August 17, 2015
So Now What?
Posted by Philip Wallach

In this post I want to turn to David’s thoughts about the policy recommendations with which To the Edge concludes. These come in two parts: a critique of the recommendation to establish a financial crisis emergency fund, and then a rather broader expression of skepticism about the whole game of making policy recommendations at all. I’ll take these in turn.

First, David says that the idea of a financial crisis emergency fund “seems disconnected with the project of discerning how governments can obtain legitimacy.” I suppose that is a natural first impression, and even one that I’ve sought to heighten with some provocative language: I say that what we need is a slush fund, though an accountable one. Since most people think of “slush fund” as a wholly pejorative phrase, especially with regards to legitimacy, the suggestion is meant to be a little jarring, and all the more so since “accountable slush fund” seems to most people like an oxymoron. So what am I hoping to accomplish with this suggestion, and what exactly would it entail?

To my mind, there were two leading causes why officials did so badly at legitimating the responses to the crisis. Probably most important is what I discussed in my previous post here: legitimation was just not a priority, or even a consciously pursued objective, in many cases. As Timothy Geithner’s book made clear, what thinking about legitimacy there was often took the form of, “If you solve it, it will come,” meaning that legitimacy should just take care of itself if policymakers focus on and succeed at crisis mitigation.

But next in line was that officials found they had a need for obfuscation as they availed themselves of legally dubious methods of crisis response. This is clearest in the case of the rescue of the money market mutual funds in the wake of Lehman’s demise, effected through a pledge of the Exchange Stabilization Fund (ESF). I’ve laid out the details of that maneuver in blog form elsewhere. Here I’ll stick to the bare bones: Treasury felt it needed to act so quickly that it had no time for Congress, was obliged to make a square peg fit into a round hole to do so, had great success in that maneuver in spite of its legal awkwardness, but nevertheless managed to seriously offend the sensibilities of Congress, which specifically legislated a proscription of future uses of the trick as a part of TARP.

My contention is that, under the current legal status quo, the Treasury will nevertheless have to repeat this maneuver in spirit during some future financial crisis. The guarantee program backed by the ESF turned out to be a terrific, nearly cost-free success in 2008, minimizing any potential backlash. But in a future crisis a quick action, taken by contorting the law while pretending that nothing untoward is going on, might be followed by actual losses, and the resulting brouhaha over whether crisis responders should be treated as law-breakers would be very costly in terms of legitimacy.

All of this is perfectly foreseeable, and so we ought to be able to plan for it. That’s where the Financial Crisis Emergency Fund comes in. (If you capitalize it, it starts to seem kind of real.) We ought not to require the Treasury Secretary to twist the law when he decides taking action to fight a crisis requires immediate action. Instead, we ought to make some limited pot of money explicitly available for that purpose, so that he may declare an emergency and act openly, with full public understanding of what he is doing.

By no means should that money be “no strings attached”; indeed, one of the appeals of planning is that we could attach a number of conditions to discipline the use of this money, as we find it difficult to do with less clearly spelled out, as-yet unidentified alternatives relying on legal manipulation. To ensure accountability, I suggest: “instant and comprehensive reporting, fast-track procedures for Congress to stop any outflows of money it found inappropriate, and even streamlined procedures for fining or impeaching a Secretary found to have misused the fund. In addition, time limits could be attached to restrict usage to the early, chaotic period, and of course there would be an upper dollar limit based on how much money was in the fund. Once committed, presumably it would take another act of Congress to replenish the funds.”

In short, the idea seeks to enhance legitimacy by winning a victory for realism, legal and political. Because we understand that when we fail to make provision for scrambling, it must happen in a legally underhanded way that may impair legitimacy, we should choose to plan. Doing so can facilitate public scrutiny of official actions in a way that should bolster legitimacy, which is crucial in the low-trust environment we now inhabit.

I also make some more boring suggestions in the book: more investment in clear decision-making protocols and record-keeping practices that preserve the rationales behind important choices, serious efforts to educate the public and congressional back-benchers about the nature of the responses, and the creation of special oversight bodies dedicated to ensuring the integrity of crisis response programs.

This brings me to David’s second point, which he makes in a sufficiently distinctive way to merit quoting:

One does not want to be a nihilist, but sometimes I wonder why we need to solve the problems of administration posed by a great financial crisis. Are solutions even possible? Is it interesting to, say, call for more congressional involvement next time, or more routinized accountability mechanisms? It may be that learning is possible only if it [is] accompanied with a course for future action.

Well, listen, maybe one does want to be a nihilist sometimes. When you have suggestions about how the government should make its practices more sensible, but lack flashy or grass-rootsy hooks to make those ideas cut through the noise, having a cultivated sense of resignation from the get-go may be only healthy. But for some of these relatively dull prescriptions, one isn’t hoping to inspire a movement; one is hoping that the people occupying key bureaucratic positions in the next crisis might quietly absorb some lessons that could inform them. Here’s hoping that’s you, reader.

Next time: on to the amazing (and continuing!) saga of AIG.

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