Should the Uber-Bailout be Unreviewable?
posted by Frank Pasquale
Both Jack Balkin and Glenn Greenwald point out a disturbing aspect of the draft bailout plan: its provision that “Decisions by the Secretary pursuant to the authority of this Act are . . . committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Balkin raises many troubling possibilities:
Oversight and regulations of public contracts are designed to prevent malfeasance, corruption, self-dealing and conflicts of interest in the distribution of federal monies. 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. . . .
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.
Admittedly, financial reporting has encouraged us to see the policy here as essentially being made on the fly by a group of three, including the Federal Reserve Chairman (Ben Bernanke) and the President of the New York Fed. I will leave it to scholars of Roman history to explain how much better a triumvirate functioned than consuls or emperors. . . .
Greenwald is shocked, and notes that “all of this was both foreseeable as well as foreseen . . . and it’s also happened before, when the Federal Government bailed out the S&L industry that (with John McCain’s help [to friends like Charles Keating]) was able to gamble recklessly and then force the country to protect them from their losses.” Perhaps we are to believe that the new uber-agency will have on hand a stable of honest brokers and technical economists capable of better handling contingencies they overlooked in the past. However, Nassim Nicholas Taleb raises some doubts by analogizing “experts’” misuse of statistics to a homelier anecdote:
[Example 1:] A Turkey is fed for a 1000 days—every days confirms to its statistical department that the human race cares about its welfare “with increased statistical significance”. On the 1001st day, the turkey has a surprise.
[Example 2:] The banking system (betting AGAINST rare events [by observing ever-rising profits at firms that peddled CDO's, derivatives, and other exotic financial instruments]) just lost > 1 Trillion dollars (so far) on a single error, more than was ever earned in the history of banking. Yet bankers kept their previous bonuses and it looks like citizens have to foot the bills. And one Professor Ben Bernanke pronounced right before the blowup that we live in an era of stability and “great moderation” (he is now piloting a plane and we all are passengers on it).
I am not an expert on these markets, and I can’t say with any certainty whether this plan will work. However, one thing that is very clear to me is that leading news outlets (asleep at the wheel for so long, and apparently even now likely to hire those bored by the whole affair) need to start focusing on the distributional consequences of whatever bailout occurs. Greenwald’s perspective here is invaluable:
The headline in the largest Brazilian newspaper this week was: “Capitalist Socialism??” and articles all week have questioned. . . whether [the US just] . . . ushered in some perverse form of “socialism” where industries are nationalized and massive debt imposed on workers in order to protect the wealthiest. . . .
Can anyone point to any discussion of what the implications are for having the Federal Government seize control of the largest and most powerful insurance company in the country, as well as virtually the entire mortgage industry and other key swaths of financial services? Haven’t we heard all these years that national health care was an extremely risky and dangerous undertaking because of what happens when the Federal Government gets too involved in an industry?
Apparently bailouts for well-heeled brokers are quite attractive to this administration. . . .help to kids without health care, not so much. As I noted after the Bear Sterns bailout, the $30 billion spent on that firm alone would have covered 4 million more children with heatlh insurance.
Greenwald asks “How can these bailouts not at least be categorically conditioned on the disgorgement of ill-gotten gains from those who are responsible?” Unfortunately, for the Grover Norquists of the world, the bailouts may actually be functional–they drain billions of dollars out of the treasury that might have once gone to intrusive, socialistic programs like Medicare or SCHIP expansions. . . .or truly dreadful ideas like adequately paying the ever-shrinking number of dentists who take Medicaid.
Given the three trillion dollars dedicated to Iraq, and the new trillion now reserved for this bailout, it appears that executive branch policymakers have moved from a “starve the beast” strategy to an “exhaust the beast” reality. I had once thought that using “beast” as a metaphor for the state was a diabolical rhetorical device for reifying the old bromide “government is not the solution, government is the problem.” But the more one considers the distributional consequences of the “predator state’s” interventions in the financial markets, the more appropriate that figure of speech may be. In other words, Norquist’s characterization of the state as a beast was a self-fulfilling prophecy–fulfilled by his own disciples.
UPDATE: Given the relevance of L. Randall Wray’s review of Galbraith’s The Predator State (in the Journal of Economic Issues) to the current situation, it makes sense to quote it:
[Galbraith] provides a careful analysis of the frontline battles on many of the most important issues–Social Security, health care, inequality, immigration, security after 9-11, trade and outsourcing, and global warming—showing how “market solutions” are designed to enrich a favored oligarchy through a spoils system administered through the state’s structure. The policy “mistakes” in Iraq or New Orleans or at Bear-Stearns do not result from incompetence—indeed they only appear to be failures because we apply inappropriate measures of success. There is no common good, no public purpose, no shareholder’s interest; we are the prey and governments as well as corporations are run by and for predators. . . .
There is a way out, but it is not easy. Historically, regulation and standards have required acceptance by progressive business—those firms that recognized they would lose in races to the bottom.
Let’s hope that some responsible companies in the financial world can play the same advocacy role that Safeway has been playing in health policy. As G. Richard Shell has noted, progressive businesses need to learn to make the rules–or their rivals will.
September 21, 2008 at 10:59 am
Posted in: Economic Analysis of Law, Securities
Print This Post
Responses (3)
Benjamin Keele - September 21, 2008 at 3:14 pm
A few years ago, I
wrote an article examining the incidence of denials of judicial review and
found that they occurred more often than most would expect. Certainly,
though, this bailout plan is most important governmental action that is
unreviewable that I have ever seen.
In case anyone is interested, the article is available at
http://digitalcommons.unl.edu/poliscitheses/2.
Dennis Tuchler - September 21, 2008 at 4:48 pm
Assume there were judicial review available. Who would have standing to raise the issue of the excessive delegation of authority?
A.J. Sutter - September 21, 2008 at 11:06 pm
Dennis, I think your question might not be the right one to ask, because it seems based on too minimal an assumption. Namely that the plan is unamended save for the judicial review issue.
The better solution is to provide expressly for Congressional and/or judicial oversight in the plan. If judicial review is included, the bill could include creation of a cause of action for suit and a description of who has standing to sue.
As for who *should* have standing to sue, that’s a political issue. As one who’s pocket is about to be picked for this, I think all taxpayers should have standing; that’s unlikely, however. And I think that some financial institutions should have the right to sue if DoT acts in a discriminatory fashion (is cronyism past this administration?) But that’s just off the top of my head; given the incredible amounts at stake ($700B at any one time — so in actuality a whole lot more), someone ought to give this aspect of the plan, among others, more than the top-of-the-head thinkthrough it seems to have received.
Leave a Reply