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The Financial Crisis from the Viewpoint of a Constitutional Scholar: How Today's Debacle Recalls James Madison's Nightmare at the Founding that None Would Have the Virtue to Lead


Thursday, Oct. 02, 2008

I will be the first to admit that I, like many Americans, am basically illiterate when it comes to fancy financial "instruments." Like many Americans, I do have a mortgage, a bank account, and college savings and retirement accounts. Otherwise, however, I trusted bankers, financial advisors, and, frankly, the market to lead me along the correct path.

Yet I believe that one does not have to be a financial genius to understand what is going wrong now. That is because we do not simply have a market failure or a Wall Street debacle at issue here. Instead, the problem now is Founder James Madison's nightmare: Not a single individual in national government seems to have the virtues needed to lead us out of this dark and slippery cave. And that most definitely includes the presidential candidates.

What I Didn't Know: The Full Financial Situation

Before considering Madison's fears, I'll offer a bit more detail about my own situation, as I believe it is all too typical. I honestly did not realize what was happening in the big picture until I read in The Economist (desperately trying to understand whether this is a depression) that investment banks are history. The investment banks either have been converted to old-fashioned banks (the fate, for instance, of Bear Stearns) or permitted to die (the fate, for instance, of Lehman Brothers).

Talk about the end of an era: When MBAs became the sexy degree of the Seventies, becoming an investment banker was the ultimate career goal. Now, we are not just seeing the meltdown of obscenely "creative" financial instruments and their Wall Street purveyors, but also the end of the Harvard, Wharton, or Stanford MBA as the ticket to power and glory. As it turns out, greed and intelligence alone are not enough to build an economy for the people.

Likewise, I knew that there were new mortgage "products" out there, but I did not fully comprehend that Fannie Mae and Freddie Mac were consciously created to give mortgages to those who -- according to neutral financial rules -- otherwise could not (and sometimes could not remotely) qualify for a mortgage. Nor was I aware that Fannie Mae and Freddie Mac had underwritten as much of America's home market as, in fact, they have.

Reading the description of what these institutions did in the cold light of our present financial crisis is like walking through Alice's looking glass. I get the part about wanting everyone to have a home, but I am dumbstruck by the utter stupidity of the utopian vision that held that, to achieve that goal, long-honored banking rules for mortgages could be ignored with impunity. We are back to basics: You cannot get blood out of a stone, and you cannot give financially shaky individuals 30-year, exploding, ARM or other innovative mortgages thinking that the sheer innovation of the financial product will mitigate the risk.

I also lacked important historical knowledge: The Clinton Administration put Fannie and Freddie into place, but it was under the Bush Administration (first with a Republican Congress, then a Democratic Congress) that they exploded. And I was shocked to learn that even after being recently "saved" by government takeover, Fannie and Freddie are still not prohibited from doing what they did before: giving loans to un-creditworthy recipients.

Fortunately, for all the knowledge I lacked, I do possess a point of view on the crisis that I believe provides some insights: that of a student and professor of the Founding, the Constitution, and constitutional law.

The Constitutional Structure and Why It Matters Now

To begin, I believe that the national frustration right now is due in no small part to the fact that the federal players are playing ill-fitting roles. The presidency was designed for emergencies. The Framers chose one person to run the executive branch because they knew there would be disasters, wars, and foreign dealings that would need quick, univocal action - the kind a legislature could never provide.

Accordingly, if this is an emergency - if we face nearly certain financial failure -- the Framers' teachings and the structure they created counsel that it should be the President's job. President Bush should have been moving, through his Cabinet and especially the Treasury, to take decisive action.

Was that possible? Presidential candidate and Senator John McCain suggested Tuesday that the President has such tools (and lots of available funds) at his disposal. That means that the President himself could have forestalled the 770+ point drop in the stock market, shoring up the nation's financial stability despite the rift in Congress. (While one has to give McCain credit for finally coming up with the idea, it is the sort of idea that was needed a week earlier. One can only wonder whether McCain's camp dragged its heels in making the suggestion, because it wanted to first see if McCain could come out of the congressional debates last week as the savior of the economy. That did not come to pass for him (or Obama, who surely had similar aspirations), and so he floated the idea this week that the President himself could solve the problem in the short term.)

A president exists just for such emergencies; but the actions he (or she) takes can later be modified by congressional action. In other words, this was never an either-or situation. The President could have acted to shore up the credit crisis. Then, Congress could have -- after deliberation and consideration -- modified, reversed, or entrenched the President's actions.

The problem, of course, has been that there never was a lamer duck than President Bush. He has permitted himself to be a hostage to the election - even when the country has been falling apart at the financial seams. It is no secret that McCain and the Republican Party have dictated that Bush must stay as far in the shadows as possible during the campaign - so that McCain is not tarred by some of the lowest approval ratings in the history of presidential polling. This means-justifies-the-ends reasoning produced the backward dynamic that a Presidential candidate told the President on Tuesday that he - the President - should be taking unilateral action.

How The President's Failure to Act Has Left Congress Doing What It Is Not Institutionally Equipped to Do

Because the President (and his advisors) did not exercise executive power decisively, Congress rushed in to fill the void. The way the members of Congress tell it, they were invited in. Perhaps, but it's certain that they wasted no time setting up the first press conference to announce that they would be taking over the situation.

The difficulty here, though, is that Congress was constructed to be a lumbering, slow-moving, deliberative giant, utterly incapable of acting as a single individual can. It is not just a truism that what Congress generates is sausage, not beauty. In haste, Congress was incapable of producing a plan to tackle this very difficult situation that could generate enough confidence in either the American people or its own members.

Neither Senator McCain nor Senator Obama, nor the House leadership was capable of delivering. Predictably - but perhaps most disappointingly, because of her preeminent leadership role -- House Speaker Nancy Pelosi acted out of the self-interest that James Madison and the Framers feared would be the death of the representative scheme they designed: She took the floor on Monday to issue a political screed against the Bush Administration, rather than pointing toward the larger good she and her fellow Representatives were elected to serve.

Of course, Pelosi was correct in saying that the Bush Administration had not covered itself in glory during its eight years overseeing the financial markets. On the other side of the aisle, too, the Republicans who have been making the point that the Clinton Administration set up the system that has tanked and expanded it when they gained power in Congress are also correct.

But the fundamentals of accountable, representative government dictate the following question: Who cares? Our representatives were not supposed to be conducting a history seminar for the purpose of attaching blame. They were supposed to be finding solutions for extraordinary problems that the American people could not solve on their own.

The Senate was back in session on Wednesday to pass a revised version of the rescue package, but it has become increasingly clear that the American people don't need just any plan. Do we continue to have a true emergency? (I will defer to the experts on that assessment.) If so, the President can buy Congress the time to do this right. Instead of the Senate voting on the bill on Wednesday, he should have made available the funds already at his disposal to tide over near-dead institutions (whichever are worth saving). I assume that they can be provided with the caveat that Congress will be structuring the larger plan in the near future, which is to say the funds would come with strings. New ideas have started to surface from the universities, Wall Street, and elsewhere. If Congress takes a collective breath, explores the options, and truly deliberates, there is a chance it can reduce the cost and risk to taxpayers while righting the credit crisis ship.

A key element here was also contemplated by the Framers and especially Madison - factions, or interest groups. Speed in Congress is typically accompanied by some well-connected interest group in the background taking advantage of the situation to push its interests before other interests get a chance to respond. Slowing down the congressional process makes it possible for more interests to be heard and dilutes the voices of those most closely connected to the powers that be. More importantly, it makes it possible for the people to be heard.

The only good news here is that the Supreme Court has not been asked to take emergency action. As an institution, it is even less capable than is Congress of reaching sound results under tight time pressure, and it is the least expert of the branches in these matters.

Between the war on terror and the financial crisis, there has never been more need for wisdom in leadership. There are plenty of politicians clamoring for the mantle, but none that seem to deserve it.

Marci Hamilton is the Paul R. Verkuil Chair in Public Law at Benjamin N. Cardozo School of Law and author of God vs. the Gavel: Religion and the Rule of Law (Cambridge University Press 2005), now available in paperback.

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