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Different remedies, same constitutional problem

By Jack M. Balkin

Today Paul Krugman points out, as several others have recently, that instead of purchasing bad debt and selling it off, the government might be better advised to purchase shares in failing financial institutions. This would promote liquidity by helping to recapitalize these institutions, and it would give the government (and the taxpayers) a stake in their recovery. Secretary Paulson's current plan, by contrast, would seem to require purchasing bad debt at a premium price, which would make Wall Street institutions better off without demanding very much from them in terms of reform. It would also place all the risk on taxpayers.

Whether we solve the crisis by purchasing debt or purchasing equity, however, the constitutional problem raised in my earlier post remains the same. (This is a point about proper constitutional design, and not about whether any court would find the plan unconstitutional.).

We must not try to solve our current difficulties by giving the Secretary of the Treasury, (aka the Executive Branch), carte blanche to purchase whatever he likes whenever he likes, to deputize private parties to act as agents of the government, and to buy and sell shares and proceeds on whatever terms he thinks best, without any form of regulation or oversight, whether legislative or judicial. The dangers of malfeasance, corruption, self-dealing and conflicts of interest are present even if we are talking about purchasing equity rather than debt. They just arise in slightly different ways.

Any solution to the fiscal crisis that allows the President to take over large portions of our financial markets has to have regulatory and oversight mechanisms, not only for the banks and financial institutions, but also for the President himself. The powers that Presidents gain in emergencies they do not easily surrender, and almost never do so voluntarily. Moreover, Presidents often think that by helping their friends they are helping the country. This is true whether the President is a Democrat or a Republican, liberal or conservative. The next President will almost certainly assume any new powers we give to this one.

What we are talking about in this crisis is not simply providing additional liquidity to financial markets. What we are talking about is fundamentally altering the executive's role in managing a key sector of the economy. We place these powers not in the hands of an independent agency like the federal reserve board relatively isolated from day to day political pressures, but in the hands of political appointees who serve at the pleasure of the President and who will inevitably be influenced by political considerations both high and low. We are contemplating something quite big and potentially quite lasting here. If we do this, we had better do it right at the outset.

Full post as published by Balkinization on September 22, 2008 (boomark / email).