Katharina Pistor on financial risk, wealth creation, digital currencies, and more

Pistor shows how governments perpetuate financial-sector fragility, distinguishes between trading nature derivatives and protecting nature, and more. The PS Say More Newsletter | [View this message in a web browser]( [PS Say More]( This week in Say More, PS talks with Katharina Pistor, Professor of Comparative Law at Columbia Law School and the author of [The Code of Capital: How the Law Creates Wealth and Inequality](. To read the full interview – in which Pistor highlights the government’s role in perpetuating financial-sector fragility, urges stronger enforcement of legal accountability for political leaders, explains why trading nature derivatives should not be confused with protecting nature, and more – [click here](. Katharina Pistor Says More... [Michael Spence]( Syndicate: You have [lamented]( the excessive financialization of the economy, noting that “finance is both dumb and dangerous,” not least because it relies almost entirely on the price mechanism. How should we go about changing what you call a “bloated, fragile financial system that is in constant need of stewardship by central banks”? Katharina Pistor: The price mechanism assumes that everything that matters can be reliably expressed in prices, and when it comes to corporate shares, for example, that the price reflects all relevant information about the company. Yet investors are interested only in the price at which they will be able to resell the shares in the future. They pay little attention to costs – social, environmental, or otherwise – that firms can shift to others. In fact, thanks to “limited liability,” investors are protected from incurring these costs directly. The price mechanism is also used for assessing debt, but rarely the risk that debt poses to the financial system. Credit-based financial systems are inherently fragile, because they under-estimate... [Continue reading]( By the Way... PS: Testifying before Congress in 2019, you [noted]( that recent advances in digital and crypto technologies “put the dream of an inclusive and efficient financial system within our reach,” but realizing this dream would require “great care.” What do digital currencies demand of legal systems? Can monetary sovereignty [exist]( without territorial sovereignty? KP: We have become accustomed to profit-driven money creation by private banks. But the creation of the US dollar and other public moneys was driven by purpose, not profit. Prior to the information-technology revolution, private intermediaries might have been needed to ensure the diffusion of money, but even this is not clear. In any case, we now have technology that makes it possible to place money-creation in the hands of a single actor, yet assure broad access. This can be done by way of central-bank (or better yet, treasury) digital currencies, which cut out the middlemen (banks). Or, as Mark Zuckerberg tried (but failed) to do with Libra, it can be done by a single economic actor who cuts out the government. This is more difficult, because... [Continue reading]( [PS. Subscribe to PS Digital now and save 30% on your first year with us.]( [PS Say More: Raghuram G. Rajan on inflation, financial risks, interest rates, and more]( [Raghuram G. Rajan on inflation, financial risks, interest rates, and more]( Raghuram G. Rajan says when the US Federal Reserve might start cutting rates, considers how to mitigate monetary-policy spillovers, proposes measures to boost financial stability, and more. Rajan, a former governor of the Reserve Bank of India, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of [Monetary Policy and Its Unintended Consequences](. [Read now]( [PS. Subscribe to PS Digital now and save 30% on your first year with us.]( [Facebook]( [Twitter]( [LinkedIn]( Project Syndicate publishes and provides, on a not-for-profit basis, original commentary by the world's leading thinkers to more than 500 media outlets in over 150 countries. Receipt of this newsletter does not guarantee rights to re-publish any of its content. This newsletter is a service of [Project Syndicate](. [Change your newsletter preferences](. Follow us on [Facebook]( [Twitter]( and [YouTube](. © Project Syndicate, all rights reserved. [Unsubscribe from all newsletters](.