Abstract
Invalidating conjectures of financial engineering by supervening events, the subprime crisis called for critical rationalism. Contract modification based on rebus sic stantibus would be its perfect legal translation. Since the crisis originated in the US, legal origins theory (LOT) should predict an adaptive solution based on judge-made law, but has remained silent so far. As a ruling on frustration of purpose in a previous economic crisis, Alcoa vs. Essex could serve as a precedent in American common law. Instead, the US relied on legislative, regulatory, executive, fiscal and monetary means, which LOT associates with “political channels” prevailing in civil law countries. We argue that judicial relief and legislation can interact functionally. Their slow process in the US and America’s backward real estate recording system has impeded rapid crisis resolution, however. To avoid the risk of a global version of Japan’s “lost decade”, we suggest banks apply rebus sic stantibus notionally. Negotiated contract modification and balance sheet adjustment, linked by a feedback loop, would maintain value in otherwise “toxic” mortgage-backed securities, mitigate losses, reduce new capital needs, avoid the cost of ever more foreclosures and provide a more focused stimulus to the economy than the Federal Reserve’s quantitative easing. It would rapidly restore Hayekian “spontaneous order” in the financial sector’s own best interest.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Ailing banks still wield influence. International Herald Tribune 15, 6 June 2009.
- 2.
Early hope for mortgage help recedes, International Herald Tribune 17, 6 July 2009.
- 3.
Authers (2009).
- 4.
Nocera (2009).
- 5.
A convinced deregulator, even now. International Herald Tribune 13, 18 November, 2008.
- 6.
See also Shiller (2009), at 9.
- 7.
Examining the Anger on Merrill Deal. International Herald Tribune 9, July 18, 2009.
- 8.
US Congress helped banks defang key accounting rule: The payoff is likely to be fatter bottom lines in the second quarter. Wall Street Journal, 4 June 2009, 14.
- 9.
“Wall Street profits from trade with Fed”, Financial Times, 2 August 2009.
- 10.
Credit crunch explained to the Queen, Financial Times, 3 August 2009, available at http://www.ft.com/cms/s/0/7e44cbce-79fd-11de-b86f-00144feabdc0.html.
- 11.
“Bernanke outlines exit strategy”, Financial Times, 22 July 2009.
- 12.
“Wall Street ties cast cloud over Geithner”, International Herald Tribune, April 18, 2009, 1, 16.
- 13.
“On the March”, Financial Times, June 9, 2009, 9.
- 14.
“A battle to place blame for a flawed, costly bet”, International Herald Tribune, January 30, 2009, 9.
- 15.
New York Times, June 29, 2011.
- 16.
New York Times, July 13, 2011.
- 17.
Reuters, January 7, 2013.
- 18.
New York Times Editorial, March 17, 2012.
- 19.
New York Times Deal Book, November 20, 2013.
- 20.
Financial Times, supra note 31.
- 21.
Tett (2009).
- 22.
“Stress tests show $75bn buffer needed”, Financial Times, May 7, 2009.
- 23.
Wall Street Journal, supra note 19.
- 24.
“Ein Preisträger, der eine Zeitenwende markiert”, Handelsblatt, October 1, 2009, 21; on the motives of the award see Reuters News 11 February 2009, available at http://www.reuters.com/article/pressRelease/idUS90172+11-Feb-2009+PRN20090211.
- 25.
For the summit communiqué see Full G20 Communiqué, Financial Times, 25 September 2009.
References
Admati A, Hellwig M (2013) The bankers’ new clothes: what’s wrong with banking and what to do about it. Princeton University Press, Princeton
Akerlof G, Shiller R (2009) Animal spirits: how human psychology drives the economy and why it matters for global capitalism. Princeton University Press, Princeton
Aluminum Co. of America vs. Essex Group (1980) 499 Federal Supplement 53
Arrunada B (2011) Property titling and conveyancing. In: Smith H, Ayotte K (eds) Research handbook on the economics of property law, Research handbooks in law and economics series. Edward Elgar, Cheltenham, pp 237–256
Arrunada B, Garoupa N (2005) The choice of titling systems in land. J Law Econ 48(2):709–727
Atiyah PS, Summers R (1987) Form and substance in Anglo-American law: a comparative study of legal reasoning, legal theory and legal institutions. Oxford University Press, Oxford
Authers J (2009) Short view: looking for the bottom. Financial Times, 29 September 2009. Available at http://www.ft.com/cms/s/0/207ccd58-ad1e-11de-9caf-00144feabdc0.html
Beck T, Demirgüc-Kunt A, Levine R (2003) Law and finance: why does legal origin matter? J Comp Econ 31(4):653–675
Bernanke B (2002) Making sure ‘it’ doesn’t happen again. Remarks by Governor Ben S. Bernanke Before the National Economists Club, November 21. http://www.google.fr/search?hl=fr&q=ben+bernanke+2002+speech&meta=lr%3Dlang_de|lang_en&aq=5&oq=Ben+Bernanke
Blum R (1969) Soziale Marktwirtschaft zwischen Neoliberalismus und Ordoliberalismus. J.C.B. Mohr, Tübingen
Böhm F (1948) Das Reichsgericht und die Kartelle. Ordo 1:157–175
Burns JMG (2009) Packing the court: the rise of judicial power and the coming crisis of the Supreme Court. Penguin Press HC, London
Coase R (1988) The firm, the market and the law. University of Chicago Press, Chicago
Dam K (2010) The subprime crisis and financial regulation: international and comparative perspectives. The University of Chicago Law School John Ohlin Law & Economics Working Paper 517, March 2010
de Soto H (2009) Toxic paper: the Obama administration must tackle a problem that has bedeviled the emerging markets for years. Newsweek, March 2
Esser J, Schmidt E (1984) Schuldrecht 1, Allgemeiner Teil, Entstehung, Inhalt und Beendigung von Schuldverhältnissen. Ein Lehrbuch. Mueller C.F, Heidelberg
Eucken W (1949) Die Wettbewerbsordnung und ihre Verwirklichung. Ordo 2:1–9
Farnsworth EA (1990) Farnsworth on contract. Aspen Publishers, Colorado
Farnsworth EA (2006) Comparative contract law. In: Reimann M, Zimmermann R (eds) The oxford handbook of comparative law. Oxford University Press, Oxford, pp 899–936
Fauvarque-Cosson B (2013) Le changement de circonstances. Contribution to the Symposium “Unforeseen Circumstances, Financial Crisis and Long Term Energy Contracts” jointly organized by the Université de Liège, the Centre de recherche interdisciplinaire droit, économie, société (CRIDES) of the Université catholique de Louvain and the European Law Institute in Brussels on July 1
Feldstein M (2011) How to stop the drop in home values. New York Times, New York, October 13
Fisher I (1933) The debt deflation theory of great depressions. Econometrica 1:337–356
Friedman D (1989) The efficient breach fallacy. J Legal Stud 18(1):1–24
Friedman M, Schwartz A (1963) A monetary history of the United States 1867–1960. Princeton University Press, Princeton
Gallanter M, Frozena A (2011) The continuing decline of civil trials in American courts. Pound Civil Justice Institute, 2011 Forum for State Appellate Court Judges
Glenn HP (2004) Legal traditions of the world: sustainable diversity in law, 2nd edn. Oxford University Press, Oxford
Green S (2009) Seeking salvation. New Statesman, July 2. http://www.newstatesman.com/business/2009/07/world-economic-market-china
Haley JO (1998) The spirit of Japanese law. University of Georgia Press, Athens
Halson R (2001) Contract law. Longman, London
Honsell H (2008) Einleitung zum BGB. In: von Staudinger J (ed) Kommentar zum BGB, Eckpfeiler des Zivilrechts. Sellier-de Gruyter, Berlin
Iijima K (1994) Jijou Henkou no kouka to shite no keiyaku no tekigou to kaijo (rescission and adjustment of contracts as consequences of changed circumstances). Toritsudai Hougakkai Zasshi 35:127–145
IMF (2009) The size of fiscal expansion: an analysis of the largest countries. Staff Paper, February 2009. www.imf.org/external/np/pp/eng/2009/020109.pdf
IMF (2009) World economic outlook, April 22
IMF (2009) World economic outlook update, July 8
IMF (2009) Global financial stability report, October
Koo R (2003) Balance sheet recession: Japan’s struggle with uncharted economics and its global implications. Wiley, Singapore
Krell v. Henry (1903) 2 KB 740
Krugman P (2008) European crass warfare. International Herald Tribune, 7, 16 December
Krugman P (2011) Another insider job. New York Times, New York, March 13
Kubo H (1999) Jijou henkou to yoken kanosei – seme ni kisubeki jiyu no youken (The principle of changed circumstances and the requirements of non-foreseeability and non-imputable cause). Hougaku Kyoshitsu 100:208–218
La Porta R, Lopez-De-Silanes F, Shleifer A, Vishny R (1997) Legal determinants of external finance. J Finance 52(3):1131–1150
La Porta R, Lopez-De-Silanes F, Shleifer A, Vishny R (1998) Law and finance. J Polit Econ 106(6):1113–1151
La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R (1999) The quality of government. J Law Econ Organ 15:222
La Porta R, Lopez-de-Silanes F, Shleifer A (2008) The economic consequences of legal origins. J Econ Lit 46(2):285–365
Levitin A (2009) Written testimony before the United States House of Representatives Committee on the Judiciary, January 22
Li DX (2000) On default correlation: a copula function approach. J Fixed Income 9(4):43–55
Liu P (2008) Die Veränderung der Umstände im chinesischen Zivilrecht. Verlag Dr. Kovac, Hamburg
Mahoney P (2000) The common law and economic growth: Hayek might be right. University of Virginia School of Law Working Papers Series, 00–8
Merkel A (2009) Speech at the World Economic Forum, January30, 2009. Available at http://www.bundeskanzlerin.de/nn_704298/Content/EN/Reden/2009/2009-01-30-merkel-davos-rede.html
Mestmäcker E-J (2007) A legal theory without law: Posner v. Hayek on economic analysis of law. Mohr (Siebeck), Tübingen
Nocera J (2009) A big stick but no carrot on housing. Int Herald Tribune (Column) 7, 11 July 2009
North D (1990) Institutions, institutional change and economic performance. Cambridge University Press, Cambridge
Nottage L (2008) Changing contract lenses: unexpected supervening events in English, New Zealand, US, Japanese and international sales law practice. Indiana J Global Legal Stud 14:385–395
Oertmann P (1921) Die Geschäftgrundlage: Ein neuer Rechtsbegriff. A Deichert’sche Verlagsbuchhandlung-Dr. Werner Schöll, Leipzig
Oppenheim L, Lauterpacht H (1954) International law, 8th edn. David McKay Company, New York
Popper KR (1945) The open society and its enemies. Princeton University Press, Princeton
Popper KR (1963) Conjectures and refutations: the growth of scientific knowledge. Harper Torchbooks, New York
Popper KR (1992) Brief an meine russischen Leser (Preface to the first Russian edition of the open society an its enemies). Reprinted in the German original as a preface to die offene gesellschaft und ihre feinde, 7th edn. J.C.B. Mohr (Paul Siebeck), Tübingen
Posner R (1986) Economic analysis of law, 3rd edn. Little, Brown, London
Posner R (2003) Law, pragmatism and democracy. Harvard University Press, Cambridge
Rajan R, Zingales L (2003) The great reversal: the politics of financial development in the twentieth century. J Financial Econ 69(1):5
Rehm G, Julius H (2009) The new Chinese property rights law: an evaluation from a continental European perspective. Columbia J Asian Law 22:2–22
Salmon F (2009) The secret formula that destroyed Wall Street. Wired, Boone, pp 74–79, 112
Samuelson P (2009) Debate with Robert Merton at Boston University on January 14. http://www.youtube.com/watch?v=zCudGmRIsfk
Sarkozy N (2009) Speech at Argonay, October 23 2008. http://www.ambafrance-ca.org/spip.php?article2466
Sawada JT (1968) Subsequent conduct and supervening events: a study of two selected problems in contract jurisprudence. Tokyo University Press, Tokyo
Saxonhouse G, Stern R (eds) (2004) Japan’s lost decade: origins, consequences and prospects for recovery. Wiley-Blackwell, Hoboken
Schmiegelow M (2002) Senryakuteki puragumatisumu ni tachi kaere: Nihon keizai e no shohosen (Recover strategic pragmatism: the prescription for the Japanese economy). Japan Center Econ Res Bull 895:4–14
Schmiegelow M (2003) Which ‘recipe’ for the Japanese economy? Asien 87:78–86
Schmiegelow H (2006) Why legal transformation assistance from Germany and Japan to former east bloc countries. J Jpn Law 11(22):5–38
Schmiegelow H (2009) Courts and codes for open societies and free markets. Workshop Institutional Competition between Common Law and Civil Law at the University of Louvain March 10
Schmiegelow H (2009b) Seikai keizai kiki no dasshutsu no kagi wa ajia to oushu (The world economic crisis, American origins, global effects, Asian and European solutions). Chuokoron (Tokyo) 124(8):152–161 (August, 2009)
Schmiegelow H (2013) A counter-intuitive common law/civil law efficiency divide: rules and structures of civil procedure in 8 developed or newly industrialized countries. Joint Working Paper Series of the Centre de Recherche Droit, Economie et Société (CRIDES), the Institut de recherche économique et sociale (IRES) and the Centre d’études sur les crises et conflits internationaux (CECRI) of the Université Catholique de Louvain No. 01/13 April
Schmiegelow M, Schmiegelow H (1975) The new mercantilism in international relations: the case of France’s external monetary policy. Int Organ 29(2):367–391
Schmiegelow M, Schmiegelow H (1989) Strategic pragmatism: Japanese lessons in the use of economic theory. Praeger, New York
Schmiegelow H, Schmiegelow M (2009) Contract modification as a rebus sic stantibus solution to the subprime crisis. Joint Working Paper Series of CRIDES, IRES and CECRI of the University of Louvain No. 02/09 (October 2009)
Shiller R (2005) Irrational exuberance, 2nd edn. Broadway Business, New York
Shiller R (2007) Historic turning points in real estate. Cowles Foundation Discussion Paper No. 1610 (July)
Shiller R (2008) The subprime solution: how today’s global financial crisis happened. Princeton University Press, Princeton
Shiller R (2009) A failure to control the animal spirits. Financial Times, 9 March 2009
Soros G (2008) The crisis and what to do about it. The New York Review of Books 55, 10, December 4. http://www.nybooks.com
Speidel RE (1982) The new spirit of contract. J Law Commerce 2:193–226
Spence M (2009) Does growth have a future? International Business Times, August 8. http://www.ibtimes.com/articles/20090624/does-growth-have-future.htm
Streit M (1992) Economic order, private law and public policy: the Freiburg school of law and economics in perspective. J Inst Theor Econ 148:675–704
Summers L (2009) Interview for the Financial Times, March 8. http://www.ft.com/cms/s/0/5d8b5e18-0c14-11de-b87d0000779fd2ac.html
Summers L (2011) How to avoid our lost decade. Financial Times, June 12
Taylor v. Caldwell (1863) 3 B&S 826
Tett G (2009) The liquidity pipes remain clogged. Financial Times (Financial Markets Editorial), 10 August 2009
Trubek D, Galanter M (1974) Scholars in self-estrangement: some reflections on the crisis in law and development studies in the United States. Wisconsin Law Rev 4:1086–1097
US Congress (2010) Dodd-Frank Wall Street reform and consumer protection act HR 4173
US Department of Justice (2012) Federal Government and State Attorneys General reach $25 billion agreement with five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses. Press release, February 9. http://www.justice.gov/opa/pr/2012/February/12-ag-186.html
US Department of Justice (2013) Justice Department, Federal and State partners secure record $13 billion global settlement with JP Morgan for misleading investors about securities containing toxic mortgages. Press release, November 19. http://www.justice.gov/opa/pr/2013/November/13-ag-1237.html
US Department of the Treasury (2009) Making homes affordable program. http://www.treasury.gov/press/releases/tg108.htm
US House of Representatives (2009) Helping families save their homes in bankruptcy act of 2009 HR 200
von Hayek F (1944) The road to serfdom. Chicago University Press, Chicago
von Hayek F (1948) Economics and knowledge. In: von Hayek F (ed) Individualism and economic order. University of Chicago Press, Chicago
von Hayek F (1952) The counter-revolution of science. The Free Press, New York
von Hayek F (1960) The constitution of liberty. University of Chicago Press, Chicago
von Hayek F (1973) Law, legislation and liberty. Routledge & Kegan Paul, London
von Hayek F (1978) The pretense of knowledge. In: Hayek F (ed) New studies in philosophy, politics and economics, and the history of ideas. Routledge and Kegan Paul, London
von Hayek F (1996) Evolution und spontane Ordnung. In: von Hayek F, Kerber von Mohr W (eds) Die Anmassung von Wissen: Neue Freiburger Studien. J.C.B. Mohr, Tübingen
Wang JG (1997) On the doctrine of rebus sic stantibus. Southwest Univ Polit Sci Law Rev 89(1):46–66
Yoshikawa H (2001) Japan’s lost decade. The International House of Japan, Tokyo
Zimmerman R (1990) The law of obligations: roman foundations of the civilian tradition. Oxford University Press, Oxford
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Schmiegelow, H., Schmiegelow, M. (2014). Contract Modification as a rebus sic stantibus Solution to the Subprime Crisis. In: Schmiegelow, M., Schmiegelow, H. (eds) Institutional Competition between Common Law and Civil Law. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-54660-0_4
Download citation
DOI: https://doi.org/10.1007/978-3-642-54660-0_4
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-54659-4
Online ISBN: 978-3-642-54660-0
eBook Packages: Humanities, Social Sciences and LawLaw and Criminology (R0)