Is the Bailout Constitutional?

October 20, 2008 • Commentary
This article appeared in Legal Times on October 20, 2008.

In the current crisis, bank runs and other forms of financial panic could lead to the collapse of the country’s or even the world’s economic edifice. Extraordinary measures might be in order. In extremis, it may seem quixotic to question the constitutionality of the federal bailout‐​but it’s essential nonetheless.

Realists might say, “Save your ivory‐​tower doubts for the law journals.” Supreme Court Justice Robert Jackson famously wrote, “The Constitution is not a suicide pact.” Douse the flames first; then repair the bad wiring.

But a declaration of unconstitutionality, if justified, serves three vital purposes today. It imposes a heavy burden on proponents of the bailout to explain why the Constitution can be violated with impunity. It reinforces the case for abandoning the program once any true emergency has passed. And it helps establish a presumption against adopting similar measures that might be proposed to resolve future “emergencies.”

Bad Precedents

Even now some experts, including my colleagues at the Cato Institute, believe that alternative proposals (perhaps even constitutional proposals) could achieve the desired ends without socializing the financial sector and without establishing statist precedents that could haunt us for decades or longer.

Opponents of the bailout are unconvinced when media pundits and presidential candidates carp about the failure of deregulation, the need for immediate government intervention, and the final days of capitalism. According to bailout skeptics, government created this crisis‐​with everything from artificially low interest rates to political pressures for “affordable” housing, quick loans for bad credit risks, and the subsidization of agencies such as Fannie Mae and Freddie Mac. The predictable result of those perverse incentives: greater leverage and more risk. Heads, the private sector wins; tails, the taxpayer loses. Critics ask why a solution to the problem should now be entrusted to the bureaucrats who got us into this mess.

On that question, I concede insufficient expertise. More important, events on the ground seem to have superseded the policy debate. The bailout moves ahead, never mind that many economists and public finance specialists insist it is more invasive than required and unlikely to address root causes. We embark on this adventure notwithstanding the controversy regarding its necessity and effectiveness.

I turn, therefore, to the threshold question that should have, but has not been, adequately examined: Is the bailout constitutional?

No Authority

It is not. The federal government has no constitutional authority to spend taxpayers’ money to buy distressed assets, much less to take an ownership position in private financial institutions. And Con­gress has no constitutional authority to delegate nearly plenary legislative power to the Treasury secretary, an executive branch official.

Congress can proceed only from legitimate authority, not from good intentions alone. That means we must find a constitutional pedigree for each proposed law.

One possible rationale for the bailout is the all‐​encompassing commerce clause. As the country grew and some people came to believe that most of its problems required national regulatory solutions, Congress sought to find a specific constitutional power that would justify an ambitious federal agenda. The commerce clause became the vehicle of choice.

Yet that is not why the clause was written into the Constitution. Under the Arti cles of Confederation, the national government lacked the power to regulate interstate commerce. Each state was free to advance local interests and to create barriers to trade without regard to possible prejudice to out‐​of‐​state interests. That process devolved into what Justice William Johnson, concurring in Gibbons v. Ogden (1824), characterized as a “conflict of commercial regulations, destructive to the harmony of the States.”

The solution: a constitutional convention at which, according to Johnson, “If there was any one object riding over every other in the adoption of the Constitution, it was to keep the commercial intercourse among the States free from all invidious and partial restraints.”

Instead of serving as that shield against interference by the states, the commerce power has become a sword wielded by the federal government in pursuit of a boundless array of regulatory programs. That financial markets are interstate does not authorize the federal government to do anything and everything to manage those markets. The commerce power is to “regulate,” but commerce is not regulated by eliminating private risk and substituting tax‐​funded handouts to favored economic actors. The Framers who crafted the commerce clause could not have intended to empower Congress to give an executive official virtual carte blanche over all financial institutions.

Moreover, it is not a commerce clause argument to say that Congress created the mess and, therefore, Congress can do whatever it wants to fix the mess. Legislators’ misdeeds do not ipso facto justify the socialization of private banks, brokers, mortgage companies, and insurance companies‐​and who knows where it stops.

Even if Congress could defend the bailout as a means of preventing interstate impediments to commerce, that would not legitimize any and all means.

No Intelligible Principle

To legitimately invoke the commerce power, Congress must show not only that a federal program is necessary, but also that it is proper‐​that is, the program does not violate other foundational principles, such as federalism, separation of powers, and limited government. Congress has not made that showing.

Indeed, the bailout quite clearly violates the Constitution’s separation‐​of‐​powers principle‐​in particular, what has become known as the nondelegation doctrine, which states that Congress may not delegate its legislative power to any other entity, including the Cabinet departments of the executive branch. Article I, section 1 of the Constitution states, “All legislative Powers … shall be vested in a Congress.” A plain reading of that text shows that lawmaking is for the legislative branch, which does not include the Treasury Department. Yet when Congress authorized the bailout package, it gave Secretary Henry Paul son Jr. unprecedented power to act as a super‐​legislature.

True enough, the Supreme Court, in a series of cases beginning in 1928, condoned some forms of delegation. Legis la tors may delegate their authority, said the Court in J.W. Hampton Jr. & Co. v. United States (1928), so long as Congress “shall lay down … an intelligible principle to which the person or body authorized … is directed to conform.”

What, then, is the intelligible principle to which Henry Paulson must conform? No one knows‐​least of all the taxpayers, who will bear the cost. “Make things better” is not an intelligible principle.

These days delegation has become a formula for irresponsibility. Congress gets to claim credit for the supposed benefits of the bailout, yet dodge culpability for the associated costs.

But Congress itself, not an executive official, must be accountable for the consequences of laws that Congress puts in place. That tenet has been a cornerstone of our Constitution for more than two centuries. John Locke got it right in his Second Treatise of Civil Government (1690): The separation‐​of‐​powers principle means that “the legislative [branch] cannot transfer the power of making laws to any other hands.” The legislative power, wrote Locke, is “to make laws, and not to make legislators.”

Despite that sound advice, the Treas ury secretary is now the one calling the shots as he partially nationalizes a significant sector of our economy.

Honest Choices

Maybe the bailout is necessary. Maybe it will even work. But necessary or not, temporarily effective or not, the bailout is unconstitutional. And constitutionality is not restored merely by the invocation of “emergency” by the administration and Congress.

Conservatives should have learned that lesson when the Great Depression drove the New Deal expansion of government. Liberals should have learned it more recently when civil liberties were compromised in pursuit of real and imagined terrorists. To preserve the rule of law, we must condemn all legislation that offends the Constitution‐​no matter how unlikely the prospect that courts will invalidate the offending acts; no matter how unwise, from a policy perspective, court intervention might be.

When policy is allowed to trump constitutionality, three choices are available to honest citizens. We can abandon the proposal and try to accomplish the desired ends using alternative but constitutional means. We can change the Constitution so that the proposal is no longer unlawful. Or, at a minimum, we can acknowledge the truth‐​that we are violating the Constitution in pursuit of demonstrably necessary ends, which could not be otherwise attained.

But we have chosen none of the above. Instead, we have proceeded with the bailout despite few, if any, cautionary words about its unconstitutionality. That’s a recipe for lawlessness, not to mention a precedent that will rear its ugly head every time there’s serious trouble that the federal government thinks it can fix.

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