Legal experts discuss if the Paulson Plan is legal

Summary:  a continuation of the previous post, America appoints a Magister Populi to deal with the financial crisis.  Here we discuss if the Paulson plan is legal.  While presumably accurate, these legal experts cited below are telling us that the Constitutional regime is comatose if not yet terminal.  Their analysis reads like a follow-up chapter to my 4 July 2006 post “Forecast: Death of the American Constitution.”  Does it reassure you to learn that NAZI philopher Carl Schmitt provided the intellectual basis for these sweeping emergency actions?  (Reminding us once again that in many ways Hitler was just early, and that the struggle against these ideas has not ended).


  1. Can Congress exempt Executive actions from Court review?
  2. The Bailout Statute“, by David Zaring, posted at the Conglomerate, 20 September 2008
  3. A stream of excellent analysis at The Volokh Conspiracy.
  4. A further Schmittian (and constitutional?) moment“, Sandy Levinson, posted at Balkinization, 19 September 2008
  5. Our Schmittian Administrative Law“, Adrian Vermeule (Harvard Law School), Harvard Law Review, 2009  — Who is this NAZI?
  6. New deal or no deal“, Eric Rauchway, posted at Edge of the American West, 20 September 2008 — Compare this with New Deal legislation.
  7. Delegation Run Amok“, David Bernstein, The Volokh Conspiracy, 21 September 2008 — Another reason this plan is Court-proof.


1. Can Congress exempt Executive actions from Court review?

Section 8 is an essential and necessary requirement for the role of Magister Populi. To make it legal I believe (having no training in the law) that this clause invokes Article III, Section 2 of The Constitution:

In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make.

2.The Bailout Statute“, by David Zaring, posted at the Conglomerate, 20 September 2008 — Excerpt:

Congress bailed out S&Ls before, and survived constitutional challenge then, I can’t see why it wouldn’t be able to bail out other financial institutions now. So: can it do this? Yes. However:

*  Has Treasury been delegated an unconstitutionally broad amount of power?

These powers are broad, and because of a weird clause in the preamble of the statute, not the only things Treasury can do: “The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation” sales, appointments, regulations, etc. It’s that “without limitation” language – suggesting that the powers granted to Treasury are examples, rather than limited authorizations, that might give a nondelegation afficianado a little pause. You know, can Treasury take this new sovereign wealth fund and buy anything it likes? Isn’t that unconstitutionally broad? Maybe so …. but your first presumption is that broad grants of power haven’t been held to be unconstitutionally broad since 1935. I think this easily passes muster.

*  And there’s no judicial review.

Courts don’t like these clauses – but particularly in civil or constitutional rights cases (see the Supreme Court and GITMO). And for constitutional questions like non-delegation or commerce clause violations, they’d probably just ignore this clause. But otherwise, for run-of-the-mill review of how Treasury implements this scheme, I can’t see there being a problem keeping the courts out. Heck, judges probably want to be cut out of the supervision of Treasury’s supervision of the economy.

3. A stream of excellent analysis at The Volokh Conspiracy.

A series of short, focused posts.  Esp note how these bailouts are crafted so that they pretend to conform to existing law.

4. The Paulson plan is not unprecedented.  The NAZI’s explained how these things should work.

A further Schmittian (and constitutional?) moment“, Sandy Levinson, posted at Balkinization, 19 September 2008 —  Excerpt:

This is exactly what Carl Schmitt met by an “exceptional” situation that requires legal transgression and perhaps even “dictatorship.” Recall, incidentally, that “Sovereign is he who decides the existence of a state of exception.” Well, it’s easy enough to identify the “sovereign(s)” this past week: Ben Bernanke and Henry Paulson.

5. Who is this NAZI guy?

Our Schmittian Administrative Law“, Adrian Vermeule (Harvard Law School), Harvard Law Review, 2009 — Abstract:

Our administrative law contains, built right into its structure, a series of legal black holes and grey holes – domains in which statutes, judicial decisions and institutional practice either explicitly or implicitly exempt the executive from legal constraints. Legal black holes and grey holes are best understood by drawing upon the thought of Carl Schmitt, in particular his account of the relationship between legality and emergencies. In this sense, American administrative law is Schmittian. Moreover, it is inevitably so. Extending legality to eliminate these black and grey holes is impracticable; any aspiration to eliminate the Schmittian elements of our administrative law is utopian.

6. How does the grant of power to Paulson compare with New Deal Legislation?

New deal or no deal“, Eric Rauchway (Professor of History at UC Davis), posted at Edge of the American West, 20 September 2008 — Excerpt:

It’s certainly both brief and expansive. The Secretary of the Treasury may purchase mortgage-related assets, and hire people to help him do it, and designate agents to do it, pretty much insofar as he pleases, up to $700,000,000,000, beholden to nobody and subject to no review, for the next two years.

Compare for example the Reconstruction Finance Corporation, created in January 1932, at 47 Stat. 5, and authorized to loan to pretty much any lending agency as it pleased, with not more than $200,000,000 for the relief of banks closed or in the process of liquidation. All loans had to be secured, couldn’t be made on foreign securities or acceptances, no more than 5% of the money could go to any one company, couldn’t exceed three years’ term, couldn’t pay fees or commission to applicants for loans, and so forth. Railroads accepting such loans had to do so under terms acceptable to the regulatory Interstate Commerce Commission.

The law in addition made provision for winding up the Corporation when appropriate and requiring it to report quarterly to the Congress on its activities and employees.

In short, although the situation in January of 1932 was visibly more dire than it is now, Congress was less willing to hand over utter independent authority to the Hoover administration.

With Roosevelt, Congress was a bit more trusting of the executive. Compare the National Recovery Act, of June 1933, at 48 Stat. 195. Here:

… It’s worth noting (a) the Supreme Court found this blanket grant unconstitutional; (b) the agency created under these provisions, the National Recovery Administration, is generally held to have been a bad idea partly because of its ill-defined mission and was basically defunct by the time the Court got to it,

7. Another reason the plan is bullet-proof:  the damage will be done long before the Supreme Court decides the case.

Delegation Run Amok“, David Bernstein, The Volokh Conspiracy, 21 September 2008 — Excerpt:

From all indications, the proposed “bailout” bill will result in delegation run amok–Congress will be ceding virtually unreviewable dictatorial power to the executive branch to spend $700 billion however it pleases.

… Perhaps this presents an opportunity for the Supreme Court to reassert some limits on delegation. In fact, even under current doctrine, one can argue that the bill contains no “intelligible principle” as required, unless “do something about this crisis, here’s a boatload of money” is an intelligible principle.

Co-blogger Eric need not fear, this need not interfere with responding to the emergency. The Court can take its sweet time to hear a case on this–the Court didn’t declare the National Industrial Recovery Act unconstitutional until two years after its passage, and it would take time for appeals to percolate in any event.

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

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 the current crisis

  1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
  2. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
  3. Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
  4. Another voice warning about the nationalization of AIG, 18 September 2008
  5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
  6. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
  7. Another step away from our Constitutional system, with applause, 19 September 2008
  8. What do we know about the financial crisis? What are the key questions?, 20 September 2008
  9. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  10. America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
  11. Legal experts discuss if the Paulson Plan is legal, 21 September 2008

For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.

A few of the most important posts warning about this crisis

This crisis has long been forecast by many, including in articles on this site.  Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results.  Here are some of those posts.

  1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?, 18 March 208  — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
  9. Prof Nouriel Roubini describes “The Decline of the American Empire” ,18 August 2008
  10. The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
  11. “The changing balance of global financial power”, by Brad Setser, 22 August 2008
  12. “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008

To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime.

9 thoughts on “Legal experts discuss if the Paulson Plan is legal”

  1. If it turns out to be illegal, how will that matter? Imagine how long it will take for the Supreme Court to call this unconstitutional. What’s going to happen once they do that? Are the banks going to have to give the money back?

    This has to be stopped tomorrow, or that money is gone. Call congressmen.

  2. Seizing property by the government is old news. The supreme court ruled in the New Jersey case that local jurisdictions can seize whatever they want via eminent domain: Wikipedia entry on “Kelo vs. City of New London.”

    So why not the US government? When I was growing up in Ohio they condemned block after block of old businesses just because they wanted new buildings and put business owners who couldn’t afford to move out of business.

    The real problem is that to have a healthy competitive capitalistic system you have to have many competing institutions engaged in small enterprises, which is rarely enforced by law.

    * The computer business in the US is largely controlled by IBM, Microsoft, HP, and Dell and a host of less important foreign companies.
    * The automotive business has had only 3 significant US based firms for some time, but they don’t have nearly the monopoly powers that Microsoft has.

    I suspect the investment banking business will be more like the auto business.

  3. With the current environment inside the Beltway, the debate over the legality would be moot. If you are opposed to this further expansion of Kleptocracy, call or fill out an email form for your Senators and House Rep. Be polite and to the point. Tell them you oppose a bill that gives a $700 billion credit line to SecTreas with NO oversight and makes banks official extensions of the federal government.

    Or stand silent and deal with the consequences. I’m not saying that a few phone calls matter more to a Congressional rep than tens of thousands in donations from the financial sector, but they DO respond to pressure from back home. And if nothing else, it will make you feel better that you at least tried to make your voice heard.

    The goal of this proposed bill is to let SecTreas use taxpayer money (well, Chinese money lent to the U.S.) to overpay for toxic assets as a way to recapitalize banks. There are better ways to do this, including giving strong incentives to save money in banks instead of basically forcing people to reach for yield in the equity markets.

    2009 is going to be one of the ugliest years in the history of the Republic. We can enter this new year with an ugly balance sheet, but a committement to forcing Wall Street to take the pain and restructure finance, or we can subsidize the Beltway kleptocracy, make the U.S. balance sheet even more toxic and guarantee that Wall Street will find ways to game the system.

    Sigh. What a mess. And we have no easy answers anymore. But this proposed bill is ridiculous.

  4. I’m your subprime pusher, Wall Street’s choice, don’t need to be elected.
    Horatio Alger in a gold Rolls Royce, don’t need to be elected.
    Banks need a saviour, not just a fake, don’t need to be elected.
    We’re all gonna rock to the rules that I make, don’t have to be elected.

    I never lied to you, I’ve always been cool, don’t need to be elected.
    Don’t need to get the vote, now it’s our turn to rule, don’t need to be elected.
    We’re gonna win this one, take the petrol by storm, don’t need to be elected.
    You and him together, young and strong, you’re gonna be respected.

    I promise the formation of a new party, the one party, Ein Volk! Ein Reich! Ein Decider!
    I know you whiners have problems. Don’t we all? And personally, I don’t care.

    — Alice Cooper (not)

  5. Thx for pointing out No. 3 – 5 above. The 7th (German) edition of “Die Diktatur” had been gathering dust on my shelf – unread – as part of my “antilibrary” for months as one of several improving books I have bought just in case but haven t yet found time to read. This may be as good a time as any to start.

    Do not stress the Nazi point to much. 1st ed. of this book was in 1921. As Vermeule rightly points out, Schmitt was more of an opportunist than a Nazi, albeit a very brillant one.

    Emergencies as a justification for emergency measures go back a long way, as you are certainly aware. I do not know whether all this provides for a valid analysis as to what the best policy may be right now. Schmitt may provide some basis for a discussion for the post 9/11 situation, however.

    As a German lawyer I have always thought Schmitt a good example to avoid and a warning to ambitious young lawyers. I am frankly surprised at the present interest in the man. If that is what my transatlatic colleagues now have to fall back on that may well be a reason for some additional concern.
    Fabius Maximus replies: I agree. The NAZI link serves more to illustrate how far we drift from our core beliefs, how quickly they are lost in panic.

  6. A good write up on the bailout: “Before D.C. Gets Our Money, It Owes Us Some Answers“, Newt Gingrich, posted at National Review Online, 21 September 2008 — Excerpt:

    “The balance of power on election day will shift to either McCain or Obama. Who will they pick for Treasury Secretary? What will their allies want done? We are about to give the next administration a level of detailed control over big companies on a scale even FDR did not exercise during the Great Depression. Is this really wise?”

    Newt’s questions are excellent and to the point.

  7. This is what I get for having a sick day. Another article that hits the nail on the head.

    E pluribus hokum or When the gamblers bail out the casino“, Spengler, Asia Times — Excerpt:

    “America will give between US$700-$800 billion to the Treasury to buy any bank assets it wants, on
    any terms, with no possible legal recourse. It is an invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.”

  8. If the bailout plan is accepted by Congress, it will become legal enough to be treated AS IF it was always legal.
    Same as the Iraq war “should have been” treated. But lots of folks wasted lots of time arguing about the legality, or not, of the Iraq war — while not addressing the Asset price bubble.

    Nor the certainly coming Social Security crash.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top
%d bloggers like this: