Notice & Comment

Legality, Legitimacy, and the Responses to the 2008 Financial Crisis, by Philip Wallach

Many thanks to Peter Conti-Brown for his kind words about my book and his invitation to guest-blog here. I’ve been greatly enjoying Notice & Comment since its launch, and it’s an honor to be in the company of so many distinguished legal scholars.

As a way of launching my discussion, let me offer a very brief account of the origins of To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis . In the fall of 2007, I began pursuing my Politics Ph.D. (at Princeton, known for its great tradition of Public Law scholarship) as someone who wanted to study law and especially federal regulation. From the outset I thought that banking law, which is just about the oldest body of federal regulatory law we have, would provide a fertile source of material. I also had a long-standing interest in the Federal Reserve since I participated in Fed Challenge as a high-school student. Those inclinations were reinforced by the early signs of the financial crisis that were just beginning to appear in late 2007, and became hard to miss when the Fed dramatically intervened to help Bear Stearns escape bankruptcy by selling itself to JPMorgan Chase in March 2008. From that point on, I’ve been a certified financial crisis junkie, devouring news coverage, magazine articles, books when they finally came, and of course the endless blogs—which proved their medium’s worth by providing unmatched real-time exposition and analysis of the crisis as it unfolded.

As I got myself an education in financial arcana from the blogs, my more formal education took me in other directions. My dissertation, which was a grab bag of essays on how statutory interpretation actually functions in the administrative state, ended up having more EPA than OCC or Fed—though one of my meatier chapters, now turned article , took on the question of how and why the Glass-Steagall Act got chipped away during the 1980s and 1990s. For a while I thought of following the financial crisis as a kind of a strange hobby, probably because so much of what I read was more finance and economics than law and politics. But finally it dawned on me that my attention to the government’s responses to the crisis through the lens of law and politics was a perspective that deserved to be treated in a serious and focused way, rather than just receiving incidental attention from the many brilliant minds whose overriding interest was in how and why the crisis had happened. Happily I have had the opportunity to pursue that vision over the last few years at Brookings.

The result is a book that I am sure can serve as a useful reference for future scholars looking into legal and political issues surrounding the crisis responses, but that I hope manages to go beyond that as well. It is an attempt to add a chapter to Clinton Rossiter’s account of constitutional dictatorship , to reckon with the specter of Carl Schmitt (in a very different manner than two other prominent legal scholars have done ), and to figure out what on earth people are really talking about when they say that we have a “rule of law, not men.” It tries to illuminate the relationship between legality and legitimacy in times of crisis and even ventures to offer some policy suggestions to future crisis fighters so that they might avoid the impairment to our government’s legitimacy that this round of crisis responses caused.

During my guest-blogging stint, I’ll address Peter’s concerns about how legitimacy is to be differentiated from legality, and whether we ever see strongly disliked actions that are nevertheless regarded as legitimate. (I think the answer is definitely yes, though Peter is right to wonder whether all political disagreements may be transformed into claims of illegitimacy.) Then I’ll turn to his question about the motivation of the decision not to save Lehman Brothers and explain why it shows just how tricky the relationship between law and legitimacy can be. From there, I’ll look at the changes to the law of the Fed’s lender of last resort powers made by Dodd-Frank and why that law didn’t address some of the clearest legal holes revealed by the crisis; the strange tale of the Exchange Stabilization Fund’s rescue of the money market funds and the half-hearted reform it inspired. Maybe for a grand finale I will even try to write a post that combines my interests in the EPA’s Clean Power Plan with a discussion of the financial crisis.

I’ll conclude this post with an explanation of the book’s title. It is drawn from a quotation from former Fed Chairman Paul Volcker:

To meet the challenge [of the failing financial system], the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long embedded central banking principles and practices.

The immediate response to the crisis has been to resort to untested emergency powers of the Federal Reserve. Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank.

Perhaps the most amazing thing about this statement is its date: it comes from a speech made April 8, 2008. At which point Volcker ain’ted seen nothing yet, so to speak. I look forward to reflecting on the extraordinary times for both law and legitimacy that followed Volcker’s remark and would be grateful for any comments or questions from readers along the way.

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