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Carl Schmitt and the Fed

By Jack M. Balkin

A very interesting article in today's New York Times is revealingly headlined "Fed Chief Shifts Path, Inventing Policy in Crisis." It begins as follows:

As chairman of the Federal Reserve, Ben S. Bernanke has long argued that a central bank should base its policies as much as possible on consistent principles rather than seat-of-the-pants judgment.

But now, as the meltdown in credit markets threatens major institutions on Wall Street and a recession appears inevitable, Mr. Bernanke is inventing policy on the fly.

?Modern monetary policy-making puts a lot of weight on rules, but there is no rule book for an economic crisis,? said Douglas W. Elmendorf, a senior fellow at the Brookings Institution and a former Fed economist.

On Friday, the Federal Reserve seemed to toss out the rule book altogether when it assumed the role of white knight, temporarily bailing out Bear Stearns, one of Wall Street?s biggest firms, with a short-term loan to help avoid a collapse that might send other dominoes falling.

There is, of course, much that one could say. Gretchen Morgenson, for example, has a fine column, also in the Times, noting that Bear Stearns has an unusually dubious record and that the bailout raises all of the problems associated with "moral hazard." If ever a company deserved to go down in a so-called "free market," it appears to be Bear Stearns. But that's not my main point.

Instead, what seems most revealing, and fully captured in the front page story quoted above, is the truly Schmittian character of the Fed. Recall that Schmitt defined "the sovereign" as the person who could successfully define something as a "crisis" and then basically do whatever he thought necessary to meet the crisis. The "rule of law" goes out the window during "states of exception." Well, isn't that precisely the role played by Bernanke? George W. Bush is in fact not the "great decider" where the domestic economy is concerned. Indeed, he gave a widely derided speech on Friday suggesting (quite sensibly) that there were times to step aside and watch some businesses fail. It's the Fed, a truly "independent agency" certainly not accountable to the President, that gets to make decisions regarding immediate responses to economic crises, and the rest of us--i.e., the taxpayers--will just have to live with the consequences, including the probable write down of the dubious mortgages "pledged" by the soon-to-be-defunct Bear Stears in return for their "loan."

Schmitt and other Weimar-era critics of the modern state correctly argued that old-fashioned notions of the "rule of law" couldn't survive the modern administrative state, with its mandate to intervene in the economy. Rarely has that been so vividly demonstrated as yesterday. All of us simply have to hope that Ben "The Great Decider" Bernanke knows what he's doing.

One other point: I've been describing over the past several months facets of our "constitutional dictatorship." One of the things this episode reveals is the limited domain of the President. Within certain areas, especially relating to foreign policy and the military, he does indeed have dictatorial powers (i.e., the ability to make decisions without being politically accountable). But in other domains, the President is remarkably weak. We may in effect live under a number of different "dictators," whose only commonality is that they are allowed to "invent policy" without consluting with Congress or without facing political consequences.

Full post as published by Balkinization on March 16, 2008 (boomark / email).

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