Author Archive for nate-oman
Barney Frank’s Bad Idea
posted by Nate Oman
Last month Barney Frank unveiled the House plans to fix the financial services industry. One of the provisions (section 1501) will require that any creditor who originates a loan to retain some of the ultimate risk of non-repayment of the loan. The provision is an apparently sensible response to the pathologies in the originate-to-distribute (OTD) model of mortgage lending that we saw at the height of the subprime boom. The basic idea is that originators were insufficiently incentivized to monitor the credit worthiness of applicants, and therefore manufactured a huge volume of ultimately toxic financial assets. The idea is to fix the problem of agency costs by aligning the incentives of loan originators with loan holders. Despite the plausibility of the proposal, I think that it is ultimately a bad idea.
First, it is a bad idea because it addresses a symptom rather than a cause of financial rot. The problem with the mortgage-brokers-as-villains narrative is that it fails to explain why the brokers could do a land office business selling toxic junk to a voracious secondary market. One explanation – the one implicit in section 1501 – is that brokers were taking advantage of purchasers, selling them supposedly sound financial assets that the purchasers were too unsophisticated or blinded by greed to realize were junk. To state this assumption explicitly is to see its limitations. The purchasers of mortgages were not unsophisticated consumers or little old ladies entrusting their savings to fast talking swindlers. These were a bunch of extremely wealthy, extremely sophisticated, extremely large financial institutions. It is rather unlikely that these guys were “fooled” by the mortgage brokers.
A more plausible story, in my opinion, looks at the underlying supply and demand for credit. First, why did the mortgage brokers go into the subprime market? At least in part the answer is that they could afford to do so. With the short term wholesale funding on which they relied to originate loans costing them essentially nothing, it was extremely inexpensive to originate loans. At the same time, the massive subsidization of the subprime market through implicit guarantees to the Fannie and Freddie, the so-called “Greenspan Put” on which Wall Street relied, and various (admittedly much smaller) direct subsidies created a massive demand for the assets churned out by the mortgage brokers. Add to this the impact of monetary and Chinese balance of payments factors on asset prices, and the notion that the subprime crisis was really the result of agency costs in the OTD model looks implausible. Absent macro-economic and regulatory distortions, I suspect that market competition and reputational sanctions are sufficient to keep the OTD brokers honest. Given those distortions, we have seen spectacular examples of those who did have skin in the game responding perversely to the perverse incentives with which they were presented. Read the rest of this post »
November 11, 2009 at 2:53 pm
Posted in: Consumer Protection Law, Contract Law & Beyond, Corporate Finance, Current Events, Uncategorized
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Today’s Strange Legal Relic from the Civil War
posted by Nate Oman
In 1862, the legislature of Mississippi enacted the following statute:
It is lawful for any married woman to alledge [sic] as a cause of divorce, that her husband is engaged in the service of the United States of America, either in the army or navy, or from choice reside in any one of the States of the United States in preference to residence in one of the Confederate States. Provided, that such divorce shall not render illegitimate the children of such marriage.
Interestingly, the Confederate husband whose wife sided with the Yankees was left without specific recourse, although I believe that female abandonment of the marital home was always cause for divorce. One also wonders about the loyal son of the South caught on the wrong side of the lines and forced to reside amongst the Northerners. Could he argue that he did not reside by “preference,” or was his wife free to cut him off?
November 11, 2009 at 12:37 am
Posted in: Uncategorized
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Voices from the Past
posted by Nate Oman
Of late, I have been listening to historic audio recordings online. There is something haunting about hearing the voices and sounds of a world that one generally experiences only in print. Consider, for example the earliest recorded human voice, made in France in 1860. When this almost entirely incomprehensible bit of sound was captured, the election that would put Lincoln in the White House and split apart the country was raging on the other side of the Atlantic.
Thirty-seven years later, Wilford Woodruff, the president of the Mormon church who abandoned polygamy in 1890, recorded this statement of his religious beliefs. Four years later in 1901 Booker T. Washington made this speech on “The American Negro” and William Jennings Bryan denounced imperialism. (Here is a 1921 re-recording of his famous “Cross of Gold” speech, originally given in 1896, a year before Woodruff’s recording was made.)
On the other side of the Atlantic, in 1908 Christabel Harriette Pankhurst, one of the so-called ”militant suffragettes,” justified protests and civil disobedience to get votes for women, and a year later David Lloyd George, then Chancellor of the Exchequer, defended the so-called “People’s Budget” of 1909, which marked the beginning of the British welfare state.
Here is a 1912 recording of Theodore Roosevelt in which he makes the case for vigorous trust-busting authority. Notice the nasally quality to his voice. This was pretty common among 19th and early 20th century orators, as it allowed their voices to be heard farther without the benefit of loud speakers. Later in the decade V.I. Lenin gave this speech (in Russian) about a fallen comrade. At the time of the speech, the civil war precipitated by the October Revolution still raged across Russia.
In 1931, Justice Oliver Wendell Holmes Jr. made this recording on his 90th birthday giving his thoughts on life, struggle, work, and his impending death. A few years later, FDR won re-election in the campaign of 1936 and gave this “fireside chat” on his plans to tame the federal judiciary. Four years later, in the summer of 1940 Winston Churchill spoke to the House of Commons in the aftermath of Dunkirk, declaring “We will never surrender!” It still counts, in my mind, as the most heroic moment of political rhetoric and statesmanship in the twentieth century, and one of the great moments of all time. I get goose bumps listening to it, despite Churchill’s lisp.
Finally, in honor of yesterday’s anniversary, I offer this, less historical, recording of Reagan’s challenge, “Mr. Gorbachev, tear down this wall!” Another of the great moments of 20th century political oratory.
November 10, 2009 at 10:18 am
Posted in: Uncategorized
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Ebook Readers and the Life of Legal Academia
posted by Nate Oman
I sometimes think that my life is dominated by paper, binder clips, and redwells. Being an academic necessarily means that I read a lot of article, and having a blind hatred of reading articles on a computer screen, this means that I print them out. The result is that I am constantly surrounded by stacks of paper, and on a recent trip to Chicago I was reminded of how inconvenient paper can be as I schlepped a heavy bag stuffed with article-containing redwells through the airport. My wife has also repeatedly complained about the binder clips that often litter the house.
I am not particularly enamored by the idea of ebooks. I like the feel of paper and binding. Indeed, I have fairly strong opinions about such things and will pay extra money to get an edition of a book in the physical format that I enjoy. I am still convinced that my early attraction to the law came from my fascination with the row upon row of calf-skin-bound reporters. Nevertheless, I am considering buying an ebook reader on which I can download PDF versions of papers from SSRN, Hein-Online, JSTOR, and the like to read. I am hoping that some of the more gadget-inclined of Co-Op’s readers can give some advice. My understanding is that the Kindle locks you into Amazon’s proprietary world. However, I think that the Sony readers allow you to read PDFs and other formats. Has anyone tried to run their SSRN addiction through a Sony reader? What is the reading experience like for PDF files? Are casebooks available in ebook format? (Class prep on a plane without lugging a doorstop-sized case book is appealing.)
Given that I will spend much of next semester on an airplane between Ithaca and Williamsburg, I’d like to eliminate paper as much as possible from my consumption of scholarship. Is this possible?
October 30, 2009 at 10:11 am
Posted in: Uncategorized
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Shame on the Brits!
posted by Nate Oman
By temperament, I am not a particularly passionate person. Every so often, however, the world throws up an event of such mindless horror that even phlegmatic me is roused to ire. Chris Lund points out such a horror in this post over at Prawfs. All I can say is, “What the hell are their Lordships thinking over at the new Supreme Court of the United Kingdom?” Shame! Shame on you! Read the rest of this post »
October 22, 2009 at 7:50 am
Posted in: History of Law, International & Comparative Law, Jurisprudence, Just for Fun, Law Practice, Politics, Weird
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Health care systems kill people. So what?
posted by Nate Oman
As the debate over health care reform slogs on, a particular kind of argument has become quite familiar. It goes something like this:
Health care system X is a bad system because it kills people.
In support of this assertion, we are then treated to a set of anecdotes about how this or that person died as a result of this or that health care system break down. Hence, we see critics of Obama’s proposals trotting out horror stories about how NHS bureaucracy resulted in the death of this or that Briton’s loved ones. Likewise, we see supporters of health care reform unearthing heartbreaking stories of how the American patchwork of private insurance and Medicare or Medicaid killed off dad or mom. My question is, “So what?” Read the rest of this post »
September 15, 2009 at 7:48 am
Posted in: Bioethics, Health Law, Tort Law
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The Policy Arguments for and Against Driving on the Right Side of the Road
posted by Nate Oman
Generations of law professors have always insisted that there is some class of rules where the particular content of the law is less important than that we have some clear answer to a question. The paradigmatic example is a rule specifying which side of the road one ought to drive on. The decision, so the argument goes, is entirely arbitrary so long as we all pick a side.
Not so it would seem. Read the rest of this post »
August 24, 2009 at 8:04 am
Posted in: Current Events, History of Law, Jurisprudence
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Getting into the Same Room
posted by Nate Oman
Over the summer I organized a reading group on the current financial crisis. We met once a week over lunch. One member of the group would have chosen a reading and would lead the discussion. On the whole it worked well. We had participants from the law, business, economics, political science, public policy, history, and physics (they were interested in the models used by the quants). I enjoyed it and learned a great deal from listening to people from several different disciplines chew over the same readings and issues. Talking with participants afterward, I was surprised by the number who informed me that this was the first time they had ever participated in an event like this with faculty from another department. It has got me thinking about the best of overcoming the problem of geographic and logistical ghettoization. Most of the law professors I knew are intellectually ecclectic souls. It is the great fun and virtue of the legal academy, I think, that we feel free to read and borrow from other’s disciplines. Indeed, the decline of law as an self-confident autonomous discipline and the rise of “law and…” scholarship makes cross-disciplinary reading something of a professional necessity. I wonder how well we do, however, in actually getting into the same room with scholars from other departments. Of course, for many law schools the room is physically located in a different building, sometimes on a different campus, and occasionally in a different city. At William and Mary the law school is off the main campus, down the street, and around the corner. I wonder if something as simple as architecture is driving our destiny.
I did, however, discover one great advantage of the legal academy in bringing scholars together. With the possible exception of the business school, we can offer better food.
August 21, 2009 at 9:39 am
Posted in: Uncategorized
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A Half-Baked Idea on the Evolution of Legal Scholarship
posted by Nate Oman
Having fallen into a black hole of writing for the last couple of months, I am now trying to emerge to do a bit of blogging. Over the summer I’ve had the good fortune to be part of an interdisciplinary reading group at William & Mary on the financial crisis. Yesterday one of the economists in the group, Till Schreiber, gave a fascinating presentation on the current state of macroeconomics and fiscal policy. One of the striking things to me was to see how little research has been done for the last generation or so on fiscal policy. An enormous intellectual effort has gone into thinking about monetary policy. I was frankly a bit shocked, however, not just at the amount of disagreement there was about such basic questions as the size of the fiscal multiplier, but even more at how thin the research on the topic was. One theory we batted around as to why this was so is a simple matter of the incentives that economists face. Those writing papers on monetary policy had a ready and sophisticated audience among central bankers. Indeed, those doing good work in monetary policy could hope to actually do monetary policy someday. On the other hand, the chances that the average congressman making fiscal policy could read, understand, or even be interested in sophisticated work on fiscal policy was minimal to zilch. Likewise for the chances that an academic expert on fiscal policy would be come a congressman or Senator.
I wonder if there is a similar bias at work in the legal academy. One story that you might tell is that relative to legislators judges are going to be more intellectually sophisticated when it comes to the law. Accordingly, one would expect to see more pieces explicitly addressed to judges than to legislatures. Hence, doctrinal scholarship would dominate over more straight forward law reform proposals. I think that there may have been a point in time at which this was true, but it seems to me that the trend in legal scholarship has been to move away from work that is explicitly addressed to either judges or legislatures. One way of understanding this might be simply in terms of the rising sophistication of interdisciplinary legal scholarship. Sticking with the analogy to economists, however, I wonder if the turn away from work more explicitly aimed at judges might be a result of the ideological divergence of the judiciary and the legal academy since the early 1980s. The academy, of course, has always steered left and given that since 1968 only three of the ten presidential terms have been served by Democrats the federal judiciary at least has been moving to the right. Hence, one might tell a story of the rise of “law and ….” scholarship as the academy’s response to their increasing awareness of their ideological irrelevance to what was going on in the courts.
Just a thought.
July 31, 2009 at 8:59 am
Posted in: Law School (Scholarship), Politics
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The Price of an Under-age Human Bomb
posted by Nate Oman
In the category of horrendous contracts, the BBC World Service has a haunting story today about the production of child suicide bombers in Pakistan. Children as young as 9 years old are frequently kidnapped, subjected to intensive indoctrination for a few months, and then sent forth as human bombs. Indeed, it seems that the Taliban in Pakistan has become so good at creating suicide bombers that they have turned into into a revenue device. Pakistani television is reporting that a family paid roughly $400 for a child suicide bomber to take out a rival family with whom they had some sort of dispute. The child’s handlers informed him that he was carrying out a jihad mission and pocketed the money paid for the hit.
May 26, 2009 at 9:53 am
Posted in: Contract Law & Beyond
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Chrysler and the Road to Indonesia
posted by Nate Oman
In the 1990s the economies of southeast Asia were flush with cash. The ever-increasing liquidity of global capital and its willingness to chase returns in emerging markets meant that the banks of Thailand and Indonesia had money to burn, and burn it they did. The problem, of course, was that these banks were far from the independent wealth-maximizers that one imagines in mature markets. Rather, they were deeply involved in the elite political coalitions in these countries, frequently making and administering loans at the dictation of those elites rather than the bottom line. As long as the international capital markets were pouring money into their economies, this was not a problem. On the other hand, when Russia defaulted on its debt and global capital fled from emerging markets, these banks found themselves unable to cope with the crisis given the rotteness that politics had inflicted on their balance sheets. The only way of staving off national bankruptcy were loans cobbled together by the IMF coupled with an agreement to hand the keys of economic policy over to the grown-ups at the Fund. The Chrysler bankruptcy is a flash of lightening that gives us a brief glimpse of the banking world created by the bailouts. It looks disturbingly like southeast Asia.
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May 16, 2009 at 8:07 pm
Posted in: Bankruptcy
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Deconstructing the Put-Option State
posted by Nate Oman
Larry and David Zaring have a thoughtful piece making the case against an overly exhuberent regulatory response to the financial crisis. There is a lot of wisdom to what they say. At its bottom, however, it seems to me that the keygovernment failure lay not in our regulations but in our political culture. As Simon Johnson (of the must-read Baseline Scenario blog) observes in the most recent issue of The Atlantic, our current debacle looks less like Wall Street circa 1930 than Indonesia circa 1997. The problem is not that we are reaping the whirl-wind of unregulated markets run amok, but rather that we are reaping the whirl-wind of a system where politically powerful business actors get the up-side of huge risks, while they can push the downside on to the public. We are living in the put-option state.
May 9, 2009 at 1:55 am
Posted in: Bankruptcy, Corporate Finance, Politics, Uncategorized
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The Beauty of Casuistry
posted by Nate Oman
When I get asked by non-lawyers about teaching law school (and this happens about once or twice a year) I tend to tell them a certain kind of myth about the case method. I try to throw my students into the particulars of the common law and force them to engage in a casuistic process of pushing the limits of their intuitions by testing them against new, but slightly different fact patterns. Likewise, when a student asks me something like “Yes, but what does reasonable reliance really mean?” my answer is generally that they have to look to the cases. I can’t give you a set of abstract principles that answer that question, I say, what you have to do is find a case with a fact pattern similar to yours and then either distinguish it (if it is bad for you) or argue that it covers your case (if it is good for you). In my more nominalistic moments, I will insist with what I hope is a suitably wild-eyed look that there really is nothing else there when it comes to many legal concepts. It is just the cases. Just the particulars.
May 8, 2009 at 8:43 am
Posted in: Law School, Law School (Scholarship), Law School (Teaching)
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Dismembered Goats as a Key to Understanding Contract Law
posted by Nate Oman
As a fellow contracts geek recently pointed out to me, I am obsessed with finding strange new contractual rituals. Of late, I have been collecting stories about dismembered animals. The fifteenth chapter of Genesis in the Bible, for example, records what must surely count as one of the most famous contracts in history. Abram (who will be renamed Abraham later in the story) has left his homeland in Ur and come to the land of Canaan. After defeating a coalition of local kings who had captured his brother-in-law, Abram has a vision in which God promises the childless patriarch that his decedents will outnumber the stars of heaven and that he will inherit the land of Canaan. The skeptical Abram then asks, “O Lord God, how am I to know that I shall possess it?” The text goes on:
[God] said to him, “Bring me a heifer three years old, a she-goat three years old, a ram three years old, a turtledove, and a young pigeon.” And he brought him all these, cut them in two, and leach half over against the other; but he did not cut the birds in two.
It is, to modern ears, a very strange story. Abram doubts God’s promise, but his doubts are allayed when God instructs him to dismember three animals and then lay the bits of the carcasses against one another. Why does the bloody ritual with the mutilated animals convince Abram that God’s promise is meant seriously? While the answer is obscure to us, it would have been immediately apparent to an ancient reader. God’s response to Abram transforms his promise into a legal covenant by invoking the formality that by which such covenants were created in the ancient world.
May 1, 2009 at 10:25 am
Posted in: Contract Law & Beyond
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How much is $100 million?
posted by Nate Oman
Not much…
(ht Megan McArdle)
May 1, 2009 at 10:13 am
Posted in: Uncategorized
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The History of the Conservative Legal Movement
posted by Nate Oman
Crooked Timber is going to be hosting an online symposium on Steve Teles book The Rise of the Conservative Legal Movement. They have what looks to be a good line up and first out of the gate is Jack Balkin. Check it out.
April 27, 2009 at 11:24 am
Posted in: Blogging, Book Reviews, Constitutional Law, Jurisprudence
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Efficient Browsing and the Legal Workshop
posted by Nate Oman
A consortium of top law reviews has just launched a new site, the Legal Workshop. (Solum gives his thoughts here) Unlike sites such as the Harvard Law Review Forum or the Yale Pocket Part, the Legal Workshop will publish shortened, popularized versions of articles that appear in the reviews. I heard about the idea a couple of weeks ago, when Georgetown Law Journal asked that I produce a shortened version of my forth coming article in their journal for the site. It strikes me as a very good idea, regardless of whether it excites the general public (an apparent goal of the project, and one about which Solum rightly expresses skepticism). As a professor, I suspect that this format will ultimately prove more useful to me than that adopted by say the Yale Pocket Part. The reason is that it helps me solve a problem: consuming legal scholarship.
I run into two problems. First, the volume of things that I am potentially interested in vastly exceeds my ability to read it. The result is that there are lots of things that I don’t read but would like to. Indeed, given that I am a particularly slow reader, this is a bigger problem for me than for my co-bloggers, all of whom seem much better read than me. (My excuse is that I had a learning disability as a child, didn’t learn to read until I was about 12 years old, and am still very slow.) The result is that much of the scholarship I read is directly related to a something that I am writing at the time. It is simply difficult to read much else. This feeds into my second problem: namely that most of my ideas (to the extent that I have ideas) come about serendipitously. I can plan and organize research on a particular idea. It is difficult, however, for me to plan and organize research on finding an idea. For me at least, the most effective way of stumbling on to new ideas is to read randomly what interests me and then engage in intellectual day dreaming. It can be time consuming.
I think that a large part of what counts as thought is simply arbitrage. It is taking ideas from one area and applying them to a new area. This structure, however, means that often the most useful research that you do is unrelated to any research project. Another way of putting this is that new research projects develop when I am thinking and reading about something else and then find a connection. (For example, my Georgetown piece, which looks at generality and specificity in contract law grew out of an analogy I saw between contract law and Federalist No. 10.) There is thus a sense in which intellectual browsing is immensely important for research. I need a way of dabbling and dreaming efficiently.
The “problem” with something like the Pocket Part is that it rather than decreasing the cost of browsing, it simply increases my ability to analyze a particular argument in greater depth. There is a sense, however, in which I don’t really need help doing this. This is what I do when I do specific searches of the literature and amass all of the articles on a particular topic. The Harvard Law Review Forum doesn’t really make this process any easier, even if it provides a home for good material that might otherwise not be written. It’s good but it simply doesn’t do anything to reduce my browsing costs because the new material that it generates in some sense requires or assumes that I have already read the articles in the main journal. That, however, takes time. Ideally, however, the Legal Worship should increase the efficiency of my browsing. What I am hoping is that it will let me consume more ideas than I would get from either skimming SSRN abstracts (broad but shallow) or reading long-form articles (deep but time consuming). I am hoping that it will open me up to more moments of serendipity, which is what I ultimately need.
April 21, 2009 at 8:18 pm
Posted in: Law School (Scholarship)
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Free Speech at a Cocktail Party
posted by Nate Oman
Yesterday, Dan posted a commenting policy for Concurring Opinions. Such things frequently bring forth muttered imprecations of speech control and the demise of the First Amendment. Of course the mutterers understand that Concurring Opinions, despite its obvious power and influence, is not a state actor, but still it seems like a public space. Shouldn’t we encourage the marketplace of ideas to let a thousand flowers bloom (to paraphrase Holmes and Mao)? Well no, not really.
April 21, 2009 at 3:05 pm
Posted in: Blogging
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CDSs and Bankruptcy
posted by Nate Oman
Megan McArdle correctly notes today that much of the CDS-hatred out there comes from political pundits who are not — to put it charitably — particularlly knowledgable about or interested in law or finance. (”Credit default swaps certainly caused AIG to fold, and they’ve undoubtedly made all manner of things worse, but giving them single-handed credit for the financial crisis is like blaming Italy for World War II.”) She goes on to argue, however, that CDS’s may be having the perverse incentive of pushing firms into bankruptcy. The gist of the argument is that debtors have a harder time renegotiating debt with creditors who are protected by a CDS in the event of default, and this presents a systemic problem. I’m skeptical.
April 17, 2009 at 10:53 am
Posted in: Bankruptcy, Contract Law & Beyond
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The Separation of Church and Market?
posted by Nate Oman
Over at the NYT’s Think Again blog Stanley Fish has a post on the Obama Administration’s contemplated reversal of the so-called conscience clause, which allows medical professionals to refuse to provide otherwise legal procedure when they have religious objections. Fish presents the issue as pitting the demands of a neutrally applicable law against the demands of personal conscience. He writes:
In a series of cases stretching from Reynolds v. United States (1878) to Employment Division v. Smith (1990), the Supreme Court has ruled that when the personal imperatives of one’s religion or morality lead to actions in violation of generally applicable laws laws not promulgated with the intention of affronting anyone’s conscience the violations will not be allowed and will certainly not be celebrated; for, says the court in Reynolds, “To permit this would be to make the professed doctrines of religious belief superior to the law of the land, and in effect to permit every citizen to become a law unto himself.”
Of course Fish doesn’t quite get the law right. While he is correct that generally claims that the constitution requires the exemption of religious believers from neutrally applicable laws has been a loser in court, the Justices have also been quite clear of late that despite this hostility, it is fine for law makers to create such exemptions as a matter of non-constitutional law. This is my understanding what the Bush Administration did. No matter. We don’t read Fish for the constitutional law anyway. Far more interesting is his connection of the debate to the broader issue of religion in a liberal democracy:
April 13, 2009 at 9:31 pm
Posted in: Civil Rights, Contract Law & Beyond, Jurisprudence, Politics, Religion
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