Page Index
Extraordinary problems can require extraordinary solutions. But must extraordinary solutions require extraordinary, even extra-constitutional, powers? Secretary of the Treasury Henry Paulson’s proposal for helping troubled banks and financiers puts that question squarely before us.
Imagine that you are a financier — one with boundless enthusiasm, limited scruples, and far fewer smarts than you think you have. Now, thanks to your greed, recklessness, and abysmal judgment, you’re in way over your head and sinking fast, weighted down by bad loans and an inability to raise capital to continue your destructive habits.
What do you do?
If you’re a little financier, you declare bankruptcy and spend the rest of your life in an abode that makes a tarpaper shack seem like the Taj Mahal. But if you’re a big financier, you call Henry Paulson, Secretary of the Treasury. “Henry,” you say, “you’ve got to take this subprime paper off my hands or the sky will fall on Main Street as well as Wall Street.”
What does Henry Paulson do?
He teams up with Federal Reserve Chairman Ben Bernanke. Together, they tell Congressional leaders of both parties that the sky will fall on Main Street unless the federal government, using taxpayer dollars, purchases the rotten paper. “Give us a $700 billion line of credit,” they say, “and we’ll restore the economic health of the financial markets. Main street will be safe. But we’ve got to act fast, so don’t ask too many questions. Just approve what we want; trust us, and get out of the way.”
If you’re that financier, you might heave a sigh of relief: boy, that was close. But if Congress rubber-stamps the request of Paulson, Bernanke, and Bush, you’ll be absolved of your sins, reimbursed for your losses, and retain enough liquidity to take your wife on an excursion to visit Shah Jahan’s tribute to his wife.
Bush and Paulson seek dictatorial power to help their friends on Wall Street. The draft legislative proposal for treasury authority is just three pages long, but that’s all it takes to crown Henry Paulson as America’s economic czar. In fact, most of the power grabbing occurs in just two short paragraphs:
Section 2 [Purchases of Mortage-Related Assets (b) Necessary Actions.—The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
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.
The proposed legislation would authorize the Secretary of the Treasury to spend “only” $700 billion, but he could spend it any way he wanted to spend it, wisely or unwisely, and no one, with the possible exception of a higher god, could stop him.
Were it not for this administration’s long record of regarding the Constitution as an inconvenience, or worse, I would wonder whether Section 8 (there’s irony in choosing the name Section 8 for this crazy grab for power) was a negotiating ploy, a red herring to distract Congress from the rest of the rescue legislation. But after eight years of an administration that tortures prisoners, illegally eavesdrops on law abiding citizens, and generally does whatever the hell it wants, I think that Paulson and Bush really are trying to escape judicial review and serious oversight of their bailout plan.
I’m not the only one raising the alarm. Consider the words of Naked Capitalism’s Yves Smith, a consultant in the investment banking industry, in his trenchant essay Why You Should Hate the Treasury Bailout Proposal:
First, let’s focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it’s the ceiling on the outstandings at any one time. It’s a balance sheet number, not an expenditure limit.
But here is the truly offensive section of an overreaching piece of legislation:
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.
This puts the Treasury’s actions beyond the rule of law. This is a financial coup d’etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
But far worse is the precedent it sets. This Administration has worked hard to escape any constraints on its actions, not to pursue noble causes, but to curtail civil liberties: Guantanamo, rendition, torture, warrantless wiretaps. It has used the threat of unseen terrorists and a seemingly perpetual war on radical Muslim to justify gutting the Constitution. The Supreme Court, which has been supine on many fronts, has finally started to push back, but would it challenge a bill that sweeps aside judicial review? Informed readers are encouraged to speak up.
Law Professor Jack Balkin, in Give Us More Unreviewable Power, explains the nature of the risk:
The country is currently enmeshed in a very serious financial crisis, one of the most serious since the Great Depression. The causes of this crisis are many, but one of the most important is the deregulatory philosophy that has suffused this Administration. This philosophy has proved intellectually bankrupt and now threatens to bankrupt the country as well. Had the Administration been willing to rein in the financial excesses of the past seven years, the crisis might have been avoided with far less cost to the country.
In response to the crisis created in part by its own incompetence and ideological blinders, the Administration now asks for enormous new powers to run the economy in a form of state planning that would make Friedrich Hayek turn over in this grave but would surely bring a smile to Carl Schmitt’s lips.
In the latest version of its plan, the Secretary of the Treasury is given authority to take 700 billion dollars (that’s 700,000,000,000) from the federal budget and spend it pretty much however he likes, free from any oversight requirements or restrictions that apply to public contracts and especially free from any form of judicial review. (The technical term for this is “committed to agency discretion.”).
Oversight and regulations of public contracts are designed to prevent malfeasance, corruption, self-dealing and conflicts of interest in the distribution of federal monies. (Here is a brief history of the Bush Administration’s sorry legacy of squandering taxpayer money.). The Administration wishes to dispense with all of these restraints and precautions, just as it sought to run the Iraq war on no-bid contracts. That was bad enough, but here the dangers of bad deals and conflicts of interest are staggering. The Secretary is asking for authority to bail out Wall Street and enter into negotiations with financiers who include important parts of the political and financial base of the Republican Party. Not only will the Secretary be figuring out appropriate compensation for these people, he will also to a certain extent be deputizing a number of them to carry out a wide range of functions for the government.
Put differently, the Administration wants the Secretary to take over a sizable chunk of the nation’s capital and insurance markets, and run them as a firm. It is a merger of public power and private capital that would have made a 1930s advocate of state corporatism proud. And because the Secretary’s power is effectively unreviewable, he can make sweetheart deals with any or all of the firms and financiers that got us into this mess, providing handsome compensation packages to outgoing executives or, in the alternative, bring these failures into the government to run the new grand public/private business enterprise. Give us more unreviewable power.
Fear of catastrophe can panic otherwise rational people into lunging for lifelines dangled by the Devil. And fear, reported the New York Times (Congressional Leaders Stunned by Warning.) was what Henry Paulson generated when he briefed Congressional leaders on 18 September:
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
“When you listened to him describe it you gulped,” said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
What makes this situation so dangerous constitutionally is that although we still don’t know exactly what calamity Paulson is predicting, let alone his proof that it will occur, he is proposing a remedy of staggering expense while demanding extraordinary powers — and arguing that debate on the merits must be curtailed because the situation is so dire. In his prepared testimony before the Senate banking committee this morning, he said:
When we get through this difficult period, which we will, our next task must be to address the problems in our financial system through a reform program that fixes our outdated financial regulatory structure, and provides strong measures to address other flaws and excesses. I have already put forward my recommendations on this subject. Many of you also have strong views, based on your expertise. We must have that critical debate, but we must get through this period first.
Translation: “Trust me, don’t ask questions, get your butts moving, give me what I want, or you’ll be responsible for the Republic going bankrupt. Trust me, and I’ll save you and the nation.”
Those are the words of a man on a white horse, a man who declares that not only do extraordinary problems require extraordinary solutions, they require — indeed, justify — granting government extraordinary powers.
Constitutional scholar Sandy Levinson, in A further Schmittian (and constitutional?) moment, observed:
This is exactly what Carl Schmitt met by an “exceptional” situation that requires legal transgression and perhaps even “dictatorship.” Recall, incidentally, that “Sovereign is he who decides the existence of a state of exception.” Well, it’s easy enough to identify the “sovereign(s)” this past week: Ben Bernanke and Henry Paulson.
We are not quite to that Schmittian moment yet, but get there we will if we’re not careful. This not the first time the Bush administration has cried “Exigent circumstances!” and demanded sweeping new powers, warning that a failure to act swiftly and without prolonged consideration will visit apocalyptic terrors on the nation. “This proposal,” warned the New York Times in an editorial this morning,
which is now being negotiated with Congressional leaders, would give the Treasury secretary the authority to buy any assets from any financial institution at any price that he deemed necessary to provide stability to the financial markets. And it asserts that neither the courts nor any administrative agency would be allowed to question or review those decisions.
We’ve seen this kind of over-reaching from the Bush administration before. It has usurped far too many powers under a banner of urgency — think wiretapping — and abused those powers. Now, Congress and the American people are being told that unless they quickly approve sweeping executive powers for the bailout, capitalism may collapse. Even if this administration weren’t so untrustworthy, rushing ahead would be a bad idea.
Senator Chris Dodd (D-CT), chairman of the Senate’s banking committee, echoing the concerns of the Times and others in his opening remarks this morning, the NY Times reports,
…called the Treasury proposal “stunning and unprecedented in its scope and lack of detail.”
Asserting that the plan would allow Mr. Paulson to act with “absolute impunity,” Senator Dodd said, “After reading this proposal, I can only conclude that it is not only our economy that is at risk, Mr. Secretary, but our Constitution, as well.”
In a way, the concerns of Dodd, the Times, Levinson, and many others were addressed many years ago in a famous 1935 Supreme Court decision in Schechter Poultry Corp. v. United States, sometimes referred to as the Sick Chicken Case, a separation of powers issue involving the National Industrial Recovery Act of 1933. Writing for the majority, which ruled against the Roosevelt administration, Chief Justice Charles Evans Hughes said:
Two preliminary points are stressed by the government with respect to the appropriate approach to the important questions presented. We are told that the provision of the statute authorizing the adoption of codes must be viewed in the light of the grave national crisis with which Congress was confronted. Undoubtedly, the conditions to which power is addressed are always to be considered when the exercise of power is challenged. Extraordinary conditions may call for extraordinary remedies. But the argument necessarily stops short of an attempt to justify action which lies outside the sphere of constitutional authority. Extraordinary conditions do not create or enlarge constitutional power. The Constitution established a national government with powers deemed to be adequate, as they have proved to be both in war and peace, but these powers of the national government are limited by the constitutional grants. Those who act under these grants are not at liberty to transcend the…imposed limits because they believe that more or different power is necessary. Text of full decision at Findlaw.
There are plenty of ways to provide oversight that protect the taxpayers against corruption or incompetence, Secretary Paulson against himself, and the Constitution against men on white horses. If you value liberty, let your representatives in Congress know, and know right now, that Section 8 is a constitutional skunk that can never be perfumed.