responses applies a fortiori here. The more recurrent the crisis and seemingly intractable the problem, like Israel-Palestine, the more careful we need to be about drawing the distinction between crisis and pre- or non-crisis. (And it’s no answer to declare the Middle East always in crisis. There are periods of relative calm.)

The degree of bipartisan support for emergency responses to the financial crisis reflected the intuition that crises require temporary, unpleasant policies.

Similar things can be said about the 2007-09 financial crisis. It was both true that the government had no choice but to respond to the prospect of the failure of the banking system by backstopping the banks and that during the run-up to the crisis the government wasn’t doing enough to prevent the crisis or resolve the underlying issues, because among other things it was under-regulating the banks. Even if the rescue had been structured to be harsher on banks, as some would have liked, any outcome that would have helped them heal would by definition have meant rewarding the institutions that brought down the economy. (That doesn’t mean the government shouldn’t have done more to help homeowners or others suffering from the crisis, of course.) It had to save the banks. The emergency underscored the need to address moral hazard, but that essential project couldn’t be addressed properly until the emergency had passed.

In sum, the legitimate responses to the financial crisis and the Gaza rockets both involve sanctioning a degree of chutzpah. With a few exceptions, the very financial institutions whose activities caused the late crisis were saved. The very Israeli administration that has seemed more eager for conflict than peace is today allowed to pursue conflict. Management of a crisis is about getting out of the crisis.

But as Gelpern’s taxonomy implies, that order of operations is time-bounded. When the crisis management stage ends, prevention of a future crisis and resolution of the underlying issues can and should resume in earnest. If it doesn’t, that’s not really an argument against vigorous containment. That issue—the failure of the political process—is a separate and important problem to focus on.

The distinction between crisis and non-crisis tracks is perhaps even more salient in practice than theory. It’s just not practical to seek lasting reform during a crisis. You don’t legislate a new fire code when the city is still in flames.

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