Sunday, March 16, 2008

Carl Schmitt and the Fed

Sandy Levinson

A very interesting article in today's New York Times is revealingly headlined "Fed Chief Shifts Path, Inventing Policy in Crisis." It begins as follows:
As chairman of the Federal Reserve, Ben S. Bernanke has long argued that a central bank should base its policies as much as possible on consistent principles rather than seat-of-the-pants judgment.

But now, as the meltdown in credit markets threatens major institutions on Wall Street and a recession appears inevitable, Mr. Bernanke is inventing policy on the fly.

“Modern monetary policy-making puts a lot of weight on rules, but there is no rule book for an economic crisis,” said Douglas W. Elmendorf, a senior fellow at the Brookings Institution and a former Fed economist.

On Friday, the Federal Reserve seemed to toss out the rule book altogether when it assumed the role of white knight, temporarily bailing out Bear Stearns, one of Wall Street’s biggest firms, with a short-term loan to help avoid a collapse that might send other dominoes falling.

There is, of course, much that one could say. Gretchen Morgenson, for example, has a fine column, also in the Times, noting that Bear Stearns has an unusually dubious record and that the bailout raises all of the problems associated with "moral hazard." If ever a company deserved to go down in a so-called "free market," it appears to be Bear Stearns. But that's not my main point.

Instead, what seems most revealing, and fully captured in the front page story quoted above, is the truly Schmittian character of the Fed. Recall that Schmitt defined "the sovereign" as the person who could successfully define something as a "crisis" and then basically do whatever he thought necessary to meet the crisis. The "rule of law" goes out the window during "states of exception." Well, isn't that precisely the role played by Bernanke? George W. Bush is in fact not the "great decider" where the domestic economy is concerned. Indeed, he gave a widely derided speech on Friday suggesting (quite sensibly) that there were times to step aside and watch some businesses fail. It's the Fed, a truly "independent agency" certainly not accountable to the President, that gets to make decisions regarding immediate responses to economic crises, and the rest of us--i.e., the taxpayers--will just have to live with the consequences, including the probable write down of the dubious mortgages "pledged" by the soon-to-be-defunct Bear Stears in return for their "loan."

Schmitt and other Weimar-era critics of the modern state correctly argued that old-fashioned notions of the "rule of law" couldn't survive the modern administrative state, with its mandate to intervene in the economy. Rarely has that been so vividly demonstrated as yesterday. All of us simply have to hope that Ben "The Great Decider" Bernanke knows what he's doing.

One other point: I've been describing over the past several months facets of our "constitutional dictatorship." One of the things this episode reveals is the limited domain of the President. Within certain areas, especially relating to foreign policy and the military, he does indeed have dictatorial powers (i.e., the ability to make decisions without being politically accountable). But in other domains, the President is remarkably weak. We may in effect live under a number of different "dictators," whose only commonality is that they are allowed to "invent policy" without consluting with Congress or without facing political consequences.


There will be more of the kind, it appears we are quickly approaching Willy E. Coyote moment, Bear Stearns like totally collapsed over the weekend, they were trading at $30 late Friday, now the talk is Morgan will buy it for $2 a share. Just one week ago they were $80. That is huge.

Old greenback is another couple of points down again today against euro. Don't think Bush's little $3T imperial exercise in Iraq did it, but it certainly didn't help.

We could have a financial collapse the likes of which have never been seen in history.

Whatever little can be done, should be done. The government has an important role to play here regardless of your political/philosophical outlook.

Bear Stearns's Schwartz Says Cash `Cushion' Is Ample

By Yalman Onaran

March 12


Bernanke as sovereign... Excellent reading.

In this case, I have to agree with Sandy in his use of the term dictator.

The Constitution provides no power to Congress to create an unelected and unaccountable bureaucratic 4th branch of government to run our money supply or anything else.

Most folks do not care so long as the Fed is a beneficent dictator like Greenspan who appeared to know what he was doing. Unfortunately, this Fed appears to know only panic and is gutting the value of our currency like some third world country in an overkill effort to head off a recession during an election year.

" ... like Greenspan who appeared to know what he was doing."

Shouldn't there be a follow up as to whether or not, based upon events and his performance or non-performance when he was in charge, he actually knew what he was doing? Greenspan doesn't "appear" to be prepared to take any blame for the current financial turmoil.

Perhaps after next January's replacement of George W, if things worsen in Iraq, we can expect George W's minions and trolls to say " like George W who appeared to know what he was doing."


Greenspan did a far better job navigating the very similar S&L liquidity problems than Bernanke is doing now with the mortgage liquidity problems.

Here's a NYTimes 12/7/03 article on Greenspan and the S & L crises:

Perhaps Greenspan had a bigger bucket for his bailout.

Keep in mind that there is nothing to indicate that Bernanke had contibuted prior to his appointment to the Fed to the factors that had been festering that led to the current crisis. Can the same be said about Greenspan on his Fed watch?

Expect similar excuses to be made for George W if the Iraqi situation worsens next year and beyond.

Wait, who was the guy that encouraged people to take out adjustable rate mortgages during 2004's period of extremely low interest rates?

And how did those interest rates get to be so low, I wonder, thereby encouraging secondary investors to buy riskier, but higher profit, subprime mortgages in droves?

And who was that fellow that applauded the lending industry for its fine subprime mortgage lending strategies wherein lenders can "quite efficiently judge the risk posed by individual applicants and to price that risk appropriately"?

Bernanke? No, think someone a bit more exuberant, perhaps even irrationally so.

Does the debate over a national bank and McCulloch v. Maryland come to play here?

The opinion is deemed a glorious victory, but perhaps those concerned about federal control of banking, esp. with large powers outside of much practical democratic control, had a point.

This is the same administration that made up its response to Katrina. Same outcome only this time the disaster zone is centered on Wall Street not Bourbon Street.

No one has come up with a very good answer how to manage the money supply. Central banks are merely the least bad solution we have found so far. We have, indeed, put an alarming amount of power into the hands of unelected and unaccountable bankers.

But consider the alternatives. There are good reasons for not allowing popular government to get its hands on the money supply. It is asking too much to expect the Fed not to make mistakes; bankers are human too, after all. But at least we can hope that that the Fed will make all different kinds of mistakes that will cancel each other out in the long run.

Put the money supply in the hands of popular, elected government that there will be one constant temptation, to finance expenditures with the printing presses. It never fails. I have no confidence that even the most fiscally conservative administration would be able to resist the temptation.

I am delighted that "Enlightened Layperson" has gotten us back on track, at least with regard to what I think is the central question. It is not really whether Bernanke is more able than Greensplan (or either than Paul Volker), but, rather, how, if at all, we fit the Fed into any standard-form model of "the rule of law," on the one hand, or "democratic legitimacy," on the other. Basically, what Congress did in 1913, perhaps wisely, as Enlightened Layperson argues, is to delegate to the Fed important measures of control over the economy. One might take cold comfort in the proposition that no one can really control the modern globalized economy, but surely, if anyone is trying to, it is Bernanke and his colleagues. Both Bush and Congress are basically hopeless. $1200 rebates are irrelevant to the meltdown that is threatened.

I am not necessarily critical of the Fed. I simply want to know how one analyzes it as part of our 21st century constitutional system.

The concern with the Fed is whether it is acting in a nonpartisan, nonpolitical, professional, objective, nonideologic manner in making its decisions. Volker made some tough decisions that pleased few, doing what he felt had to be done for the good of the country. Can the same be said about Greenspan or Bernanke? Let's consider the behaviour of Volker and Greenspan AFTER their terms expired. Were they primarily protective of their decisions or open about perhaps some mistakes of judgment on their parts? And what are the standards for the Fed's addressing of the central question (whatever that question is)? Yes, we perhaps can't rely upon the President and Congress. But what assurances do we have that the Fed will not be overly responsive to elected officials AND to the financial community that many (most) Fed members have been associated with in their professional careers? While we are a nation of laws, not of men, we have to be concerned with the men selected to serve on the Fed. Volker would seem to come out on top on a comparative basis. Belt tightening is strong medicine but sometimes necessary.

Sandy, I wonder whether Arendt's distinction between positive law and totalitarian law is relevant your effort to apply Schmitt to administrative law. She described totalitarian law as a "law of movement" -- which can in turn be seen as a law of decisions. All of this dovetails with modern administrative law, particular when adlaw is the basis for regulating the economy. If so, then even if Bernanke has written regulations and is not simply deciding, Schmitt is brooding over all of it . . . .

Bernanke has no idea what he is doing. He is clearly swayed by the pressure from the markets, the public and politically.

Once the markets realize you will give into them, your ability to guide the economy is lost.

His rescue of Bear Stearns is... an unbelievably ill-conceived idea. Were Greenspan still in charge, we would be planning for some short-term economic pain. Instead we are now creating a plan for a very long financial crisis.

Both Bush and Congress are basically hopeless.

Granted, the response hasn't been particularly nimble or effective, but does that remove the possibility that such institutions can adjust economic situations?

In the S&L debacle, one of the primary corrections was a raft of industry regulation legislated in 1989. FIRREA didn't spring into law because Greenspan waved a magic wand or pounded a scepter on the ground three times.

While it is true that the Fed's ability to adjust rates is particularly potent, it is also true that Congress and the President have a role to play in defining the legislative and regulatory response. Lending practices, broker behavior, and appraisal standards are all factors that seem more suceptible to regulatory intervention than the market fluctuations induced by the Fed.

Of course, the question of whether Congress and the President will push for an appropriate response, rather than a politically attractive one, still remains. That doesn't preclude them from being relevant, however.

Information in a history blog suggests that the Fed's recent actions are strictly under the rules:

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