Very sophisticated piece by @csissoko, but from a systemic risk perspective, both law and macroecon overlook the question of the dynamics of systemic interdependencies during emergencies. This is why risk vis-a-vis corporations is not the best framework. https://justmoney.org/c-sissoko-the-problem-with-shareholder-bailouts-isnt-moral-hazard-but-undermining-state-capacity/amp/?__twitter_impression=true

She is correct about the corporation as an extension of the state, an instrument for managing risks more effectively. However, this mechanism is designed to work under conditions of normalcy where the systemic properties of the interrelations between corporations are benign and

therefore can be managed through bankruptcy mechanisms. As she comes to admit in the final paragraph, under emergencies central bank has to act as a lender of last resort to make sure that bankruptcies do not trigger cascading failures along liability networks. British central

bankers who theorized LOLR, partly Bagehot but especially Thornton, knew that under emergency the distinction btw insolvent & illiquid did not make sense, since as the chain reaction of bankruptcy moved from one unit to the next, solvent but illiquid corps would become insolvent.

So, the risk we are talking about under an emergency is not about the ability of corps to translate uncertainty into quantified probabilities and judgements about the likelihood of future events. It is the structural vulnerability of the economy to a wholesale collapse in the

event of the bankruptcy of an individual corporation. Of course, you can't expect individual units to manage this structural risk, i.e. systemic risk, precisely because they bring it into being as they perform their roles as risk distributors and managers, prescribed by the state

To put it in Luhmann's terms, if risk is a first order phenomenon that is generated at the level of the corporation as a risk manager, systemic risk is a second order phenomenon produced at the level of the system, constituted out of first order relationships btw corporations.

This is precisely why you need a second order observer, as opposed to the first order observers of corp managers, step in to manage the integrity of the system as a whole. And for this you cannot just rely on devices designed for first order observation, i.e. bankruptcy laws.

Yet she's absolutely correct about the poverty of macroecon. 1 reason for this is the fact that macro was built on the founding principle of vertical aggregation of economic activity. As I show in my new piece, this principle gives us "the business cycle" https://twitter.com/ummodern/status/1247512202833207296?s=20

Once you start to aggregate the behavior of a "system" and its "component parts" into a series of aggregate magnitudes, you free yourself of the systemic dynamics within and btw different "component parts." This is of course incredibly liberating b/c than you can act at the

level of the aggregate whole as a policymaker without the need for understanding the how different nodes are interrelated with each other at the level of the system (ok, this is a simplification, but it holds in the broad sense). This also means you don't necessarily have to

understand how the financial system works as far as the macro models are concerned (hence the very late introduction of finance into macro models). Yet, it also has serious costs as we saw in 2008 when systemic properties do kick in and the system behaves in ways you dont expect.

AFAIU, this was the main lesson of the 2008 crisis. In an emergency, you cannot simply let certain corporations fail and then contain the collateral damage by flooding the economy with money (either through fiscal or monetary means). You have to make sure systemic

dont produce their own positive (destablizing) feedback loops that trigger cascading failures. This requires, as Andrew Brimmer argued in his defense of the 1974 Franklin rescue, for monetary authorities to go beyond the traditional understanding of LOLR as CB helping sound banks

And as @PMehrling argued, the Fed has to act as a market-maker of last resort so that critical financial markets continue to function. Yet, the crisis we are in also requires us to broaden these emergency ideas beyond the financial sector, because mitigating the virus requires

us to suspend large portion of real flows while maintaining the flow of financial ones. Yet, this is not as radical an idea as we may assume. For once 19th century crisis thinkers, both Bagehot and Marx, understood that what we today call systemic risk was not limited to the

financial system. When they wrote about the second and tirtiary impacts of a bankruptcy of a large corporation, they were not just talking about financial firms. They were speaking about both financial and industrial firms. Actually in 2009 with the auto bailouts we did tacitly

acknowledged the presence of systemic risk in the industrial sector. As @JayDeeDubyu explained to me over the years, auto bailout decisions were based on the systemic impact of a potential bankruptcy along the supply chain, which would have left millions unemployed as a result.

Because under an emergency you do not have the time to sort out claims like you do under normalcy, and also because you cannot fully understand what the unintended consequence of such delayed sorting out would be on the rest of the economy and the financial system, you would not

want to take the risk of thousands of bankruptcies imploding the economy. So, like Sissoko notes, it is better to suspend normalcy rules until bankruptcy procedures can handle the issue. Yet, this also raises an other issue: why rely on a free market mechanism after such a

disruptive event? Why rely on the market to figure out who should survive and who should be go? If the system requires the backing of the public authority to such a degree that we suspend normal rules of capitalism, why not see the transition from the emergency to normalcy as a

constitutive moment where we can reshape the basic units of the economy in the image of our values? Why not shutdown profitable but nevertheless environmentally destructive corporations while saving unprofitable but environmentally promising ones survive? The transition, as she

notes, will not be a straight forward one for sure; it will certainly have to be managed beyond market mechanisms. Precisely for this reason, we should not pretend that market mechanisms alone can handle it.