Jim Chen, Soft Law and the Global Financial System

• Citation: Vol. 25 No. 3
• Publication year: 2010
• topic: Business of Law

BOOK REVIEW

SOFT LAW AND THE GLOBAL FINANCIAL SYSTEM

Jim Chen*

From the ashes of global war, creative destruction forged the modern world.1 From the heights of global capitalism, destructive creativity threatens the postmodern world. The free flow of capital across national borders has fueled wealth in all nations. The democratization of capital markets has

enabled a far larger portion of the world’s population to invest in the global economy. At the same time, this expansion in the scale and scope of the world’s financial system amplifies the risk at every level, from individual investment portfolios to the very integrity of global capitalism.

A lifetime ago, the victors of the Second World War convened at Bretton Woods, New Hampshire, to write new rules for international economic engagement in the aftermath of global cataclysm. Mindful that hyperinflation and economic collapse had sparked the rise of national socialism and other tyrannical ideologies, the international community adopted three formal agreements that gave rise to the bedrock organizations of modern international economic law: the General Agreement on Tariffs and Trade (now the World

Trade Organization (“WTO”)),2 the International Monetary Fund (“IMF”),3

and the World Bank.4

These formal institutions of international economic law offered at most a modest response to the financial crisis of 2008, the deepest challenge to global markets since the Great Depression. A far more decentralized, fragmented set of institutions devised ad hoc rules for restoring order to a financial sector whose mismanagement of risk in radically democratized and destabilized

* Dean and Professor of Law, University of Louisville. Special thanks to Heather Elaine Worland Chen. I also appreciate help from Robert B. Ahdieh, Christopher French, Gil Grantmore, and Jeffrey Sexton.

1. See generally JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY 81–86 (Harper &

   Bros. Publishers 3d ed. 1950) (discussing the process of creative destruction).

2. The GATT Years: From Havana to Marrakesh, WORLD TRADE ORG., http://www.wto.org/english/ thewto_e/whatis_e/tif_e/fact4_e.htm (last visited Nov. 15, 2011).

3. History, INT’L MONETARY FUND, http://www.imf.org/external/about/history.htm (last visited Oct. 30, 2011).

4. International Bank for Reconstruction and Development (IBRD): Background, WORLD BANK, http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTIBRD/0,,contentMDK:21130269~men uPK:3168298~pagePK:64168445~piPK:64168309~theSitePK:3046012,00.html (last visited Nov. 15, 2011).

   markets had brought the entire world economy to the brink of collapse. In stark contrast with the traditional preference for international lawmaking through treaties and formal coordination among sovereign nation-states,5 the international legal system attempted to stabilize the global financial system

   through a complex web of multinational agencies, standard-setting organizations, and the rules devised by those decision-makers. During the defining economic disaster of postmodern times, soft law served as first responder.

   
   

   In Soft Law and the Global Financial System: Rule-Making in the Twenty- First Century,6 Christopher J. Brummer provides a detailed and informative analysis of the international regulatory response to the global financial crisis of 2008. This accomplishment alone warrants a close look at this book. Yet, Professor Brummer goes further in this pivotal work on the law of international

   finance. He provides a persuasive, theoretical account of international financial law. Soft Law and the Global Financial System not only describes the mechanisms of lawmaking and standard-setting for global financial markets, but also delivers a workable framework for prescribing and perhaps even perfecting the regulation of the world’s most vital and volatile economic institutions.

   
   

   Chapter 1 of Soft Law and the Global Financial System examines the related phenomena of territoriality and regulatory export in international financial law.7 The national law of dominant markets, supplemented by the customary practices of those countries’ most influential financial actors, has historically supplied many of the rules in international finance.8 By virtue of its preeminence in global capital markets, the United States as global hegemon has long dictated the terms by which bankers, broker-dealers, and other financial intermediaries have moved wealth around the world.9 The global crisis of 2008 severely undermined the American claim to economic wisdom and political legitimacy. Investors and regulators around the world freely

   assigned ample blame to “American-style free-market capitalism and the idea

   
   

5. See Joshua Kleinfeld, Skeptical Internationalism: A Study of Whether International Law Is Law, 78 FORDHAM L. REV. 2451, 2506–13 (2010).

6. CHRISTOPHER J. BRUMMER, SOFT LAW AND THE GLOBAL FINANCIAL SYSTEM: RULE-MAKING IN THE

   TWENTY-FIRST CENTURY (forthcoming Jan. 2012).

7. See generally id. (manuscript at 19–50).

8. See id. (manuscript at 30–35).

9 Id. (manuscript at 24, 29, 36–38, 45).

of globalization.”10 Countries that had emulated the American approach to financial regulation by “open[ing] themselves to trade and foreign investment took an especially tough hit.”11 Meanwhile, countries that were “less dependent on cross-border financial flows,” whether by design or by default, “weathered the storm.”12

The global economy reflects the continuing decentralization of international financial law. The ongoing crisis of confidence in sovereign debt and the European...