Introducing Guest Blogger Philip Wallach, Author of New Book on Law and the Financial Crisis

by Peter Conti-Brown — Wednesday, May 27, 2015

It’s my pleasure to introduce guest blogger Philip Wallach, a Fellow in Governance Studies at the Brookings Institution. Philip is the rather rare political scientist who doesn’t take an extreme view of law, neither as politics by another means nor as a black box of binding but indiscernible rules. He is the author of an excellent new book, To The Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis. I’ll provide a very brief review/overview, raise some questions for Philip to consider as he’d prefer, and then turn it over to him for the next two weeks.

In the book, Wallach teases out a theory of legitimacy and legality that allows us to assess the various responses to the financial crisis by the Federal Reserve and U.S. Treasury to try to make sense of why some actions skirted the bounds of law, some did not, and regardless many struck the American public as grossly illegitimate. It’s a muscular approach to theory and practice that will teach even the most active of crisis watchers something about the way that crisis responders approached—and later justified—their work.

I give the book an unqualified recommendation. Even so, there were a few places where I found myself scratching my head and wondering about the sturdiness of Wallach’s approach to these questions. I hope he can take up some of these issues over the next two weeks.

First, throughout the book, I found myself sitting uneasily with Wallach’s conception of “legitimacy,” especially as distinct from “legality.” Wallach describes legitimacy as a rather amorphous function of four different phenomena: legality, democratic legitimacy, trust, and accountability. As formulated, my trouble with differentiating legality from legitimacy is obvious: they can’t be disentangled, because legitimacy depends on legality.

But this isn’t exactly satisfying, because much of the book is looking at plainly legal actions that lacked legitimacy for reasons other than legality. Wallach is careful to note that his formulation is “not meant to provide some sort of unassailable taxonomy of how things really are in the world,” and that legitimacy’s very “slipper[iness]” “should not deter our study of it” (Wallach, p. 10). Even so, there are times when legitimacy in Wallach’s account borders on popularity. What is unpopular is illegitimate.

This reminded me of another first-rate book, historian David Sehat’s The Jefferson Rule: How the Founding Fathers Became Infallible and Our Politics Inflexible. In The Jefferson Rule, Sehat gives us the origin story (at least in our Republic) of when bona fide and good-faith political disputes got turned into questions of questions of heresy and infidelity to constitutional and republican principles. The upshot of Sehat’s argument for Wallach is the question: is there ever a political decision that is unquestionably legal that is legitimate in the eyes of those who follow the Jefferson Rule of challenging everything on first principles? More succinctly, I’d ask Wallach to identify, under his formulation of legitimacy and legality, a decision that is plainly legal, grossly unpopular, and still legitimate to those who hold the decision in low regard.

My last question is about the Fed’s controversial decision not to save Lehman Brothers by using its emergency lending authority under section 13(3) of the Federal Reserve Act. The Fed has long maintained—although mostly after the fact—that it could not lend to Lehman Brothers because the law prevented that decision. As Wallach notes, there are many “distinguished” supporters of this view (Wallach, p. 66). Whatever their pedigree, I think they’re wrong, and don’t think it’s a close call.

But as I discuss at much greater length in my forthcoming book, The Power and Independence of the Federal Reserve, the idea that 13(3) presented any kind of a statutory barrier is pure spin. There’s no obvious hook for judicial review (and no independent mechanism for enforcement), and the authority given is completely broad. Wallach calls this authority “vague” and “ambiguous,” but I don’t see it: broad discretion is not vague for being broad. In relevant part, the statute as of 2008 provided that “in unusual and exigent circumstances,” five members of the Fed’s Board of Governors could lend money through the relevant Federal Reserve Bank to any “individual, partnership, or corporation” so long as the loan is “secured to the satisfaction of the Federal reserve bank.” Before making the loan, though, the relevant Reserve Bank has to “obtain evidence” that the individual, partnership, or corporation in question “is unable to secure adequate credit accommodations from other banking institutions.”

In other words, so long as the Reserve Bank was “satisfied” by the security offered and there is “evidence”—some, any, of undefined quality—the loan could occur. I see no ambiguity or vagueness here. Instead, I think the Fed reached for legal cover when the Lehman bankruptcy turned out very differently than they had hoped. It was a political decision, not a legal one, something that Wallach outlines very well. The question for Wallach, then, is this: why is this an instance of law constraining action rather than law providing the Fed’s lawyers with an ex post rationalization?

These questions should not obscure the fact that Wallach has written a wonderful book—it is a serious and sophisticated blend of political theory and legal analysis that should be read by every lawyer and legal scholar interested in a fresh account of law and legitimacy in the response to the financial crisis. I’m certain it will be a part of the scholarly and policy conversation for years to come.

With that, I’m very much looking forward to Philip’s guest stint.

This entry was tagged .

About Peter Conti-Brown

Conti-Brown is an assistant professor at The Wharton School of the University of Pennsylvania. A historian and a legal scholar, Conti-Brown focuses on central banking, financial regulation, and public finance.

Cite As: Author Name, Title, Yale J. on Reg.: Notice & Comment (date), URL.

Leave a Reply

Your email address will not be published. Required fields are marked *