Law and Regulation in Late Modernity

The global financial crisis, which began in 2007–2008, was a multidimensional crisis brought on by the unfolding of new social and economic conditions driven by, to borrow from Castells et al. (2012, p. 2), ‘the dynamics of a deregulated global capitalism, anchored in an unfettered financial market made up of global computer networks and fed by a relentless production of synthetic securities as the source of capital accumulation and capital lending’. Davies (2010) lists 38 separate macro and microeconomic factors which have been used to explore the causes of the crisis. These include the build-up of considerable global imbalances that generated a surplus of liquidity in the years before the crisis, growing income inequality among countries, flawed macroeconomic policies which financed the rising consumption trends by borrowing, the undisciplined financial markets which facilitated and encouraged this borrowing, and the failure of regulators to bring these markets under some form of control (Davies 2010). Although the crisis was systemic and caused by a combination of these factors, it was initially forced to the surface by ‘the accumulation of small, and in themselves relatively harmless, decisions made by individual traders or bankers and banks’, who were trying to refine the market (Engelen et al. 2011, p. 9). Relatively harmless as these decisions arguably were, they concealed an irresponsible attitude towards excessive risk-taking at the expense of others, illustrated by the subprime mortgage scandal, where mortgages were sold on to another party who had no interest in whether or not they defaulted, and the private equity and hedge funds’ so-called ‘greed game’ (Peston 2008).

In Fool’s Gold, Tett (2009), a social anthropologist working as a financial journalist who was given access to the inner circles of elite bankers, describes how the ‘tribe’ of young traders at JP Morgan unleashed forces which caused the near collapse of the global financial system. This group of investment bankers, who were fervent believers in the efficiency and superiority of free markets, was largely responsible for engineering a sophisticated financial product known as a ‘credit derivative’. This complex financial instrument disembedded and re-commodified loan transactions, creating a new and opaque culture of finance, which as Picciotto (2011, p. 159) explains, was ‘underpinned by arcane techniques and mathematical modelling based upon calculations of relative volatility’. The young traders combined derivatives⁵ with the process of ‘securitisation’, which involved a lender selling its loans to an investment bank. The amalgam enabled banks to turn the risk attached to their loans, i.e. repayment risks, into a financial product and sell it as if it were bonds or shares. This innovative use of derivatives reduced the capital reserves the banks required for lending more money to a larger number of investors. Put differently, derivatives allowed them to take risk off their books, package it as ‘securities’ and sell it on in the market for high fees. When employed conservatively, derivatives, according to Tett, were capable of bringing security to global finance and worked as a means of controlling risk. At the same time, Tett (2009, p. 15) admits that there were also many investors who used derivatives to ‘make high-risk bets in the hope of windfall profit’. Once used in this way, derivatives not only generated more risk, but also dispersed the risk of investment bankers’ excesses across the financial system and around the globe.

As the application of credit derivatives spread across the sector, and other banks such as Citigroup, USB, Deutsche Bank and Merrill Lynch also adopted them, they inevitably fell into the wrong hands and were perverted. The largest application of derivatives was in subprime mortgages, which allowed the repackaging of loans to homeowners, who failed to meet the usual requirements, into bonds for sale on an industrial scale. What had been started by a group of traders at JP Morgan as a financial innovation and an attempt to control risks gradually cascaded into a full-scale crisis of global dimensions, a crisis over which (we were told) no one had any control. The governments of the US and other countries could step in only once the international economic crisis was in full bloom to bailout investment banks with hundreds of billions of dollars of taxpayers’ money to avoid a collapse of their national economies.

Tett worked on the assumption that complex derivatives were not responsible for the crisis, and if anyone was to be blamed, it was the few ‘bad apples’ within the banking community who exploited them. There are good reasons for paying attention to the actions and decisions of those individuals who acted recklessly, yet the forces which triggered the financial crisis were, as pointed out above, multi-layered, caused by macro and microeconomic factors, and cannot be reduced to the actions of one group of individuals. One cannot ignore that Tett’s ‘greedy bankers’ operated within a system which lacked transparency and did not allow the external monitoring of the way derivatives were traded. The system was, moreover, driven by an insatiable appetite for profits and paid little heed to warnings about the spread of a speculative economy divorced from production.⁶ When examining the financial crisis in terms of the actions of the few ‘bad apples’, we run the risk of overlooking the role of macroeconomic factors as well as the impact of laissez-faire capitalism that has been spreading in the UK and the United States since the 1980s.

With these points in mind, I use Tett’s description of the financial crisis to articulate three sets of concerns at the levels of the individual (human agency or social action), social system (or social structure) and global economy (transnational relations). Focusing on individual bankers and mortgage brokers, the question begging an answer is how they could act in such an unrestrained fashion. How could they make highly risky decisions motivated by what appears to be their own short-term interest alone, as well as without a sense of responsibility to their investors, financial institutions upon which their livelihood depended and the larger society? To repeat, these questions are not meant as an invitation to moralise on the culture of banking, but to explore the limits of formal regulatory regimes under the normative conditions of late modernity. Notwithstanding Tett’s attempt to blame ‘greedy bankers’, the actions of individual actors also need to be assessed in the context of the financial institutions in which they worked and in view of the imperatives of a financial system based on profitmaking and speculation. Although banking and finance are regulated domestically (e.g. the Banking Act in the UK and the Glass-Steagall Act in the US) and internationally (e.g. the Basel Accords), the story of the elite traders who manufactured these complex derivatives nevertheless suggests that there are social spaces within which the tribe of bankers may roam free, beyond the reach of the usual forms of regulation and undeterred by external monitoring. Thus, we are led to ask: how can public spaces and networks, such as those of elite bankers, exist beyond the reach of the formal (official) and informal (unofficial/extra-legal) regulatory mechanisms of early modernity? Do they exist because they are de facto out of reach of the public authorities, such as central banks and regulatory agencies, with the responsibility for the financial system, or because the liberal state is unwilling to interfere in the operations of the market economy for ideological reasons? Alternatively, could it be that a regulatory system, which has been founded on the market economy’s past performance and dysfunctions, is doomed to failure because its formal mechanisms cannot stay abreast of the continuously changing structures of the capitalist system? (cf. Hayek 1952). These questions will allow us to sharpen our focus on the role of the state, which is responsible for introducing and enforcing formal regulatory regimes, and ask: why were Western governments unable to prevent the crisis and could do so little after the event to redress its consequences?

To understand the constraints exerted on social action in late modern society we need to start with the cultural and political programme of modernity which, as argued by Eisenstadt, has ‘entailed a shift in the conception of human agency, of autonomy, and of the place of the individual in the flow of time’ (Eisenstadt 2010, p. 3). Many forms of modernity have developed in different parts of the world, but despite their differences they share a quest for emancipating human agency from the restraints of tradition. Modernity, liberally paraphrasing Giddens (1999, p. 39), replaced the claims of tradition by reason and conferred a durable appearance upon social institutions by transforming their authority from one based on traditional relationships to one based on legal bureaucracy, which facilitated the centralisation of institutional power. The combined power of modern institutions made the expansion of modernity unavoidable; yet this power, which reached its peak under industrialisation, could not totally dominate social developments because ‘reflexivity’, to borrow again from Giddens (1999, p. 39), subverted reason, ‘where reason [was] understood as the gaining of certain knowledge’.

In its most basic form, reflexivity refers to people’s ability to talk to themselves silently in their heads, or as Archer (2010, p. 5) explains, to have an ‘internal conversation’. In its more recent sociological conceptualisation, it indicates a state of self-knowledge through self-dialogue, which allows the individual to reflect on herself in relation to her circumstances and vice versa, to observe herself as subject and object and devise a plan of action accordingly. In this sense, reflexivity links social action and social structures by throwing light on the process through which human agency becomes socially embedded. However, in its radical or late modern form, it highlights the disembeddedness of the agency, or the increasing ability of the agency to reflect on structures in order to emancipate oneself from the constraints of social institutions in a way which, although not new in the context of modernity (for modernity has, admittedly, been partly about the liberation of human agency from the fetters of traditional authority, practices and institutions), is nevertheless unprecedented in its scope and societal consequences (Archer 2007, p. 2).

The reflexivity inherent in modernity has been enhanced by globalisation, accelerating the rate of structural change and causing what Bauman (2000) calls the ‘liquefaction’ of the ‘solid’ structures and relations of early modernity. Taking this idea to its final conclusion, Bauman (2005, p. 1) describes contemporary society in terms of ‘liquid modernity’, which refers to a society where ‘the conditions under which its members act change faster than it takes the ways of acting to consolidate into habits and routines’. Under these ‘liquid’ conditions, human agency becomes increasingly disembedded, i.e. independent of social structures and free from institutional and traditional ties which previously constrained social action at the level of social interaction. This also means that flexibility, i.e. ‘a readiness to change tactics and style at short notice, to abandon commitments and royalties without regret’, rather than ‘conformity to rules’ will serve the individual’s interest more effectively (Bauman 2010, p. 4). As the reflexivity of the agency is enhanced and disembeddedness spreads across society, the moral contingency of social action grows rapidly, influencing the way social institutions and systems operate. As pointed out by Beck (1992), systems such as polity and law become less capable of responding to socio-cultural complexity and moral diversity in their environment through further functional differentiation.⁷ Social forces, which could be evoked by law and polity to reshape society and mould behavioural patterns under the first stage of modernity, either become less effective or redundant, as formal regulation fails to keep pace with continuously evolving social structures.

To reiterate, ‘the apparent solidity and timeless appearance of modernity offered an ostensibly durable foundation for building relationships based on trust, certitude, security and stability, which in turn provided a rational basis for social engineering and reform’ (see Chap. 12). These solid structures are now undermined by late modernity’s temporary assemblages of shifting and precarious positions, as well as transitory social spaces and forms of community. As we argued in the previous chapter, at the centre of this development we find the increased significance of agency vis-à-vis structures. To borrow from Martyn Denscombe again, this ‘does not imply that ‘structural’ factors cease to exert any influence at all. But it does mean that there is a tendency for them to exert less influence than in the past and for greater significance to attach to individual choices in terms of the creation of self-identities’ (Denscombe 2001, p. 160). This idea can tentatively explain the seemingly unrestrained conduct of the young bankers and other professionals we discussed above. The tribe of young bankers is increasingly ‘emancipated’ from the general social and moral constraints of the society in which they live and operate, and they belong to the mobile elite of well-to-do professionals who are not constrained by national borders and cannot be pinned down in any one locality or jurisdiction; consequently, their activities cannot be controlled through the traditional means of regulation external to their field of work. Their daily work provides a site (or a rudimentary type of ‘habitus’,⁸ which we shall discuss below as a technical habitat) for knowledge-based collaboration, but is largely carried out at the global—multi-jurisdictional⁹—level, where no single external normative system can effectively monitor or regulate individual conduct. For example, as soon as the UK government started considering a super-tax to regulate the bonus culture of investment bankers and brokers in the City, the Mayor of London warned that any such measure would only result in them moving to other centres of finance with more liberal tax regimes.¹⁰ The chief executive of one of the state-backed banks warned a few months later that a large number of investment bankers were quitting the UK, causing a ‘rapid exodus’ as a result of the ‘bonus fiasco’ (Evening Standard 4 March 2010.).

Tett’s use of the word ‘tribe’ to describe the young group of investment bankers at JP Morgan is significant in itself. In an unrelated study, Ethan Waters also employs the word to portray a group of college-educated young people in California, who being liberated from the structural (economic as well as cultural) pressures to which their parents were subjected choose not to form families, or they marry much later than their parents did (Watters 2004). At the same time, they are so driven by a culture of hyper-individualism that their lives, as described in Waters’ Urban Tribes, appear as completely self-absorbed and egoistic.¹¹ Therefore, their heightened reflexivity, which emancipates them from certain constraining aspects of institutions, does not appear to empower them to look or step beyond modernity’s epistemological premises. There is, however, more to this emerging trend than liquefaction. Instead of forming traditional families, the young adults in question are forming their own communities of friends, which Waters calls ‘urban tribes’. Tett’s tribe is different from Waters’ in that it is created through the knowledge-based practices of traders: it requires of its members shared knowledge of how to trade in derivatives and other financial products, which temporarily joins them together in a collaborative network. However, Tett and Waters’ tribes, different as they are, draw attention not only to the rise of new social formations, but also to the emergence of new forms of inequality and alienation. These tribes consist of well-educated, economically independent and socially successful young professionals, whose privileged backgrounds have granted them access to economic as well as cultural resources required for living flexibly and detached from local concerns and structural pressures. They do not, in other words, represent the whole of society, but a privileged group.

As Petersen (2010, pp. 333–347) explains, a widening gap is emerging between elite citizens, the successful high-flying global citizens who feel responsible for little more than their own wellbeing and interests, and a local underclass consisting of those who feel socio-economically vulnerable and culturally defenceless. This underclass does not live a liquid life, but takes on more than its share of anxiety and uncertainty, as it is culturally and economically undermined by social processes and political forces beyond its control. In response to late modernity’s new forms of inequality, new kinds of social movements, such as the anti-globalisation movement, are born. Occupy Wall Street is an example of a new form of spontaneous social networking, which is organised in cyberspace as well as in urban space. This movement is also known as ‘We are the 99%’, which refers to the disparity in income and wellbeing between the majority of Americans and the 1 % who control the country’s wealth.

The individual never totally submitted to the normativity of social structures, institutions, customs and traditions. A gap has always existed between injunctive norms, which prescribe what ought to be done, and descriptive norms, which reflect empirically ascertainable patterns of behaviour (or how people behave in actual fact).¹² Nonetheless, human agency’s growing potential to free itself from the normative constraints of social structures is decisive for understanding the limits of formal regulation under late modernity. ‘The central aspect of regulatory compliance’, as Casey and Scott (2011, p. 77) explain, consists of ‘institutionalisation and embedding of norms within some wider set of structures’. Employment law, which we shall discuss in Sect. 3, exemplifies how law was employed to embed certain values, such as fairness and equal treatment, in the structures of the labour market. This type of regulation requires the durable structural relations of early modernity capable of normatively influencing the agency. In the context of late modernity, however, the traditional form of regulation which employs law to ground values and norms in social structures and institutions loses its determinacy, as the agency’s reflexivity grows vis-à-vis structures and institutions. Does this therefore mean that the late modern agency exists in a normative vacuum? The fact that Tett considers the young bankers as a ‘tribe’ suggests that although they might exist as ‘nomadic individuals’ (Lee 2010