Sandy:

To my knowledge, the only substantial act the Fed did independently of the Congress was to make loans to the major banks to restore their liquidity. This is well within the purview of a national bank and does not quite elevate it to a fourth branch of government.

It is true that Paulson and Brenanke scared the hell out of congressional leaders in a closed door meeting by claiming wrongly that the financial system would collapse in days if Congress did not give Treasury $700 billion (a number that was pure guestimation) to buy up financial instruments containing the bad mortgage loans.

You would have a better "constitutional dictatorship" case against Treasury for its abuse of the TARP money allocated by Congress.

By the time TARP got up and running, the panic was largely past because the Fed loans had enabled the banks to bridge the panic and obtain private loans from overseas banks to restore their liquidity. The banks now had the time to identify and weed out their bad loans.

Then Treasury came along demanding that the banks sell their assets for well below market value while they were simultaneously bragging to the public that they would then sell these assets at a profit for the taxpayers. The banks told Paulson to take a hike and refused to sell their assets for below value.

Treasury then decided to make the banks an offer they could not refuse. Paulson called the CEOs from the largest banks into a meeting and then handed them contracts selling the government ownership stakes in the banks and warrants to purchase the stock necessary to nationalize the banks in exchange for TARP money. When the banks protested, Paulson told them they had no choice because the banking regulatory bureaucracy would compel them to do so if they refused. In this way, the federal government quasi nationalized America's largest banks.

Finally, Bush used more TARP money to bail out GM and Chrysler in December after the election, which provided the lever for Obama to completely nationalize those auto makers three months later using still more TARP money.

Both buying ownership stakes in the banks and fully nationalizing the auto makers were categorically unlawful under the legislation creating TARP expressly to buy toxic assets. However, Congress did not care and, thus, the Executive was essentially given an enormous slush fund to nationalize private companies.

Here is a real case of constitutional dictatorship for your consideration.
 

"Then Treasury came along demanding that the banks sell their assets for well below market value while they were simultaneously bragging to the public that they would then sell these assets at a profit for the taxpayers. The banks told Paulson to take a hike and refused to sell their assets for below value."

This was, of course, George W. Bush's Treasury. But the commenter errs with reference to "below market value." The banks had assets on their books with values much higher than "market." If the banks had "marked-to-market," there would have been a negative impact on their financial statements. Maybe in time these assets may increase to their "paper" values. But don't hold your breath.

Our commenter also said:

"It is true that Paulson and Brenanke scared the hell out of congressional leaders in a closed door meeting by claiming wrongly that the financial system would collapse in days if Congress did not give Treasury $700 billion (a number that was pure guestimation) to buy up financial instruments containing the bad mortgage loans."

This is of course merely wild "backpack" opinion and not demonstrable of proof with facts. Now, if our commenter could establish his expertise in such matters, some might listen.
 

My objection is to the use of the word, "constitutional". Might be a dictatorship, but "constitutional"? Only our nation's class of professional sophists think so, and they're trained to view ANYTHING the government gets away with as "constitutional", regardless of what the document might say.

It's their job, after all.
 

In this year of Free Enterprise Fund v. PCAOB, I'm surprised Sandy didn't address the structural constitutional status of the Fed. If George W. Bush had wanted to/been capable of directing Henry Paulsen, he could have, but Ben Bernacke or Timothy Geither he could not.

Concern for the "independence" (read "banker control") of the Fed given its enormous power over the economy has existed since its conception. Recent discussions can be found in William Greider's Secrets of the Temple and Martin Mayer's The Fed. The supposed need to protect financial markets from government interference has historical roots in the Bank of England, whose independence was a subject of public debate and change at the beginning of the Tony Blair administration. The failure of the Fed to protect consumers from usurious bank charges and its bank-friendly administration of the Truth in Lending Act had motivated a desire to remove consuemr regulation from the Fed even before the current contretemps provided the political opening.

In the current era, the idea of government-chartered corporations such as Amtrak or independent operational agencies such as the Postal Service is not controversial as a matter of constitutional law. Of course, with respect to a national bank, it was, and its alleged unconstitutionality was one of the justifications Andrew Jackson gave for not renewing its charter (although it much more likely represents a political victory for the western frontier populism over northeast finance capitalism).

The point being, the regional feds which comprise the majority of the board are nothing more than private clubs of bankers, how is it that they have control over the creation of money and its application in cases such as the recent unpleasantness? This is not constitutional dictatorship, this is extra-constitutional dictatorship.
 

I thank Prof. Friedman for his comment. There is obviously much more that could be said about the Fed. What is so gripping about the Wessel book is the centrality of Bernanke to real-time decisionmaking where the perception, which I have no doubt was sincere, was that the future of the US and international economy was at stake.

Incidentally, the public-private melding that Prof. Friedman notes was present in the Bank of the United States as well. Marshall deemed it a "public entity," but the US owned only 20% of the stock.
 

Shag:

BD: "Then Treasury came along demanding that the banks sell their assets for well below market value while they were simultaneously bragging to the public that they would then sell these assets at a profit for the taxpayers. The banks told Paulson to take a hike and refused to sell their assets for below value."

This was, of course, George W. Bush's Treasury. But the commenter errs with reference to "below market value." The banks had assets on their books with values much higher than "market." If the banks had "marked-to-market," there would have been a negative impact on their financial statements. Maybe in time these assets may increase to their "paper" values. But don't hold your breath.

Shag, the banks own asset based instruments bundling a variety of loans, only a small part of which are defaulted home mortgages. Treasury was offering pennies on the dollar for these instruments while telling the public that it would make a profit on them. There were several investment firms gathering to buy these instruments convinced they in turn could make a profit off the government sale. In short, all the folks in the know including Treasury knew Treasury was grossly underbidding these assets.

BD: "It is true that Paulson and Brenanke scared the hell out of congressional leaders in a closed door meeting by claiming wrongly that the financial system would collapse in days if Congress did not give Treasury $700 billion (a number that was pure guestimation) to buy up financial instruments containing the bad mortgage loans."

This is of course merely wild "backpack" opinion and not demonstrable of proof with facts. Now, if our commenter could establish his expertise in such matters, some might listen.

The government has yet to buy any toxic assets with the TARP money over the past 11 months and the banking industry is still returning to profit desperately trying to repay the TARP money the government compelled them to accept to get the Obama Treasury Department out of its business. No Great Depression like collapse of the financial system has occurred over the past year nevertheless in days as Treasury and the Fed wrongly predicted.
 

I'm wondering whether Sandy could compare his view of constitutional dictatorship with Hayek's view that New Deal administrative law may have been administrative but could not properly be described as law.
 

The reference to the Bank of the U.S., which Madison eventually accepted, is interesting. Just how far back is this "constitutional dictatorship?"

Is a link to the article written by SL and Jack (Balkin?) available?

As to parliamentary systems ... unclear if this is necessarily true in all cases. For instance, does the Democratic leadership in Congress now have the power (as compared to Republicans in recent years) to ensure the membership will follow them wherever they want to go?

And, do we want a system where el jefe can be assured the parliament will do whatever s/he wants, because it would be DANGEROUS not to do so?

Likewise, I reckon, we can have a similar "dictatorship" in that sort of system too. The idea being the Fed needs to be largely outside the control of politics, no matter what system we have in place.
 

One version, perhaps only a rough draft copy, of the article cited can be found here.

Also, are we not ruled by many "dictators" these days? Somewhat less so now, but more so in the past, various local officials had broad powers over individual lives. A sheriff, a social worker's say-so respecting custody, a judge who decided (w/i broad bounds) a sentence, a general in the field who has the lives of his men in his hands, etc.

It is always a question of degree and limits. We fear the power of Ben Bernanke, but lack of proper oversight by government regulators got us in the mess we are in now as well.
 

Hayek and other critics of the New Deal inaccurately believed that there was an alternative to the modern Administrative State; they were certainly not inaccurate in believing that this new state challenged traditional verities of "rule of law," as argued most insistently (in English) by Arthur Venn Dicey. William Scheurman's brilliant book From the Norm to the Exception, on Weimar thought, notes that the key debates in German jurisprudence during the '20s were over the tension between the "welfare state" and the "rule of law."

Administrative Law (which I've never taught, probably to my detriment) is an attempt to solve some of these tensions, but it may be akin to squaring the circle.
 

"Hayek and other critics of the New Deal inaccurately believed that there was an alternative to the modern Administrative State;"

So, the road not taken magically becomes "the road that never really existed"?
 

I agree with Shag's comment.

[Bart]: Then Treasury came along demanding that the banks sell their assets for well below market value ...

So the problem would have been easily fixed had the banks simply told Treasury to GFT and sold their assets at the market value. Right? So simple a caveman could do it, I guess....

[more Bart]: ... while they were simultaneously bragging to the public that they would then sell these assets at a profit for the taxpayers.

Needless to say, this would have been Dubya's Treasury Department ... had any such thing actually happened.

Cheers,
 

"So the problem would have been easily fixed had the banks simply told Treasury to GFT and sold their assets at the market value. Right? So simple a caveman could do it, I guess...."

And then the banks get new management. So simple even a caveman would know not to try it.
 

Not only banks, corporations, the wealthy can have financial statements. Let's take a subprime mortgage borrower. His balance sheet on the asset side could, like the banks, list his real estate at book (cost) value, not the market price, such that on the liability side, his mortgage debt might determine a small positive or negative net worth, rather than a tsunami of debt. But financial reality requires the subprime borrower to mark to market. Alas, the banks need not and thereby can save their managements. Now what did Shakespeare have to say about lenders and borrowers?
 

`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`