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To the Edge

To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis

Philip A. Wallach
Copyright Date: 2015
Pages: 250
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  • Book Info
    To the Edge
    Book Description:

    Were the radical steps taken by the Treasury Department and Federal Reserve to avert the financial crisis legal? When and why did political elites and the general public question the legitimacy of the government's responses to the crisis?

    In To The Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis, Philip Wallach chronicles and examines the legal and political controversies surrounding the government's responses to the recent financial crisis. The economic devastation left behind is well-known, but some allege that even more lasting harm was inflicted on America's rule of law tradition and government legitimacy by the ambitious attempts to limit the fallout. In probing these claims, Wallach offers a searching inquiry into the meaning of the rule of law during crises.

    The book provides a detailed analysis of the policies undertaken-from the rescue of Bear Stearns in March 2008 through the tumultuous events of September 2008, the passage of the TARP and its broad usage, the alphabet soup of emergency Federal Reserve programs, the bankruptcies of Chrysler and GM, and the extended public ownership of AIG, Fannie Mae, and Freddie Mac. Throughout, Wallach probes the legal bases of the government's actions and explores why concerns about the legitimacy of government actions were only sporadically grounded in concerns about legality-and sometimes ran directly against them.

    The public's sense that government officials operated through ad hoc responses that favored powerful interests has helped bring the legitimacy of American governmental institutions to historic lows. Wallach's book recommends constructive and sensible reforms policymakers should take to ensure accountability and legitimacy before the government faces another crisis.

    eISBN: 978-0-8157-2624-1
    Subjects: Finance, Law, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-vii)
  3. Acknowledgments
    (pp. ix-xi)
  4. 1 Introduction: Law, Legitimacy, and Crisis Government
    (pp. 1-20)

    Consider the following three descriptions of government responses to the financial crisis:

    —Because they wanted access to money without having to get the legislature’s approval, government officials interpreted an old statute in a fairly farfetched way to commit up to $50 billion to guarantee that private investors would bear no risk of losses.

    —Pursuant to the terms of a law just passed, the government offered banks an investment of capital at fairly favorable terms.

    —The government left undisturbed several contracts between a private firm and its employees, concluding that it was legally obligated to do so.


  5. 2 When Legality and Legitimacy Diverge
    (pp. 21-42)

    Legitimation of government actions in modern democracies can occur in several different ways in normal times. If there is a sufficiently large majority among the electorate on an issue, satisfying their desires will produce legitimacy. But this is the exception rather than the rule; on most issues, preferences are much more amorphous and underdeveloped, such that legitimacy must be produced through more indirect processes. Simplest is when the people have a strong sense that the government’s decisions emanate from genuinely representative legislators, who faithfully discern the will of the people. But generally speaking, Western democracies suffered from a legitimacy deficit...

  6. 3 Embracing Adhocracy
    (pp. 43-78)

    President George W. Bush’s second term was hardly an era of good feelings for national politicians. Citizens were fed up with the deteriorating war in Iraq, the poorly coordinated response to Hurricane Katrina, and what they perceived as a Republican majority in Congress more attuned to the needs of K Street lobbyists than mainstream America. In the 2006 mid-term elections, they would register their call for change loud and clear, giving Democrats control of both chambers of Congress for the first time since 1994.

    And yet for all that discontent, in purely economic terms the middle years of the past...

  7. 4 Laying Out a Broad TARP
    (pp. 79-118)

    The most important part of Secretary of the Treasury Henry Paulson’s recovery plan was to ask Congress for a broadly empowering, minimally constraining enabling act giving the Treasury access to hundreds of billions of dollars. His request was framed in catastrophic terms: Congress was told to fork over the money or watch the world’s financial markets fall to pieces. Congress would quickly demonstrate that it had no intention of being dictated to or of becoming a rubber stamp for an unaccountable executive branch whose occupants enjoyed a low degree of trust. Before the enabling act ever saw a vote it...

  8. 5 Adhocracy Continued in the Obama Administration
    (pp. 119-157)

    The transition from the Bush administration to the Obama administration in January 2009 raised many questions about how the approach to crisis response might change. After all, the centerpiece of candidate Obama’s campaign message was bringing change to Washington’s way of doing things, and many people imagined that the new president could make 2009 reminiscent of 1933, a decisive break with the past.

    But the Bush administration had very clearly avoided Hoover’s path of inaction, and, much to the disappointment of those who disliked its policies, the Obama administration overwhelmingly chose to continue them rather than repudiate them. The president...

  9. 6 Accountability Mechanisms
    (pp. 158-185)

    One of the most important ways that government officials can legitimate their crisis actions is to allow them to be subjected to meaningful and consequential ex post judgment. Even if trust is in short supply, a sense of genuine accountability can alleviate suspicions and support legitimacy by making citizens confident that abuses of crisis authorities will be rooted out and corrected. Accountability might come through formal legal adjudication and remedy, but just as often accountability mechanisms are more overtly political, meant to compensate for the limits of legality and give voice to citizens’ sense of right and wrong in a...

  10. 7 Taking Stock and Looking Ahead
    (pp. 186-218)

    In responding to the financial crisis, officials at the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation sought to strike a balance between what they saw as the most directly effective ways of containing the damage and what they believed would produce legitimacy for their actions. They often erred on the side of neglecting legitimacy, creating room for a significant political backlash even as the economic situation began to brighten. This reaction played out at both the mass and elite levels, and it generated important legal changes. I examine these reactions and then conclude with suggestions about how...

  11. Glossary of Crisis Laws and Programs
    (pp. 219-222)
  12. Notes
    (pp. 223-306)
  13. Index
    (pp. 307-319)
  14. Back Matter
    (pp. 320-320)