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Hard Financial Crisis Choices

Philip Wallach
Thursday, May 21, 2015, 2:05 PM
Providing physical security to its citizens is undoubtedly the core function of the state. As readers of Lawfare well know, it is hard work to figure out how that security function should be reconciled with sometimes-conflicting imperatives of legal process, constitutional separation of powers, and transparent and accountable government.

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Providing physical security to its citizens is undoubtedly the core function of the state. As readers of Lawfare well know, it is hard work to figure out how that security function should be reconciled with sometimes-conflicting imperatives of legal process, constitutional separation of powers, and transparent and accountable government. Especially challenging is the question of how much, and for how long, exigent circumstances should expand the sphere of legitimate government activities. Not far behind physical security as a core function of the state is providing some baseline of financial stability and economic security, especially through the protection of a functional banking system and financial markets. Once again, it is hard to discern the appropriate relationship between this financial stability function and other mission-critical governmental activities. Because financial stability in a dynamic market economy includes the expectation that downturns are a healthy part of the process, it is often difficult to distinguish between a developing crisis and normal market corrections, making the balancing act between expedient action and a commitment to act through deliberate processes all the more difficult. But while there are volumes enough on the question of why economies experience financial crises, and torrid debates on which responses are most effective, there is a striking absence of commentary about “hard financial crisis choices,” and especially their legal aspects. Applicable judicial precedents are few and far between, the Federal Reserve’s emergency decision-making processes are shrouded in mystery (in contrast to its monetary policy decisions), and the Treasury Department is accustomed to extraordinary deference. This vacuum has had some very unfortunate practical consequences for those who fashioned the responses to our financial crisis response, which I explain in my new book, To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis (Brookings Institution Press, 2015). Why on earth should Lawfare readers care? Treating national security as sui generis, while obviously appropriate in some contexts, unhelpfully narrows thinking in many others. If the question is how emergencies change the scope for government action, how legitimacy is achieved by crisis responders, or what the rule of law means in times of crisis, then adding financial crises to national security crises expands the material available for analysis. Doing so may also help clarify exactly what makes national security distinctive. Some of my book’s analysis was directly inspired by Jack Goldsmith’s Power and Constraint. The latter explains how the government is actually empowered by various watchdogs and legal requirements that seem to constrain it, because they give it credibility and validation in a way that it could not otherwise produce. In the language of my book, such things provide legitimacy, which is often a necessary precondition for effective government action. If citizens had profound trust in their government (or a quasi-religious reverence for their leaders), legitimation might require very little other than some modicum of competence. But in the world of Snowden and Enron, Abu Ghraib and revolving doors, that trust is missing. Like Jack, I argue that accountability mechanisms provide at least a partial substitute by making citizens feel confident that leaders will be held to standards of reasonableness and propriety, if not immediately in the heat of a crisis response then at least afterwards, once the dust has settled. American leaders once took this principle to its logical conclusion by openly acting extralegally and then seeking retroactive validation, either through a congressional indemnity or by appealing to a jury. The classic examples are antiques: Thomas Jefferson’s spending without appropriations in response to the HMS Leopard naval incident; General Andrew Jackson’s maintenance of martial law in New Orleans (vividly described in a classic article all Lawfare readers would enjoy); or Abraham Lincoln’s famous resort to constitutional dictatorship from March to July of 1861. From the beginning of the twentieth century onward, Presidents and other crisis responders have unfailingly offered legal hooks for their emergency actions. Some academic theorists’ ambitions notwithstanding, openly extralegal declarations of prerogatives seem to have no place in our thoroughly legalized modern world (as Jack argues in a rather trenchant essay in this edited volume). Instead of asking whether law will be the tool of legitimation, the question now becomes: just how reliable a check and a legitimator is the now-universally-obligatory exercise of legal justification? If justification is based on law that itself possesses no legitimacy, or if it misuses existing law, then it cannot provide much legitimacy. On the other hand, even in the era of ubiquitous legal justification, actions with poor legal pedigrees can be accepted as legitimate if they are acceptable to the public on other grounds. We can draw some useful analogies between national security and financial crises for both of these situations in which legality and legitimacy diverge. Woodrow Wilson’s leadership during World War I provides an interesting instance in which poor legal justifications led to legitimacy problems. Congress gave Wilson’s administration unprecedented delegated powers through a number of enabling acts (the National Defense Act, Army Appropriations Act, Lever Act, and Overman Act), thus furnishing an easy way to legally justify most of his policies. But even in that context Wilson managed to push the envelope quite aggressively, both by using the vaguely defined powers as justifications for decisions that Congress refused to support (e.g., arming merchantmen, creating the Committee on Public Information---which was effectively a propaganda ministry---and censoring telegraphs) and by sustaining his wartime institutions past the end of the war against the desires of Congress. This willingness to aggressively wield emergency powers contributed to the public’s desire for a “return to normalcy” and Democrats’ resounding defeat in 1920. Similarly, having the backing of an expansive enabling act—namely the Emergency Economic Stabilization Act of 2008, better known as TARP—proved no guarantee of legitimacy in recent years. The Act itself was bitterly contested, with bipartisan congressional leaders failing to persuade populist backbenchers of either party.  (This made TARP different from most enabling acts; the September 2001 AUMF, passed nearly unanimously, is far more typical.) There was also a sense that TARP was dangerously free of actual guidance for the executive branch, providing only a panicked sanction for whatever the Treasury Department found necessary. Such criticisms were well-founded: TARP was used in ways that wildly diverged from its original stated purpose of purchasing troubled assets, eventually including loans to GM and Chrysler when Congress failed to provide a separate pot of money for them in December 2008. Of course bank bailouts will tend to be unpopular in ways that defending the homeland will not, but even so the sense that the executive branch was doing as it pleased—even after Congress had belatedly acted—contributed to the crisis responses’ legitimacy problems. Neither in Wilson’s case nor in TARP’s were qualms about improper legal justifications the driving force behind dissatisfaction, but they served to intensify existing concerns. (Coincidentally, TARP’s most fervent opponents also yearned for a return to the normalcy of federal government circa 1921…) Conversely, legal flaws don’t always entail legitimacy problems. Franklin Roosevelt’s Destroyer Deal in 1940 was supported by an at-best tendentious memorandum from Attorney General Robert Jackson, but it was widely popular and never caused Roosevelt any real political problems. In the boldest maneuver of the 2008 Financial Crisis, the Treasury Department used the Exchange Stabilization Fund to guarantee money market funds in September of that year—with only a paper-thin legal justification and absolutely no precedent to support such a strange use of an authority nominally dedicated to stabilizing international currency markets. But it was a striking success, so much so that the program it supported actually brought fees into the Treasury without ever paying any money out. The weakness of its legal justification is already nearly forgotten, of interest only to the very small handful of people interested Lawfare-like subjects. A similarity between the Destroyer Deal and the money market rescue is worth noting: both involved the federal government giving rather than taking, which limits popular opposition and also the pool of potential litigants who might have standing to challenge the action. Acting so as to only cost taxpayers generally, rather than rights-holders specifically, offers a way to avoid the determined pryings of lawyers and the unpredictable rulings of judges—harder to pull off in the national security realm, but not impossible. It is worth considering how this desire to push policymaking into less heavily lawyered areas might shape the evolution of security policy in years to come. One last musing here (if you’re eager for more, please get yourself the book!) in the form of a question, which I’d be eager to get the Lawfare community’s thoughts on. Early on during the crisis, the well-known economist and blogger Mark Thoma suggested that economists thinking about the balance between facilitating timely responses to emergencies and the need to honor the democratic process should learn from the compromise embedded in the War Powers Resolution, in which expedient action is allowed but time-limited. Sounds like a good idea…except for the whole history of the War Powers Resolution, which as I understand it is none too encouraging. Financial crisis responders also sometimes figured out ways to circumvent rather clear time limits. Support for Fannie Mae and Freddie Mac under the Housing and Economic Recovery Act of 2008 was supposed to be cut off at the end of 2009, but the Treasury interpreted that to mean nothing more than that its maximum level of support had to be specified by that time. As they understood them, the commitments put in place by then were effectively unlimited and indefinite guarantees of the two firms. What is it that makes putting hard time limits on executive branch unilateral actions so difficult? The obvious generic answer is enforceability. An enforcer must be both willing and able to meet violations with serious consequences, and it is hard to find institutional actors who are both. Courts may sometimes be willing—their tendency to defer to the executive in troubled times has limits, as Lawfare’s contributors have explored many times—but with neither purse nor sword judges' ability to stand in the way of a determined executive branch is quite modest. With its power to withdraw funding, Congress is potent enough to enforce the limits put in force by its previous incarnations, but it seems generally unwilling to exercise that power, as doing so offers no political gain and considerable political risks. Are there other possible enforcers for time limits built into grants of extraordinary executive power? Are there ways to make limits genuinely self-enforcing, such that inaction will not render the limits nugatory? Thoughts about the War Powers Resolution or about the problem more generally would be greatly appreciated, as these questions are not rhetorical. Phil Wallach is a Fellow in the Brookings Institution's Governance Studies Program.


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