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Archive for September, 2008

As I mentioned in class last night, keep an eye on the regulatory debates surrounding the ongoing financial crisis. Here are some interesting takes from  Steven Levitt (of Freakonomics fame), and Joseph Stiglitz, a Nobel Prize-winning economist.

Today, the Washington Post reports that Congress has been frustrated by unilateral decisions by the Federal Reserve, backed by the Treasury Department, to bail out various financial institutions.

Here are a few interesting excerpts from the article:

One idea that’s rapidly gaining currency is the creation of a new federal entity that would acquire “toxic” mortgage-backed assets from failing firms and hold them until the housing market improves….

Setting up such an entity also would give lawmakers a chance to determine the parameters of future bailouts, as opposed to leaving the decision in [Federal Reserve Chairman] Bernanke’s hands. While most lawmakers said they trust Bernanke’s judgment, Frank said he was troubled to learn in the meeting Tuesday that Bernanke has legal authority to use the central bank’s reserves, which total $888 billion, to make loans to any entity under any terms he deems economically justified.

“No one in this democracy — unelected — should have $800 billion to dispense as he sees fit,” Frank said. “It may be that there is so much bad debt out there clogging our system that we may have to have some intervention. But it shouldn’t be the unilateral decision of the chairman of the Federal Reserve with the backing of the secretary of the Treasury.”

Should Congress create a new agency to acquire bad debt?  If so, when? We already have agencies and regulations to oversee these financial institutions.  But it is rapidly becoming apparent that these regulatory mechanisms have failed. What could Congress do vis-a-vis The Fed and the Treasury Department?

Second, recall the non-delegation cases, in which the Court scrutinized congressional grants of authority to the executive branch to take swift, decisive actions during economic crises. What might those cases say about the current balance of power between Congress and the executive branch in regulating the financial sector?

Are there any other administrative law issues at play here?

UPDATE: The draft bailout legislation has a provision stating that “Decisions by the Secretary pursuant to the authority of this Act are . . . committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”  We’ll discuss this issue later in the semester, in Classes 24 and 25. 

See Frank Pasquale’s post at Concurring Opinions for a nice summary of the response to this language.

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This week, the media have begun reporting a scandal at the Minerals Management Service (MMS), a branch of the Interior Department.  Investigators from the Interior Department’s own Inspector General found that MMS officials had, to put it kindly, inappropriate financial and personal relationships with the oil companies that they regulate.

The MMS runs the controversial Royalty-In-Kind program, which “allows energy companies to pay the government in oil and gas, rather than cash, for the privilege of drilling on government land.”

Recall our discussion last week of how the two political branches can control or influence agencies.  There are a few interesting points here.

First, the Justice Department refused to prosecute two of the highest ranking officials named in the Inspector General’s report, reportedly creating tension with officials at the Interior Department.  Why might Justice refuse to prosecute here?  Can Congress do anything if Justice fails to prosecute?

Second, auditors at the Interior Department said they weren’t allowed to audit the MMS for failing to properly collect royalties from the oil companies.  Again, can Congress do anything in this regard?  If so, what?  And what should President Bush do?

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