Summary: as our ruling elites use the financial crisis to gather economic and political power, the next step is the granting of extraordinary powers to our Executives. Following historical precedent, these will follow the usual forms while greatly changing the substance.
Contents
- A historical precedent
- Hot excerpts from the Paulson proposal
- See the following post: “Legal experts discuss if the Paulson Plan is legal“
1. Historical Precedent
America’s original Founders borrowed extensively from practices of the Roman Republic. So do today’s Founders of the new American regime when expanding the government’s power. From Wikipedia (slightly edited):
Dictator was a political office of the Roman Republic. Appointed in a time of crisis, the dictator was above the three branches of government in the constitution of the Roman Republic, as no other body or officer could check his power.
A legal innovation of the Roman Republic, the dictator (Latin for “one who dictates orders”) — officially known as the Magister Populi (“Master of the People”) and the Praetor Maximus (“The supreme Praetor“) — was an extraordinary magistrate whose function was to perform tasks exceeding the authority of any of the ordinary magistrates.
The Roman Senate passed a senatus consultum authorizing the consuls to nominate a dictator, who was the sole exception to the Roman legal principles of collegiality (multiple tenants of the same office) and responsibility (being legally able to be held to answer for actions in office); there could never be more than one dictator at any one time for any reason, and no dictator could ever be held legally responsible for any action during his time in office for any reason.
The reasons which led to the appointment of a dictator required that there should be only one at a time and great power was visited upon them — the imperium magnus, having the ultimate imperium maius(a higher degree of imperium), which was the ability to overrule or remove from office the other curule magistrates upon whom imperium was conferred, including the ability to order their death. The dictators that were appointed for carrying on the business of the state were said to be nominated rei gerundae causa (for the matter to be done), for the “putting down of rebellion”, or ironically in the case of Sulla, as “Dictator for the making of laws and for the settling of the constitution”.
Of course Secretary of the Treasury Paulson will not become a dictator. The term has little utility, weighted down by a millenium of baggage. Nor does history repeat; it just rhymes. Still, the discretionary scope of power and freedom from judicial review to be granted Paulson are without precedent in American history, even in wartime.
2. The Paulson proposal
Go here to see the full text of the legislative proposal from Treasury Department for authority to buy mortgage-related assets. Here are a few of the choice items. Section 8 is my favorite.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.-The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.-The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Key Treasury Department documents
We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us. See this page for a current list of Treasury Department documents.
Some FM posts about causes of the current crisis
- The post-WWII geopolitical regime is dying, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
- Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the 1982 – 2006 economic expansion; why the down cycle will be so severe.
- Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
- A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
- A picture of the post-WWII debt supercycle, 26 September 2008
- Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
- Causes of the financial crisis (no, its not the usual list), 29 October 2008
- Government policy errors and the Great Depession, 1 November 2008
- A look at our government’s debt – rising because we like to spend, 29 December 2009
- Economics is not a morality tale, 14 January 2009
- Q&A on the FM website – who to blame for the mortgage crisis?, 16 January 2010
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.
There’s some precedent for this stunning expansion of executive powers. Similar powers over banks and credit were assumed during the Great Depression, and in WW II the state took control of the whole economy. The Chairman of the Federal Reserve has the dictatorial power to decide on inter-bank lending rates, which in effect set limits to how quickly the economy can grow, and indirectly determine what is an “acceptable” level of unemployment.
Paulson’s present power to shape our future (and to reward his buddies at Goldman Sachs) is great indeed, but is it greater than Bush’s power over the last seven years to wreck our material and moral standing in the world? The drift toward greater executive powers has been going on for a long time in this country. It seems to be required by the country’s size and our position in the world. As someone remarked, you can have democracy or you can have empire, but you can’t have both.
Helena Cobban has a long comment today on an article in WaPo on China and Japan’s recent delegations to Washington. At a rough guess, it appears their investment in US bonds and securities, and their concern that those assets remain solvent, easily exceeds $2 trillion. In this sense, you might say that Secy Paulson is merely our representative in discussions with our two giant creditors. Or it may be more accurate to call him China and Japan’s agent in our government.
Among many interesting observations in the WaPo article, this one made me pause:
“Andy Xie, an independent economist who was formerly Morgan Stanley’s chief Asia economist, said the United States needs to accept that a large amount of U.S. assets must be transferred to other countries’ ownership. “If the U.S. is not willing to accept that,” Xie said, “they will have to print money and the dollar will fall. And we will be headed toward a global financial meltdown.”
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Fabius Maximus replies: I do not get the point of her article. The need to prevent losses to our creditors from a GSE bankruptcy was one of the most-discussed drivers of the bailout. Cobban writes as if she discoverd it today (truly a revelation of the blindingly obvious). I and many many others have been writing about these things for years.
It’s not clear from Cobban’s article if she yet understands what is happening. Xie’s comment (one of those writing about this for many years) refers to the inevitable exchange of US IOY’s (like US governemnt bonds, given in payment for imports) for actual goods, services, and tangible assets. Most American’s do not understand that we enjoyed the imports, but have not yet paid for them. The bonds are like a balance on the national Visa account — a promise of future repayment.
That future has not yet arrived. But it will, a crisis far greater than today’s. An inevitable result of our past and present actions.
Section 6 is also interesting as it looks like it allows the Gov’t to perpetually buy up debts as soon as they pawn off some other mortgage related “asset” for say 10 cents on the dollar.
Welcome to the perpetual bailout machine for corporate America.
What I see of this abominable legislation the more I understand why Congress is so desperate to pass if before the public can voice their opinion against it.
Not good: Has giving a blank check to the executive branch in any context worked out well in the past 8 years?
And possibly not effective:
The problems are: Liquidity, Capitalization, Solvency, and Trust.
Buying up instead of accepting as collateral (which the Fed has already been doing for much of this shit) doesn’t provide any more liquidity benifit, won’t help with capitalization unless the treasury significantly overpays, and doesn’t help with solvency unless the treasury significantly overpays, and the only way to restore trust is regulation and time.
Calculated Risk notes this further feature of the bailout package: “Paulson: Foreign banks can use U.S. rescue plan“, Reuters, 21 September 2008 — Excerpt:
“Treasury Secretary Henry Paulson said Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.
“‘Yes, and they should. Because … if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution,’ Paulson said on ABC television’s ‘This Week with George Stephanopolous.'”
(I dont know if this is logical, but it’s there in the fine print.)
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Fabius Maximus replies: We cannot plead the “we didn’t know the details in the fine print” excuse. The details about this massive nationalization have been clearly spelled out for us.
“but it’s there in the fine print.”
That is not correct. It is clearly stated in the “FACT SHEET: Proposed Treasury Authority to Purchase Troubled Assets“, which is only one page (529 words, half the length of my typical post).
Update: Is the Paulson proposal legal?
Links and excerpts from various legal excerpts grew to long, so have been moved to their own post: “Legal experts discuss if the Paulson Plan is legal“.
It’s all following the wrong logic. As I said before the original view was that it was a lquidity crisis, only now is it sinking in that it is a solvancy crisis. But acting true to form, panic has set in.
The solvancy shortage is going to increase, we have not yet began to see the full impacts of personal mortgage defaults (for some chilly data see “We’ve Only Just Begun“, Steven Keen’s Oz Debtwatch, 19 September 2008).
Plus we also face the commercial property collapse coming in from the wings, then the corporate collapses.
I said to a friend a few months ago “by trying to save everything, Bernanke will save nothing”. They should have performed brutal surgery and concentrating on ring fencing ‘real’ financial institutions (those that directly impact the real economy), voiding all the CDO and insurance contracts, etc. Difficult to control (a channeled train wreck basically) and would require deft handling and international coordination, but at least it would be over by now and huge amounts of debt would be destroyed and solvancy levelled off. In fact, at the consumer end (remember those Poulson) large numbers of people would suddenly own their houses, improving their personal (and currently rapidly deteriorating) solvancy and putting a floor under consumption. In other words, save the bottom of the pyramid that holds the whole thing up and let the top go.
Too late now, we face deteriorating US solvancy levels (at all levels) with collapsing consumption that this action will barely slow down (think of it as a shallow speed hump on a steep hill at best).
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Fabius Maximus replies: As one of the crowd warning about this for many years, I must say that the analysis by Keen is incomplete, and wrong in the key essentials. I think Oldsceptic has a better grasp of the situation.
The very size of the problem prevents clear diagnosis. Household debt in America has been rising since WWII. This growth accellerated after the 1980-82 recession, and again after the 190-91 recession, and again after the 2001 recession. Bank Credit Analysts’ term for this is the best I have seen: the post-WWII debt supercycle. See “Death of the post-WWII geopolitical regime – death by debt” for details.
Subprime mortgages were just the grain of sand that collapsed the pile, as was (from a larger perspective) the housing bubble. These are aspects of the problem — parts, not the whole.
US households have too much debt. As I explain in “A happy ending to the current economic recession“, there are only four ways to solve this problem: growth, inflation, socialization, and defaults. We were sliding along into a deflationary cycle as debt defaults. Now Paulson seeks to socialize the debt, putting much of it on the national VISA card.
Fortunately the national VISA card has much additional borrowing power (that is, unless our creditors pull it). But we are sliding into a recession, which will force additonal deleveraging. And the boomer’s retirement lies in the medium-term future, for which we have made big promises but no preparations.
Interesting times ahead, for sure.
“Legal experts discuss whether the Paulson plan is legal”?
With a Justice Department as profoundly compromised as this one, & a weak Congress lacking the initiative (or possibly even the skill) to reform it, this is little better than debating the number of angels that will fit on the head of a pin.
This crisis bears all the hallmarks of having been engineered & planned for – the proposal is huge & complex, yet it came forth in a matter of mere days. “Oversight” from such a spineless Congress is the perfect fig-leaf to deflect criticism, & is unlikely to prevent gradual weakening of any intelligent & humane amendments.
Meanwhile, the stock market keeps dropping.
This is indeed a solvency crisis – & belief in the magical healing power of moving the bad paper around is at this point dubious at best.
jim,
moving the bad paper around
I knew they were making those deck chairs out of something new…
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