Saturday, September 20, 2008

Meet the Odd Couple (Our Current Constitutional Dictators re the Economy)

Sandy Levinson

Tomorrow's NYTimes will include a just-posted article by Peter Baker on how "A Professor and a Banker Bury Old Dogma on Markets." It is, of course, about Ben Bernanke (the professor) and Henry Paulson (the banker). I include some passages from the article that are especially interesting if one is wearing glasses with a Schmittian lens, together with my italicized interpolations:

Talking into the speaker phone on a coffee table in his office, Mr. Bernanke told Mr. Paulson that it was time to stop treating the symptoms by bailing out distressed companies and instead start attacking the root problem with a comprehensive strategy.

Congress would have to sign off, and it would fall to Mr. Paulson, as the envoy of the executive branch, to take the lead. [What is meaning of "sign off" in this sentence? Is this the equivalent that Congress would genuinely be called on to "decide," after a suitably deliberative process, or, rather, that it would have to rubber-stamp a decision basically made by the Professor and the Banker?]

Mr. Paulson understood. He had been reluctant to send lawmakers a plan that might not pass, worrying that a rejection would only further damage the markets. During two conference calls Wednesday night and Thursday morning, he agreed that they had no choice. [I.e., prior to this past week, there was some fear that, for better or worse, Congress would exercise independent judgment and reject any "plan" that Paulson, speaking, presumably, in behalf of George W. Bush, might send to Congress. Now, this fear no longer operated.]

“It just happened dramatically,” Mr. Paulson said in an interview on Friday. “There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious.” [I.e., the truly "exceptional situation," calling for the suspension of the normal "political calculus," had arrived.]

Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street dealmaker, started what would be the government’s largest economic rescue in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years to come. [Again, the word "started" is interesting. Would it be accurate to say that, in Schmittian fashion, they basically "decided to put into operation the government's largest economic rescue....."]

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat.

Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told officials last week, according to one participant. [Is this a credible statement? It probably depends on what one means by "ideologue," of course. Is the argument that a "financial crisis," like other crises, generates the capacity to see things more clearly and suddenly to realize that the supposed commitments of a lifetime (or at least a political career, see, e.g., John McCain on regulation) are profoundly mistaken? Or is it just possible that the "plans" being improvised by the Professor and the Banker continue to reflect ideological perspectives even if not, one hopes, the kinds of crass "low-political" considerations that would surely be present if, say, Karl Rove were playing his accustomed role of asking only "what is good for the Republican Party"?].

The improvisational nature of their effort has turned President Bush and Congressional Democrats into virtual bystanders, sometimes uncertain about what comes next and left to wonder about the new power dynamics in the capital. [Schmitt would certainly be unsurprised that the legislature would increasingly become irrelevant, filled with bloviators who speak to the "bases," while "real governance" goes on within a sometimes improvisitorial executive branch. "Improvisation," of course, is just another synomym for "decisionism." The "constitutional dictator" in the given situation a) gets to define the existence of the emergency and then b) gets to offer proposed solutions to said emergency.] Seemingly every time lawmakers tried to get a handle on what was happening and what role they might play with elections around the corner, Mr. Paulson and Mr. Bernanke would show up again on Capitol Hill for another evening meeting with another surprise development.

Returning to an earlier post, and a criticism leveled by Marty Lederman, it remains totally unclear whether the Professor and the Banker have "transgressed" any laws, and I am willing to believe that the answer, as Marty has suggested, is no inasmuch as certain New Deal legislation can be interpreted as sufficient delegation to justify the Administration's (and the Fed's) actions. But then there are two other questions that are relevant to other debates about Bush Administration actions:

1) To what degree were lawyers consulted by Bernanke and Paulson concerning their legal powers?

2) Perhaps even more to the point, did they receive any advice that they could not engage in any particular action(s) deemed "neessary" to resolve the crisis and to prevent the "cataclysm" of a meltdown of the US (and world) economic order, or did they receive consistently "happy endings," i.e., that they could in fact do whatever they deemed "necessary and proper" (to coin a phrase)? And, also to the point, what was the phenomenological disposition of any lawyers consulted? Were they rigorously detached and independent, ready to give bad news along with happier conclusions, or were they basically like John Yoo, ready (and willing) to read any ostensibly supportive legislation in a maximalist way that would justify whatever Bernanke and Paulson might want to do? (How critical would we be if the answer turns out to be the latter?)

I note another story just posted on the Times, "Administration is Seeking $700 Billion for Wall Street Bailout." I quote its first paragraphs:

The Bush administration on Saturday formally proposed to Congress what could become the largest financial bailout in United States history, requesting unfettered authority for the Treasury Department to buy up to $700 billion in mortgage-related assets.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill, where negotiations were likely to be complicated but quick. Democratic Congressional leaders have pledged to approve legislation by the end of this week.

The Bush Administration, even in its waning days, certainly seems to like "unfettered authority." So is this the equivalent, applied to the economic sector, of the "national-security" unfettered authority asked for, and basically granted, by a submissive and scared Democratic Congress? Such legislation, of course, can be made to fit within "rule-of-law" paradigms if all that is required is ex-ante legislative acquiescence to the executive. But, as I have argued earlier, this is far, far away from any civics-book vision of how our ostensibly separation-of-powers system is supposed to work. I do wonder if Brandeis, Cardozo, and Stone would label what appears, at least today, to be the proposed legislation, which will presumably be added to the U.S. Code within the week, as being "delegation run riot" and whether we should care what the answer is.

A bonus question: Do any of us want, or expect, Senators McCain, Obama, and Biden in effect to suspend their campaigns over this next week in order to return to Washington to study carefully the Administration legislation and to participate in whatever will count as legislative hearings about it? Sarah Palin, of course, can campaign on her own and continue to dazzle the country with her deep knowledge of economic issues (but I digress...)


I thought one of the central critiques of Administration surveillance and detention policy was that the Administration did not seek Congressional authorization. Here we have a situation where the Administration quickly recognized that it needed to seek Congressional authorization for its policy.

Sandy's critique is that the authorization is "ex-ante." But it is my understanding that Congress will place limits on executive compensation and include in the legislation other provisions that were not part of the Administration plan.

Sandy might respond that the "key elements" of the bailout were developed solely by the Adminisration.

Suppose that a few Congressional leaders had played a key in developing those elements. Would that make any difference at all to the Schmittian analysis? If not, wouldn't the Schmittian analysis apply to almost any kind of leadership in an emergency?

I've got a question in Constitutional Law.

The proposed law sent by Paulson to Congress to be passed includes this:

"Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency. "

1. Can Congress abandon their Constitutional right to oversight of the Executive in this way?

2. Does this statement also mean that even the President cannot question the uses the Secretary of Treasury makes of the $700 billion? I'm not sure I can see how the President could review the expenditures without using an administrative agency of some kind.

While my question 2 seems to be a stretch, I wouldn't give the authority to override Congressional oversight to someone I trusted a great deal, and nothing the Bush administration has said or done gives me the slightest inclination to trust anyone in it. Even if it were Constitutional to give them the authority which I suspect it is not.

As I understand it, the Constitution does allow Congress to determine jurisdiction of the courts, so that part seems that it may be constitutional. But of course I am no lawyer.

The plan outline certainly raises some serious issues. One of the problems with analyzing this crisis over the last year has been the uncertainty about whether it involves a liquidity problem or a solvency problem. In the former case, the assets (mostly mortgages, but also their derivatives) have long-term value which can't be realized right now. In the latter case, there aren't sufficient assets to cover the debts (say, because of fraud).

We need to know which one it is in order to evaluate the proposed rescue plan. If it's a liquidity problem, then the plan may (MAY) make sense. The government could take the position of a long term investor and simply wait for the assets to pay off, in contrast to the current market participants who need the money more quickly. If the plan requires a reasonable discount, then the delay won't cost much in the long run.

OTOH, if the assets are, as seems very possible, worth nothing at all, then this plan is simply a wealth transfer from taxpayers to those who are already wealthy (or at least would be wealthy if they hadn't screwed up). That's pretty hard to justify absent some very significant consideration for ordinary taxpayers.

The crisis atmosphere lends itself to suspicion of Administration motives. It's eerily similar to the invasion of Iraq, the FISA bill, the torture bill, and other phony emergencies concocted by the Administration in order to centralize power. If, as it seems, the plan allows Henry Paulsen to disburse $700 billion -- I can hear Everett Dirkson groaning in his grave -- without supervision, that's disturbing enough even if we had good reason to trust the Administration.

Germane, I think, from another thread:

Look at how it's played out. The Fed (owned by its member commercial banks but ostensibly answerable to Congress and the Executive) has just consolidated almost COMPLETE control over the financial landscape. Before this year, there were powerful private companies (e.g., AIG) and investment banks that were beyond the control of the Fed. Now, practically ALL are gone. The commercial banks now control everything (with the sole exception of Goldman Sachs), with the Fed at their helm.

Here is the irony. The Fed is not bailing us out. "We" (the USG) are bailing out the Fed!


I am against the legislation proposed today. How can we stop them? IMO they are corrupt.

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

That's the language from Section 1 of the proposed bill. It's not clear to me what the limitation on "US headquartered companies" is supposed to accomplish. After all, any foreign entity could simply sell the MBS to, say, Morgan Stanley, which could then turn around and sell them to the Treasury.

The more I think about the language of Section 8 (which makes the Secretary's actions unreviewable), the less I think that a veto would generate a constitutional crisis and the more I think that passage might well do so.

I sometimes wonder how often the real world penetrates into the ivory towers of Academe...

I know as a fact that the UK Government Legal Service makes sure that the Permanent Secretaries of every department have at their disposal pre-prepared drafts of emergency regulations, orders in Council, proclamations and bills, to cover every possible contingency ranging from thermo-nuclear war to a breakdown in the banking system or the outbreak of an infectious disease. See, for example our Civil Contingencies Act 2004 which provides for Orders in Council or Ministerial Regulations to be made instantly in the case of just about every conceivable kind of emergency.

Our Treasury has drafts of orders which can be made in any market emergency. If need be, it would take about an hour to completely isolate the UK financial system from the rest of the world, close all the markets, re-impose exchange controls etc.

I would be amazed if there were not similar "play books" in every Department of the US Government.

Likewise every major law firm in the City of London runs 24 hours a day 7 days a week and I know from personal experience that our colleagues in New York offer similar services.

A respectable player will have a few hundred corporations in 20-30 jurisdictions available "off the shelf" to serve as the vehicles for any super-urgent deal.

Why else do the Courts provide for a duty judge to be available 24 hours a day, 7 days a week, 365 days a year to grant emergency injunctions and the like?

Both inside and outside government, lawyers will be available at any time day or night to put together whatever cannot wait until the next working day.

And if the lawyers miss something in an emergency - that's life - in today's world where I was quite often sent a fax on something complex asking for an opinion by return - I did the best I could and included some boilerplate which I hoped would protect my PI cover if I was later shown to be wrong.

Those who dont's enjoy that kind of life can always settle for explaining to rows of spotty students how to manumit a slave according to the law of the Twelve Tables!

The proposed bill also contains the following:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency”.

I think it also deserves constitutional scrutiny

1) The Fed and Treasury obviously conducted a legal review as the cited the provision of the USC under which they leant money and concluded they needed legislation to form the new government entity.

2) I am sure they stretched their statutory authority to the limit to deal immediately with the crisis and will ask Congress to enact complex legislation with broad powers that many members will not even begin to understand with the assumption that the government can revisit the issue with more leisure in the future once the crisis had passed. This makes perfect sense and does not challenge the Constitution.

3) Sec 8 curtails judicial and administrative review , not congressional review, of the administrative decisions of the Secretary. To the extent that Sec 8 violates due process, the courts will simply ignore it.

4) There are some significant misunderstandings of what is being done here:

a) This new entity will be virtually holding an auction and purchasing the most discounted assets first. This will drive down the potential costs.

b) The assets being purchased should on average have substantial value because they are based upon foreclosed real property. Unlike the private sector, the government can sit on this property and resell it when the real estate market rebounds in a year or two. Indeed, a couple financial analysts on NPR yesterday were discussing what would happen if the government ended up making a profit in these assets.

pinkerd raises an important point: Is it sufficient (to still my doubts) that an administration seeks "authorization" instead of acting unilaterally. Generally, of course, the answer is yes, but it is important, surely, whether the Congress genuinely scrutinizes the authorization seeker or instead, because of heightened rhetoric (which may even be true) about "crisis" and "emergency," basically rubberstamps the requestion. Consider the Tonkin Resolution and the passage of the USA PATRIOT Act. Or, to go back much further in time, consider Congress's basically rubber-stamping, after only a day of debate, James K. Polk's desire to go to war with Mexico, which Abraham Lincoln properly denounced.

It obviously remains to be seen how much congressional modification of the legislation will occur and how much, instead, the Democratic leadership will (properly) try to load up the bill with other social welfare legislation and dare the President to veto it.

It should be an interesting week coming up!!

Another concern is that this bailout plan might not be such a bright idea, but that Congress will rush to pass it anyway without even listening to outside advice. See this from Brookings:

and this from the WaPost:

and this from Luigi Zingales of UChicago:

and lastly Paul Krugman:

Also, note that there is no real cap on spending under this proposal - "the Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

Also, note that there is no real cap on spending under this proposal - "the Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

In other words, a slush fund.

The New York Times has obtained a draft of the bill from the AP The Bush Administration’s $700 Billion Rescue Plan

It is a short bill, just 12 sections, and seems to be the paradigm of civil service drafting for emergency legislation with the usual clauses for such bills, once parodied by A.P. Herbert: "If anything shall seem, the Minister may deem, a certificate of demption shall confer complete exemption".

Aficionados of the genre may care to contrast the US draft bill with the Banking (Special Provisions) Act 2008 rushed though the UK parliament to enable the take-over of Northern Rock - the first UK institution to get into deep water by holding too much toxic US paper.

Obviously, the Administration intent is to obtain quick statutory cover to start buying in the toxic paper ASAP before Congress recesses for the general election leaving it to the next administration and the next Congress to take care of the detailed workout.

One would hope that the Congress would want to tack on some similar provisions to help those at the sharp end, - i.e. the homeowners in or threatened with foreclosure, and possibly some further short-term assistance for the poorest citizens.

As Professor Levinson says - this next week should be 'interesting'. Forget not that there is a Chinese curse: "May you live in interesting times!"

Tray listed some expressions of concern. The Brookings Inst - Elmsdorf - Concerns about the Treasury Plan makes this valid point:-

First, the affected debt instruments are quite heterogeneous, which makes setting appropriate prices and quantities very difficult. If all MBS were alike, the government could simply undertake a reverse auction, purchasing the cheapest securities on offer until the market yield was driven down to the desired level. But MBS differ in the probability of mortgage repayment and other characteristics. If the government said it would buy a certain amount of AAA-rated MBS at the lowest price offered, and a certain amount of AA-rated MBS at the lowest price offered, it would be placing undue weight on ratings that have been widely derided, and current holders would likely sell the government the lowest-quality securities within each ratings class. Derivatives of MBS are even more idiosyncratic, so running an effective reverse auction for them would be even more difficult. Instead of auctions, the government could consider buying eligible securities at a pre-set premium over current market prices—except that the illiquidity of financial markets now means that market prices for many of these securities do not exist. Alternatively, the government could use its judgment—or the judgment of a hired investment firm—to decide which debt securities to buy and from whom and at what price, but the potential for inefficiency, unfairness, and abuse in such a system is high.

A second problem with buying troubled debt is that it provides the most help to the financial institutions that made what are, in retrospect, the worst investment decisions. Banks that stayed clear of this debt or sold such debt at cut-rate prices earlier this year in an effort to move beyond the crisis would receive no direct gain from such a program, while banks that made the biggest commitments to low-quality mortgages and have delayed dealing with their balance-sheet problems would be the biggest beneficiaries.

The WaPo op-ed by Sebastian Mallaby A Bad Bank Rescue follows suit and suggests alternatives.

Mr Mallaby seems to have forgotten what he may have learned at the Financial Times. The USA market does not operate in a vacuum. Neither he nor the other economists he refers to address the point that this toxic paper is not just held by US banks but by banks throughout the world system. They are being told by their regulators to raise capital to replace the bad paper and it is that which has led to the banks worldwide turning off the lending spigot while they work to reconstitute their eligble assets.

The US and other systems depend on credit for the economy to function at all. Since the US is running a substantial balance of payments deficit, that credit has to come from overseas. "Overseas" is likely to look askance at the US Government giving US banks "state aid" by way of injections of capital which competition law prohibits within the EU. US banks operate within the EU and are regulated over here as well.

Remember also that there is some US$740 billion of credit card receivables out there - also bundled into derivative securities. The warning signs of the present credit crunch have been around for some time - and credit card defaults were one such early indicator - see this article from February 2008 Over the Limit

Longer term, there will have to be a real effort to encourage people to return to a "thrift" culture - saving in a bank or a thrift institution of some kind to accumulate the money needed to buy that TV or new car rather than buying on credit.

Meanwhile the toxic US paper has to come out of the world banking system, not just that of the USA. The alternative is a collapse of confidence in the US dollar as an international trading currency, a return to exchange controls, a cash rather than a credit economy and real pain. That may yet be the ultimate outcome in any event.

I guess it was that scenario which so shocked the congressional leadership. What is perhaps more shocking is that the wider world of punditry has not yet cottoned on to the very real enormity of the crisis.

There seems to be something of a "this can't be happening to the USA - we're too big" syndrome. That attitude was fine when the USA was the world's creditor - I am old enough to remember that in the 1960's I was allowed to obtain US or other foreign currency to travel abroad just once a year and it was limited to US$250 - but the US financed its good times and the Iraq war on credit - and the creditors are unable to continue the facility.

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