Tuesday, September 30, 2008

Bleeding Out the Excess Humors: Government Spending and the Financial Crisis

In the first presidential debate last Friday, the moderator's first question was addressed to John McCain: "[A]re there fundamental differences between your approach and Senator Obama's approach to what you would do as president to lead this country out of the financial crisis?" McCain's reply began as follows: "Well, the first thing we have to do is get spending under control in Washington. It's completely out of control." He soon added: "I'm going to veto every single spending bill that comes across my desk."

Different viewers surely had different moments during the debate when their jaws dropped. Sen. McCain's assertion that Pakistan was "a failed state" caused at least one knowledgeable commentator to drop a stitch. (Sorry for the mixed metaphor.) For me, though, it was that first answer about cutting government spending that left me staring in wonder. McCain's comments indicated a complete disconnect from even the most basic understanding of macroeconomics and a mindless commitment to an orthodoxy that would make matters much worse. Perhaps worse still, Sen. Obama did not -- and arguably could not -- say as much. While his comments were true as far as they went, Obama accepted McCain's premise that we need to cut spending right now.

In two recent blog posts, Michael Dorf has pointed out that, even on its own terms, McCain's proposed spending freeze would not actually cut spending and that government spending fails to explain either the origins of the housing crisis or how McCain could support the now-defeated rescue bill if he believes his own explanation. All true. The problem, though, is much more fundamental (to use one of Sen. McCain's favorite words): cutting spending right now would be the worst thing to do.

Let's put aside for now whether government spending is the culprit in getting us into this mess. (I don't think that it is, but that's irrelevant for now.) Let's also put aside whether there are long-term fiscal imbalances that need to be addressed. (I strongly suspect that those problems are overstated, but I readily acknowledge that reasonable people can disagree.) The question that McCain and Obama addressed was what to do when one of them becomes president in less than four months. They said that we should cut government spending. This is utter foolishness.

One cannot, of course, do justice to the macroeconomics of deficit spending in one short blog post. Perhaps the most direct way to put the point is this: Cutting spending when the economy is already weak and getting weaker is like bleeding a dying patient. Consumers are scared, many are losing their jobs, and access to credit to buy things is drying up. We can thus expect consumption spending to weaken considerably. Businesses have lost access to credit and, more importantly, have lost any plausible reason to invest in expanding their businesses in the face of a potentially disastrous recession or even depression; so we can similarly expect business spending to continue to weaken. The rest of the world has caught our financial contagion, and most of our trading partners have seen their economies weaken significantly in recent months. Notwithstanding the tanking of the U.S. dollar, therefore, exports will not bail us out. State and local governments are already in the process of slashing budgets as their tax receipts shrink. The only pillars remaining to bear all the weight of propping up the economy are thus federal spending and tax cuts. (Tax cuts, as welcome as they would be for strapped consumers, are also less likely to be spent by people who are understandably scared about their immediate futures and who thus need to put as much aside as they can.) Yet the candidates say that the first thing they would do is cut federal spending. Let's open another vein and see if the patient gets better!

The most generous thing one can say about this lunacy is that one or both senators is really against "wasteful spending," not all federal spending. If so, neither even came close to saying so. Still, it is counter-intuitive but true that even wasteful spending is better than no spending at all when the economy is down. The scientist who receives a grant for studying the DNA of bears in Montana, after all, buys groceries and pays rent. I would be the first to say that we should always try to spend government money on non-wasteful projects (though I see no reason why the infamous bear DNA study is thought to be presumptively wasteful); but neither candidate is talking about keeping up the same level of spending by shifting funds from dumb stuff to smart stuff.

We will need a stimulus package, and we will need it soon. Yet neither party's nominee (nor any of the other leaders in Washington) will say as much. Given that Sen. Obama leads the party that has traditionally been more open to the idea that at least temporary government stimulus is necessary, why did he at least not say something about the foolishness of cutting spending right now? Just as some people still like to blame Bill Clinton for the country's problems, I blame him for this.

The essence of Clinton's triangulation strategy was to accept his opponents' critique of "old Democrats" and claim that there is a Third Way that accepts the wisdom of both sides and rejects their excesses. Sounds nice. In the case of government spending and deficits, Clinton's strategy involved accepting the idea that government is bad and refusing to defend the important roles that government must play. While I suspect that Clinton understood that cutting spending in a situation like the one we currently face would be the height of folly, the reality is that his rhetorical stance undercut the ability of anyone in national politics to stand up for real fiscal sanity. If Sen. Obama had said: "You know what? Cutting government spending right now is the exact opposite of what we should do," everyone would have been shocked. Republicans would have had a field day, and Democrats would have distanced themselves from his comments. (A congratulatory blog post from me probably could not save his campaign.)

In short, strategic capitulation on matters of principle comes with a price. Right now, the best we can hope for is that the next president will ignore the conventional wisdom (and his own words) and realize that an economy on its deathbed needs all the life blood it can get.

-- Posted by Neil H. Buchanan

[Through Oct. 15, I am cross-posting on the Concurring Opinions blog.]

Monday, September 29, 2008


I'm still not an economist, yet I continue to be amazed by what must be either the economic illiteracy or deliberate obfuscation of the McCain/Palin campaign. The all-purpose answer to the question of how we got into, and how we should get out of, the current crisis, is government spending: The government spent too much in the past and should spend less in the future. Sen. McCain has said something like this over and over again, including in Friday's debate, and Gov. Palin, to the extent that she said anything that could be said to have propositional content, seemed to reaffirm the point in her Katie Couric interview.

Let's begin with the low-hanging fruit. If someone were committed to the proposition that government spending is bad for the economy, wouldn't he or she be strenuously opposed to the bailout? Indeed, wouldn't he or she be opposed to all of the proposed alternatives to the bailout that involve large expenditures of government funds? I suppose one could support the bailout---or at least not oppose it---if one thought the government would end up making a profit, but that seems unlikely here, and in any event, one hears absolutely nothing from McCain or Palin about why, if government (non-military) spending is generally bad, this time it's even a necessary evil.

Now the slightly higher fruit: Within the last couple of weeks, McCain has sometimes suggested that the underlying cause of the current crisis was "greed" on Wall Street, notwithstanding the fact that as a free marketeer, he was supposed to believe that through the magic of the market, private greed leads to public good. Perhaps because McCain is not convincing attacking greed, he has also stuck with his other explanation: government spending has gotten out of control. During Friday's debate, he cited government spending over and over again as the cause of our problems, including, specifically, the current financial crisis. To wit: "And the reason, one of the major reasons why we're in the difficulties we are in today is because spending got out of control."

Huh? There are plenty of reasons why one might think that wasteful government spending is a bad idea, but surely it was either irrelevant to, or actually worked against, the causes of the financial crisis. The housing bubble facilitated the sub-prime mortgage crisis because, with home prices rising, lenders didn't worry about borrowers' ability to repay: If the borrower defaulted, no biggie; the house is worth more anyway; and borrowers falling behind in their payments could simply flip the houses for a profit. What, if anything, was the effect of federal deficit spending on the housing bubble? Probably to make it a little less bubbly than it might have been. When the government spends more money than it collects in taxes, it must borrow money. That government demand for credit in turn raises the cost of credit, i.e., drives interest rates up, which makes home purchasing somewhat less attractive. So, without excessive government spending, we probably would have had even lower interest rates, and an even larger bubble.

There is a possible counter-story here: Low interest rates were the product of a deliberate Fed policy of economic stimulus that wouldn't have been necessary but for the drag that government spending had on the economy. There's no really good evidence that the Bush deficits dragged the economy in this way; a Keynesian would say just the opposite. But to the extent that one buys this counter-story, then the blame for keeping interest rates falls on the architect of the Fed policy, Alan Greenspan. And McCain, while listening most to Phil Gramm on economic matters, has frequently cited Greenspan as his great sage. So the counter-story is an even bigger mess for McCain.

To be clear, I'm not saying that the Bush deficits have been good for the economy. What I am saying is that tracing their effects requires at least some rudimentary understanding of supply and demand. If McCain has such an understanding, he has not explained how his single-minded focus on government spending as the root of all evil fits in with it.

Posted by Mike Dorf

Saturday, September 27, 2008

McCain's Blizzard of Words on Pakistan

Like a number of others, I did a series of double takes upon hearing some of John McCain's comments on Pakistan during this exchange in last night's presidential debate:

MCCAIN: Now, on this issue of aiding Pakistan... We've got to get the support of the people of -- of Pakistan....

OBAMA: [T]he problem, John, with the strategy that's been pursued was that, for 10 years, we coddled Musharraf, we alienated the Pakistani population, because we were anti-democratic. We had a 20th-century mindset that basically said, "Well, you know, he may be a dictator, but he's our dictator."

And as a consequence, we lost legitimacy in Pakistan. We spent $10 billion. And in the meantime, they weren't going after Al Qaida, and they are more powerful now than at any time since we began the war in Afghanistan.

That's going to change when I'm president of the United States.

MCCAIN: I -- I don't think that Senator Obama understands that there was a failed state in Pakistan when Musharraf came to power. Everybody who was around then, and had been there, and knew about it knew that it was a failed state. [link]

Perhaps McCain is being tutored on foreign policy by his vice presidential nominee, because I got lost in a hailstorm of nonsense there. McCain's insistence upon the need "to get the support of the people of Pakistan" is all well and good -- and I'm sure that the people of Pakistan would have welcomed that sentiment back in the winter, when Musharraf was trampling all over them. Instead, McCain unconditionally backed Musharraf at every turn, hailing the General as a "legitimately elected" president in the face of all evidence to the contrary. McCain even went so far as to call Musharraf a "scrupulously honest" man who had "done a pretty good job" and deserved the "benefit of the doubt" in the aftermath of his Emergency and Benazir Bhutto's assassination. I do not know when, precisely, the moment was when McCain looked into Musharraf's eyes and got a sense of the man's scrupulously honest soul, but McCain's character reference came several years after the Pakistani public got a good look for themselves, when the General brazenly reneged on a public promise that he would step down as army chief of staff.

But what should we make of McCain's puzzling claim that Pakistan was a "failed state" before Musharraf's 1999 military coup? The assertion goes well beyond defending the Bush administration's unconditional support for Musharraf in recent years against Obama's criticism. Rather, McCain necessarily seems to be asserting that Musharraf's decision to overthrow Pakistan's democratically elected government in the first place was justified. Failed States according to Fund for Peace/Foreign Policy, 2005-2007It turns out McCain has made this assertion before, asserting on the campaign trail in Iowa that Pakistan was a "failed state" before Musharraf came to power because it "had corrupt governments and they would rotate back and forth and there was corruption." Of course, reasonable people can certainly disagree about how precisely to define a "failed state," but it seems a stretch to put late-1990s Pakistan in that category. It's also not as if Pakistan fared particularly well in this respect under Musharraf. At least according to the index developed by the Fund for Peace and Foreign Policy, Pakistan was at pretty serious risk of becoming a "failed state" during each of the last three years of Musharraf's tenure as president. In any event, having "corrupt governments [that] rotate back and forth" certainly cannot be what defines a "failed state," as McCain would have it. By McCain's definition, one might conclude that India was a failed state in the late 1980s and again in the late 1990s.

McCain's justification of Musharraf's 1999 military coup is yet another example in which he seems to be singing a rather different tune than he was eight years ago. Recall that McCain was running for president when Musharraf overthrew Nawaz Sharif in 1999 -- indeed, he was explicitly asked for his views about Musharraf's coup in an interview only a few weeks later:

LARRY KING: How about military takeover bringing stability in Pakistan?

MCCAIN: Well, it may have brought some semblance of stability, but we only want the institutions of democracy that -- to prevail in this and every other country in the world, and to have to resort to a military coup is not something the United States should support. The -- I think [Gov. Bush's] point was that this was a very corrupt government that was overthrown, but it's -- in my view, it's still not a reason to overthrow it. It's a reason for us to do everything we can to help clean up that corruption and have the rule of law prevail in Pakistan and every other country in the world. [CNN, Larry King Live, Nov. 15, 1999, via Nexis]

UPDATE (9/28/08): Teeth Maestro rounds up some reactions to the debate by Pakistani bloggers at Global Voices.

UPDATE (9/30/08): Matthew Yglesias reports that he asked William Milam -- who, as U.S. Ambassador to Pakistan at the time of Musharraf's 1999 coup, "was certainly 'around then' and 'had been there'" -- for his view of whether Pakistan was a "failed state" before Musharraf assumed power. Milam's response:

[W]hile there were a lot of things wrong in Pakistan during the years leading up to the 1999 military takeover, Pakistan was not a failed state as we normally define such states. I am on record as stating publicly that, having come to Pakistan from Liberia a year before the takeover, I had a pretty good idea of what failed states look like, and [Pakistan] was not one. [link]

Posted by Anil Kalhan

I'm No Economist But I Can Do Arithmetic

During the first Presidential debate last night, Jim Lehrer challenged each candidate about what he would do to take account of the new fiscal reality likely to result from the bailout (or whatever action is taken). Sen. Obama said he would invest in vital infrastructure and look to cut unnecessary programs, singling out private insurance for Medicare; he also suggested he would delay some of his other proposals, presumably including health care; and he said he would seek an expeditious reduction in our spending on Iraq. Sen. McCain said he would consider an across-the-board spending freeze on non-military, non-veterans, non-entitlement programs.

How much would such a freeze (described post-debate by a McCain campaign spinner as a "bold" answer) save? Well, according to the government figures, in 2006, total discretionary spending was $843 billion. Of that, $411 billion was spent on defense, and another $33 billion on veterans. So, the category of spending McCain singled out totaled $399 billion. In 2007, non-military, non-veterans, non-entitlement spending totaled $389 billion. The source cited only has requests for 2008, rather than actual allocations, but that number is $410 billion. So, without a freeze, from 2006 to 2007, this category of federal spending actually declined, but let's give McCain the benefit of the doubt and assume that without a freeze this time, we would see the growth equal to what we see between the actual 2007 number and the President's 2008 request. That would be an increase of $21 billion.

In other words, the "bold" McCain plan to offset the $700 billion bailout would be to reduce federal spending by at most about $21 billion. But of course it's not even that much, because if we use the President's numbers, military and veterans' spending increases from FY 2007 to FY 2008 by $58 billion. So, before we even take into account the annual growth in entitlements spending, McCain's "freeze" would actually leave the government $37 billion further in the hole. To be sure, he could seek less in military spending than Bush has, but over the course of the Afghanistan and Iraq wars, the President and Congress have tended to budget too little money for ongoing operations, requiring periodic supplemental spending bills.

The most optimistic scenario for McCain would seem to be something like modest growth or even no growth in defense spending, coupled with modest growth in entitlements. According to HHS, federal entitlement spending rose from $561 billion in 2006 to $631 billion in 2007 to a projected $671 billion in FY 2008. So let's be extremely generous to McCain and assume that entitlement spending only grows by $40 billion. That still more than wipes out the savings from his across-the-board freeze, even assuming flat military and veterans' spending.

Bottom Line: Obama was correct when, in the debate, he said that McCain's approach would use a cleaver instead of a scalpel, but the much bigger problem with McCain's freeze is that McCain's cleaver is orders of magnitude too small to do the job.

Posted by Mike Dorf

Friday, September 26, 2008

This Post May Already Be Moot

I had planned to write today about the next steps in dealing with the financial crisis, following the agreement in Washington on the major contours of a bailout plan. Last night, however, the plan fell apart, with House Republicans walking away from the negotiations. The nature of any actions at the Federal level -- as I write at 8:30am EDT on Friday -- are thus very much in doubt. With the situation in flux, I will take the opportunity here to offer a few thoughts on the crisis and a number of ways that it might yet be handled, either picking up where we left off or starting from scratch.

If the players in Washington do not abandon the general contours of the plan that the Bush Administration proposed (a revolving line of credit falsely called a "$700 billion bailout" when in fact it could be any amount, and when the numbers that are being tossed around are gross, not net, costs to the Treasury), then clearly the movement in the past week has all been in the right direction. Rejecting Treasury Secretary Paulson's blank check approach was entirely appropriate, in particular the deservedly reviled Section 8: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

In addition, insisting that government infusions of funds be tied to equity shares in the companies who benefit is precisely what is needed to make sure that the net cost of the bailout to taxpayers is minimized. Efforts to ensure that those who made the wrong decisions do not walk away from the mess with huge payouts is at least politically necessary (and by my lights completely justified). Finally, making sure that distressed homeowners receive assistance -- through, among other things, access to bankruptcy proceedings, which are hardly pain-free and which are designed to require at least partial payment of loans -- is essential to address the underlying problem of nonperforming debt. "Nonperforming debt," after all, is simply people not making any payments on their loans. Reducing that problem is the key to all of this.

If, however, the political grandstanding really means that we are starting over, the good news is that there are some very thoughtful alternatives available. Bob Hockett, a law professor at Cornell, offered an extremely interesting plan on Dorf on Law yesterday afternoon, before the talks collapsed. Bob suggests that the Federal Housing Administration (FHA) and the newly-renationalized Fannie and Freddie (and Ginnie) are the perfect institutions to deal with the problem at the level of housing rather than on Wall Street. I cannot do justice to his plan in this post, so I'll just encourage everyone to link to it here. It's a fairly long read, as blog posts go, but very much worth the time.

Similarly, the economist Jamie Galbraith, in an op-ed in the Washington Post, offers the disarmingly brilliant idea of using deposit insurance and the FDIC as the levers to fortify the financial system. (More provocatively, he wonders whether a bailout is even necessary, now that the banking system has consolidated so dramatically.) Taking off the $100,000 limit on deposit insurance and allowing the FDIC to perform its duties would potentially defuse the problem:
Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.
What both Hockett and Galbraith have in common is an ability to see the value of using institutions that already exist to do what they already are capable of doing well, if we would only let them. Those institutions already provide oversight, and they in turn are subject to oversight. No need to set up a new bipartisan review board or any such untested system that would surely become a political football.

Interestingly, therefore, even though the efforts over the past 30 years to deregulate the financial system have led to this crisis, the anti-regulation zealots at least left the structures in place to allow a relatively quick and simple regulatory solution. The regulators have been underfunded, ridiculed, and prevented from doing their jobs, but to their great credit (and the credit of the politicians who created those institutions during the last great financial crisis), they are still there. We would do well to put them back to work.

[Note: Through October 15, I am cross-posting my Dorf on Law posts on the Concurring Opinions blog.]

Posted by Neil H. Buchanan

Thursday, September 25, 2008


[With the bailout now practically a done deal, here's why it's a bad idea, courtesy of my Cornell colleague, Robert Hockett].

It is now widely heard upon Wall Street, K Street, Main Street and beyond that the U.S. financial system might be faced with a sort of “financial 9/11.” Some now accordingly urge that a manner of “financial U.S.A. Patriot Act” be passed quickly. Treasury Secretary Paulson, Fed Chairman Bernanke, and other Administration officials urge Congress to confer nearly unreviewable discretion upon Treasury, that it might employ up to $700 billion or more in federal funds for the purchase of illiquid assets now seizing up credit markets. Mr. Bush has just addressed the nation from the White House in prime time, urging support of Treasury’s proposal. He tells us ominously, employing the words “you” and “your” multiple times, that each of our incomes, our life savings, our homes and even our neighborhoods are threatened. He summons Senators McCain and Obama to a White House “summit” on the crisis, and Senator McCain speaks of “suspending” the presidential campaign. Tonally speaking, it all sounds quite eerily familiar.

Meanwhile, in response to these developments, unsurprising objections are raised. Some balk at the breadth of discretion, as well as the Iraq-rivaling volume of money, that Treasury’s proposal would place at the Secretary’s discretionary disposal: Paulson, they note, could buy any assets under the plan, from anyone – even his erstwhile investment bank colleagues or “cronies” now out for gravy. Others object the proposal in any event affords Wall Street a pass on improvident, “speculative,” even “predatory” investment practices at Main Street’s expense. They also note Treasury’s likelihood of retaining the same firms that partly have wrought the present crisis, to hold and manage those assets the plan contemplates Treasury’s purchasing. Still other objectors observe that Treasury’s plan does nothing for those Main Streeters whose deceptively marketed home mortgages now face default, and whose prospective defaults lie at root of the present troubles. Some in this camp also wonder whether Treasury’s plan isn’t simply a retread of Bush’s original plan to gut Social Security, resurfacing in a new guise: Bail out Wall Street, including private insurance firms, so that nothing will be left in the fisc to bail out social insurance. Finally, some even cry out that Treasury’s proposal raises the frightening specter of “financial socialism.”

Would it be churlish to say, in the midst of this drama, “hold on there fellas!,” and point out that all of the shouting is both unnecessary and misdirected? I think not. For lost in the burning barn, trading floor style hubbub is an obvious solution right under our noses. It is a solution, moreover, that avoids all the objections just cited as well as another that’s not yet been raised, which I shall describe in a moment. The obvious solution is to restore, at least temporarily and possibly permanently, the business of low-end mortgage finance, refinance, financial counseling, and mortgage securitization to those still existing agencies which made low-end mortgages possible in the first place, then handled the bulk of them for decades: I refer to the Federal Housing Administration (FHA), working in tandem with its originally government-sponsored and recently re-nationalized sibling enterprises (GSEs), Fannie Mae and Freddie Mac, along with Ginnie Mae. Treasury’s new plan for bailout long has been these institutions’ bailiwick.

Think back and recollect recent history for a moment: The institutions I cite here were breathtakingly innovative when first introduced at the end of the Hoover and start of the Roosevelt Administrations. They were founded, moreover, precisely in order to address our last economy-wide home-foreclosure crisis – and the Depression it deepened or caused. FHA afforded mortgage insurance for the first time in our history, showing possible and indeed profitable what had long been thought impossible. The standards that FHA imposed as condition upon that insurance gave rise both to nation-wide quality standards in new housing stock, and to a nationally standardized fixed rate mortgage instrument – the now familiar, but theretofore unheard of, 30 year mortgage. (Previously one had to put at least 50% down on a home purchase, and had to refinance every few years.) That standard instrument for its part made securitization possible, and Fannie, then Freddie and Ginnie, were government-founded precisely in order to “make” that secondary market, hence to complete default-risk markets and thus render home finance widely available to virtually all working Americans.

FHA and its securitizing GSE siblings performed these coordinate functions, for decades, astonishingly well – before it was given over to Wall Street, which got into the act only once Washington and Main Street had showed it for profitable. For FHA and its GSE siblings quickly transformed us from a nation in which fewer than 40 percent owned their own homes, to a true “stakeholder” nation in which nearly 70 percent do. They can do the job again. And in so doing they can save both Wall Street and the broader financial economy as well – all in a manner quite free and clear of the objections now understandably raised to the Bush Treasury’s proposal.

Here is how: First distinguish two very different components of the present “crisis.” The core, and initiating, component is a comparative minority of subprime-mortgage-backed securities (MBSs) of now questionable worth, held along with other assets by a good many financial institutions (FIs). These securities are now widely thought to be “toxic” because many – but not all and not even a majority – of the mortgages that back them are troubled. The latter are troubled, in turn, because many were improvidently – in some cases even misleadingly or “predatorily” – extended by private lenders working outside of FHA’s ambit. These mortgages included very low “teaser” rates of repayment at the front end, followed by “ballooning” rates that kicked in shortly thereafter. Many to whom these were marketed did not know what they were getting into, and the mortgage originators did nothing either to warn them or check on their abilities to pay. Nor did they consider the interests of purchasers of these mortgages in the secondary markets, who widely assumed the due diligence had been done.

The second and peripheral, but now growing component of the present crisis is psychological. It is a case study in Stiglitz’s and Weiss’s credit rationing problem – or, more familiarly, Akerloff’s “market for lemons” problem: We have a financial market made jittery by uncertainty over what portions of various FIs’ portfolios are held in the form of the troubled mortgage-backed securities. The greater and longer enduring these jitters, the more prone investors become in the short run to undervalue affected institutions’ portfolios – even the “good” portions thereof. The more that investors accordingly seek to shed stakes in these institutions, in turn, the more rapidly the remaining such stakes lose their short-run values. A classic and all too familiar “downward spiral” ensues; a self-fulfilling prophesy, in fact: The psychological component of the problem ultimately grows larger than the initiating component, even though causally tied to and rooted in it. And this spiral is instrumentally facilitated and augmented, of course, by short-selling practices and short-term market-value accounting of asset portfolios.

What is the solution, and what do FHA and its GSE siblings have to do with it? Simple: Immediately reverse the downward spiral by directly addressing the cause at its core – the bad mortgages and the securities they back. Do so, moreover, through precisely those instrumentalities originally created and still best equipped to deal with low-end mortgages and the securities they back. Those are, as mentioned above, FHA and its recently renationalized siblings, Fannie and Freddie. This way you not only address the core problem directly and avoid the objections now facing Treasury’s plan: You also straightforwardly cabin the peripheral psychological problem, by “signaling” clearly to all that the real problem is discrete, containable, and now well contained.

Now, what is it to “address” the core and peripheral problems through FHA and its GSE siblings? How, that’s to say, would the plan work in detail? Well, several variations are possible, and some are already on offer – for example, by Mike Barr at the Center for American Progress, by Bob Shiller at Cowles, by Senator Dodd and Representative Frank, and even by me. Half of what most urgently needs to be done is now common to all of these plans, and even to the one sensible part of Treasury’s plan now before Congress. I’ll specify both halves of what’s most important, however, by reference to my own plan. I’ll do so because this is quite naturally the plan I know best, and because this plan’s the one that I think can most quickly and readily be effected by institutions we already have. For what I propose is precisely what these institutions already did – again, for decades – before we embarked on a few poorly designed privatizations.

First, then, as proposed by Treasury, we purgatively purchase the perceivedly “toxic” MBSs now said to be “clogging” the market. But we do so, not via essentially unfettered Treasury action apt to keep “Wall Street’s” – and K Street’s – interests closer to heart and more immediately in mind than “Main Street’s,” while lacking current institutional capacity to hold MBS portfolios in any event. We do it instead through our originally national, and now newly renationalized, GSEs – which already are in the business of holding these securities. These institutions, recall, pursuant to their originally well cabined home-ownership-spreading mandates, made the secondary markets in mortgages in the first place. Indeed they once constituted them entirely. They still hold, moreover, the great bulk of MBSs, and indeed hold the best of them. Through these institutions, then, purchase outstanding MBSs back from key FIs at a rate greater than currently undervalued market, but lower than more “fundamental” discounted cashflow value. When stability returns and market values come back into line with the mean, Fannie and Freddie will have recovered much of their new outlays. They might even come out ahead – as they routinely did before their rushed, moral-hazard-occasioning privatizations.

Second and simultaneously, through FHA, immediately commence refinancing arrangements with, and financial counseling for, all of those home-buying borrowers whose mortgages back the repurchased MBSs. At least do that for all of those who, thanks to misleadingly packaged, privately offered mortgages, in the wake of the 2006 real estate slump now find themselves in over their heads. Why do this through FHA? Easy: Just as the MBS buybacks described in the previous paragraph are Fannie’s, Freddie’s, and Ginnie’s original bailwicks, so are mortgage financing, refinancing, and financial counseling FHA’s original and continuing bailiwick. Moreover, as home-ownership-spreading always has been and remains FHA’s institutional mission, we can be reasonably confident that it will have the best interests of home-buyers now unnecessarily faced with foreclosure at heart. We can also expect FHA to be more effective and efficient a workout-arranger than would be judges suddenly called upon to blue-pencil mortgage contracts in the manner now vaguely envisaged by some members of Congress. Indeed FHA, long the principal home-ownership-spreading and sole self-financed agency of our federal government, is ideally situated to oversee nearly all aspects of our dealing with the present crisis. Why in heaven’s name are we contemplating handing this to Treasury?

Note that, in contrast to Treasury’s plan now before Congress, the FHA/GSE plan I have just sketched would not involve placing any government instrumentality in charge of any asset, activity, or market with which it is not already intimately and extensively engaged: There is no problem of over-delegation or new “nationalization” here of the sort that need worry those now objecting to possible promotion of Secretary – or “Comrade” – Paulson to a sort of “Homeland Financial Security Czar” or “Financial Commissar.” Nor does the FHA/GSE plan ignore distressed home buyers, or reward predatory lenders or improvident investors: To the contrary, it places these concerns center stage, and in doing so also, collaterally, addresses all real concerns currently facing the financial markets at large. Instead of purporting to protect Main Street by rescuing Wall Street as Treasury’s current proposal does, that’s to say, it “flips” the relation and rescues Wall Street by rescuing Main Street. And in so doing, it avoids every problem cited above in connection with all the objections we are now hearing to Treasury’s proposal.

The FHA/GSE plan that I here propose also avoids an additional problem occasioned by Treasury’s plan, which does not appear yet to have been noticed: Ominously couched and urgently advocated as it is in diffuse, plenary terms, Treasury’s plan and its present style of advocacy reinforce a potentially tragic and yet avoidable public misperception. That is the perception that some foggily indefinable and unforeseeable, hence pervasive and paralyzing, financial “infection” has suddenly come to afflict us from nowhere. This dispiriting and unnecessary misapprehension reinforces that very sense of panic and powerlessness which I suggested above represents both the largest and most readily reversible component of our current financial distress. It is as if someone were seeking to make us all feel as we did while the dust was still hanging in the air on the twelfth of September, 2001. “Fuzzy math,” fuzzy mandate, fuzzy faux fix.

Yet as I’ve argued, the problem is not at all fuzzy, but is clear and distinct. It is thus readily amenable to discrete, clearly contoured solution – through existing instrumentalities within whose long-existent and constitutionally legitimate mandates it already falls. Those are institutions we founded during the late Hoover and early Roosevelt years to address essentially the same problem we face now – a home finance crisis that caused or deepened a “Great Depression.” Clean up the core mortgage and MBS problem through precisely those core agencies we first founded, during that last great housing crisis and associated Depression, to handle what amounts to essentially the same problem we face now. Then all the large and diffuse peripheral problems now being debated in Congress, in the press, and even “out in the street” by protesters scheduled to demonstrate on Wall Street later today will quickly take care of themselves. Ignore K Street and save Main Street, and you’ll have saved Wall Street to boot.

[Robert Hockett teaches international finance, financial institutions, and financial regulation at Cornell Law School. He is currently completing a book titled A Jeffersonian Republic by Hamiltonian Means: Democratized Finance for a Distributively Just “Ownership Society.”]

Posted by Mike Dorf on behalf of Bob Hockett

Wednesday, September 24, 2008

Reasons not to postpone Friday's debate

5. The debate scheduled for Friday is supposed to be on foreign policy. McCain knows that with the financial crisis upon us, holding it on Friday will mean that domestic economic issues will instead play a substantial role in the debate. McCain believes that he will do better in a foreign policy debate than in a domestic policy debate in which Obama will point out how Phil Gramm, McCain's economic savant, bears more responsibility than anyone for the current mess (although plenty of Dems, including Pres. Clinton, bear their share too). By delaying the debate until after the financial crisis has been "solved," McCain can get a debate in which he talks about how principled he was in supporting the surge.

4. Even if we assume the purest of motives on the part of the McCain campaign, the idea that there is an emergency that demands the presence of two Senators who have stated their views more publicly than nearly all of their colleagues has substantive content. It feeds the Bush/Paulson idea that the American economy is teetering on the edge of permanent collapse. That sense of panic is, as others have noted, what got us the Patriot Act and (much worse in my view) the Iraq War. There are good reasons not to panic now (laid out nicely by my college classmate Chris Carroll here).

3. The notion that politics is irrelevant to how to spend $700 billion of public funds is absurd. If that's not a political decision, I don't know what is.

2. Just a couple of months ago, the McCain campaign was proposing 10 successive weekly town hall meetings. In a democracy, one would think that a crisis heightens rather than lessens the need for public debate.

1. I already invited guests to my house to watch the debate, and I also bought popcorn and beer.

Posted by Mike Dorf


(Updated!) My latest FindLaw column (now posted here) explains why Sarah Palin's question -- "What is it exactly that the V.P. does every day?" -- is not quite so disqualifying for the job she now seeks as it at first appears. As far as the Constitution is concerned, the answer to Palin's question is, not very much. My column goes on to explain that modern VPs, pretty much beginning with Walter Mondale, have taken on a great deal of responsibility.

On reflection, therefore, Palin's question may well be disqualifying, but in a different way, for it shows that she has not been paying anything resembling close attention to how the government actually functions. How could anyone following national events for the last 7 and 3/4 years fail to notice that Dick Cheney is one of the most powerful people in America? One need not think (as I do not think) that Cheney was the "real" President, with Bush only the front man, to recognize that Cheney was the driving force on crucial decisions, including the most important domestic issue (prior to last week) and the most important foreign policy issue.

If the McCain/Palin campaign were to respond, I imagine that their spin would go something like this: Governor Palin is a Washington outsider. During the last 8 years, indeed for her entire adult life, she has been busy raising a family and serving her community and her state. Her lack of attention to the bickering in Washington is a qualification, not a flaw.

Nice try, but I don't buy it. Sure, the outsider card is a perennial winner. Both Obama and McCain are trying to play it themselves. However, it's one thing to say (whether truthfully or not) that you're not part of the Washington culture. It's quite another to admit that you don't have any idea how it works. Or to put the point as pungently as I can, if you want to clean out the Augean stables, you need to know where all the horse crap is.

So there. My column refers to urine ("warm bucket of piss") and now I've penned an accompanying blog entry referring to feces. My work is done.

Posted by Mike Dorf

Tuesday, September 23, 2008

Who's Right and What's Left?

One of the most interesting developments in the current financial crisis is the coalition of the left and right against the center (or what should probably be called the center-right, but I'll just call the center for simplicity.) Some on the right oppose the $700 billion bailout because it undermines market incentives. Thus, KY Rep Sen. Jim Bunning made this pitch: "It’s financial socialism, and it’s un-American." Meanwhile, on the left, there is marked skepticism for a plan that allocates billions to investors and nothing to people who have lost their homes, even as it radically undermines the possibility of other government programs, such as health care.

The media have tended to portray those who favor the bailout in its current form as a pragmatic departure for a generally conservative Bush Administration. But of course it is no such thing. Between the wars in Afghanistan and Iraq, the massive tax cuts, and the addition of the prescription drug benefit, the Bush Administration has been anything but fiscally conservative.

That said, the description of the bailout as "socialism" is somewhat off target. It might better be described as crony capitalism. The main problem with the proposed bailout is not that the government would end up running the economy; Sec. Paulson would almost certainly spin off or outsource the management of the junk assets the govt acquires. After its effect on all other government spending, the main problem is that the bailout would dramatically undermine the discipline of the market. Although it wouldn't make much difference in total cost to the taxpayers, I would include in any package a very high wealth tax on corporate CEOs, hedge fund managers, and others who who made tens of millions of dollars while creating a mess for shareholders. Such effectively retroactive taxation would satisfy the Constitution's minimal requirements for civil retroactivity. Of course, as some on the left argue (e.g., here), that still doesn't justify the bailout, but it would at least somewhat reduce the distorted incentives going forward.

Finally, the people, i.e., Paulson and to a lesser extent Bernanke, who are urging Congress to act quickly or risk meltdown are issuing a self-fulfilling prophesy. "The markets need to know we're fixing the problem right now, or we'll have an irreversible credit freeze and economic death spiral," they say. And then, surprise surprise, when Congress is slow to act, credit tightens and the Dow falls.

Posted by Mike Dorf

Monday, September 22, 2008

Student Evaluations

Yesterday's NY Times Magazine, a special issue devoted to higher education, contained a particularly interesting story of professor hired to teach a course at Wesleyan, and then let go the following year because her student evaluations weren't good enough. Part of the point of the story is that three quarters of the students actually did think the course highly effective, although reactions were polarized. More broadly, the story points out how colleges and universities have increasingly made retention decisions based on student evaluations.

Here I'll make two main observations. First, as the magazine story itself notes, at research universities (the only sort of institution at which I have taught professionally), teaching still rarely plays a substantial role in retention decisions (although I have seen speculation about the teaching effectiveness of an entry-level candidate with no prior teaching experience used as a criterion in appointments decisions). Truly incompetent teaching may prevent a marginal scholar from receiving tenure, just as stellar teaching can help secure tenure for a marginal scholar, but research universities simply do not value teaching nearly as much as scholarship. (That said, nearly all of my colleagues have tended to care a great deal about their own teaching, including those who were regarded as poor teachers by their students.)

Second, here's a radical idea: How about measuring teaching effectiveness by outcomes? There are obvious problems, here, of course. One is the development of good outcome measures. For a law school contracts class, do we look at how students later fared on the contracts questions on the bar? Any test-based measure could have the unfortunate effect of encouraging teaching to the test. Moreover, what about undergraduate courses that have education for its own sake as their goal? How do we measure the "outputs" of a course in music appreciation or meta-ethics? The solution to these problems would have to differ by area, but for law school courses, one easy method would be to administer evaluations a few years after graduation. I have often been told by alumni that they thought my civil procedure course was mystifying, boring or worse when they took it, but that years later they really appreciated it when thorny issues arose in practice. (Presumably there were also students who liked the course when they took it but then later realized they didn't learn what they needed to. These students tend not to contact me.)

Tracking would be difficult for a proposal such as this one, as would the complication of the exam: Evaluations are typically administered before exams so students don't simply praise the teachers who gave them high grades and criticize those who gave them low ones. By delaying evaluations for years, however, my proposal would permit most former students to get past their grades. And in any event, the current practice itself introduces distortions: In some courses, students don't appreciate how effective the teaching was until they study at the end of the semester.

In any event, my goal here is to start a conversation on how to improve teaching evaluations. Additional suggestions are welcome.

Posted by Mike Dorf

Saturday, September 20, 2008


As a lawyer and former college debater, I probably have an inflated view of the importance of the Presidential and Vice Presidential debates. Actually running the government requires a somewhat different skill set from debating well. That said, and with the first Presidential debate less than a week away, debates are useful for at least the following reasons:

1) Especially in a campaign focused on nonsense (lapel pins, lipstick, etc), debates provide an opportunity to draw out policy contrasts. (This is much more true of the general election than the primaries.)

2) Effective communication with the pubic and others is part of the job of the President, and debates will at least expose those candidates who are not minimally qualified for that task (although these candidates are nonetheless elected sometimes).

3) Debates provide an opportunity for journalists or opposing candidates to ask tough questions with follow-ups, thus pushing the candidates off of their prepared talking points. That in turn gives greater sharpness to policy contrasts and can help the public figure out whether the candidate knows the relevant policy areas in detail beyond the executive summary of the briefing book. And that, in turn, is relevant because an under-informed President will either make under-informed decisions or rely excessively on advisers.

The relatively open formats for the 3 Presidential debates look likely to serve these three functions. However, the Vice Presidential debate will not. According to this NY Times story, the VP debates "will have shorter question-and-answer segments than those for the presidential nominees." The story goes on: "McCain advisers said they had been concerned that a loose format could leave Ms. Palin, a relatively inexperienced debater, at a disadvantage and largely on the defensive."

Not mentioned is that the disadvantage of a more open format would hardly be unfair. The McCain explanation is reminiscent of an old story about a lawyer who, upon hearing a damning piece of testimony by a witness, stands and says "objection." The judge asks "what is the basis for your objection?" The lawyer can't think of anything in the rules of evidence, and so finally says, "too damaging to my client."

Posted by Mike Dorf

Friday, September 19, 2008


One of the certainties of being a tax policy scholar who is not opposed to all taxes is that I am called names on a regular basis. The most common epithets are the standby favorites of the Cold War era: commie, pinko, commie-pinko, socialist, red, Marxist, Marxist/socialist . . . you get the idea. It pretty much does not matter what one says -- again, unless one says that all taxes are theft -- but the most surefire way to become subject to this kind of name-calling is to advocate any kind of income redistribution. Thus, while giving a talk last year, someone asked me if my argument might suggest that we should increase the estate tax. When I said yes, another academic (!) in the room said, "Oh, I see, so you believe in 'from those who have the ability to those who have the need,' right?"

I bring this up now because of the recent increase in the frequency of the attacks on Sen. Barack Obama as a "socialist" because of his tax positions. As should be well known by now, Obama has proposed a tax plan that would cut taxes for couples with income under $250,000 per year (and singles under $200,000) and raise taxes on those with higher incomes, especially those with the highest 0.1% of taxable incomes. Sen. John McCain's tax plan would lower taxes for everyone, but the cuts for lower-income people are small while the cuts for the highest income people would be enormous. (For a nice chart, see here. See also the nonpartisan Tax Policy Center's analysis here, which criticizes both Obama's and McCain's plans not on distributional grounds but because of concerns about future deficits, finding that Obama's plan increases the total debt by less than McCain's over ten years.) The choice on distributional grounds couldn't be more stark.

Is Obama's plan socialism? Of course not. There is no nationalizing of key industries or any of the other hallmarks that distinguish socialist economies from mixed capitalist economies. His plan is, however, an attempt to redistribute the tax burden. If someone wants to claim that the tax burden is already skewed too much toward the rich, they're free to do so. I have argued otherwise elsewhere. The charge of socialism, however, just doesn't fit. Sharing a common goal (reducing income disparities) doesn't make a non-socialist a socialist any more than wanting peace on earth makes a Christian a Buddhist.

This will not stop the name-calling, of course. Those who have a comic-book version of capitalism in their minds, in which there is either no government or only a government "so small that it can be drowned in a bathtub" (in one anti-taxer's famous phrase), will always feel free to describe any deviation from their pure system as a movement in the direction of a state takeover of the economy. The charge of socialism thus really means "having at least one thing in common with a socialist system that I disapprove of."

In any case, this has been a rather bad week for pure free marketeers. Even Europeans (those socialists!) have reportedly been "stunned" by the Bush administration's participation in bailouts in the financial sector. Calling Obama a commie because he wants to increase tax progressivity looks pretty weak next to Republican-led government takeovers of financial companies that are not being allowed to fail. One scholar asked in apparent horror, "Do we live in a market economy or not?" in response to one of the recent federal rescue efforts.

I have argued recently that these efforts are necessary, because the alternative is worse. The bailouts, however, are necessary not to undermine capitalism but to save it. Full-scale crises are the playground of extremists, and no time in American history saw a larger or more energized domestic movement of genuine Communists than the Great Depression. The Republican neo-socialists of 2008, therefore, are welcome on my red bandwagon. I like mixed capitalism, and I want to see it continue in an improved form. As far as I can tell, so does Sen. Obama. Pure free markets are not even possible in practice (as I'll argue in a future post), but if any deviation from the results of absolutely unregulated market outcomes is socialism, we are all socialists now. In fact, we have been for quite a long time.

[Note: During September, I am cross-posting my Dorf on Law posts on the Concurring Opinions blog.]

-- Posted by Neil H. Buchanan

Thursday, September 18, 2008

Structure, Shmucture

About a year ago, Justice Scalia spoke at a symposium on "Separation of Powers as a Safeguard of Federalism" at Notre Dame Law School. A copy of the published proceedings just crossed my desk. In addition to a number of interesting scholarly articles, the issue includes a very short introduction by Justice Scalia. It includes Justice Scalia's claim---which he has made in other settings---that the structural provisions of a constitution (things like federalism and separation of powers) are more important than rights provisions. Only half-jokingly, he says that when he was a law professor, he referred to structural constitutional law as "real" constitutional law.

There is a certain plausibility to this claim. For example, were it not for the structural provision of the Electoral College, Al Gore would have likely won the Presidency in 2000. I say "likely" rather than surely because the candidates would have campaigned differently if they knew that the winner of the popular vote would win the Presidency, and so in this counter-factual world, we couldn't say for sure that Gore would still have won the popular vote. But you get the point: The fact that Alaska has as much representation in the U.S. Senate as California tells us a great deal about what our national policies will look like, probably more than the wording of the First Amendment tells us.

Justice Scalia gives a nice example. He quotes two liberal provisions of the old Soviet Constituton, respectively forbidding persecution for criticizing the government, and protecting freedom of speech, assembly, and the press. He then goes on to say of these guarantees:

They were not worth the paper they were printed on, as are the human rights guarantees of a large number of still-extant countries governed by Presidents-for-Life. They are what the Framers of our Constitution called “parchment guarantees,” because the real constitutions of those countries--the provisions that establish the institutions of government--do not prevent the centralization of power in one man or one party, thus enabling the guarantees to be ignored. Structure is everything.

Justice Scalia is half-right here. Nice-sounding rights in a constitution do not ensure governmentla compliance. But Scalia is half-wrong as well, because we can say exactly the same thing about structure. Take the old Soviet Constitution. It contains structural provisions guaranteeing the freedom of Soviet Republics to secede (Article 72), that representatives to soviets of people's deputies shall be chosen on the basis of universal adult suffrage by secret ballot on a one-person, one-vote basis (Articles 95-97), and judicial independence (Article 155). These provisions also weren't worth the paper they were printed on.

Now it might be objected that matters like voting and judicial independence are not about structure but rights. Yet that seems plainly false; rights and structure intertwine. Consider two U.S. examples: 1) The Suspension Clause of Article I protects the right to habeas corpus and serves a separation-of-powers function. 2) If a state were to abolish the right to vote for state legislative officials, it would surely violate the structural provision guaranteeing to each state a republican form of government. But surely the Guarantee Clause (as it is known) is structural in ensuring a particular form of government. And yet both it and the Suspension Clause, like the entire Constitution, are ultimately mere parchment barriers.

Or if you want to stick with Russia, consider the fact that Russia's recent decline into autocracy is being accomplished in large part by intimidation of the independent media--i.e., by violating rights--so that Putin and Medvedev could ensure their election without rigging actual votes.

What distinguishes real from sham constitutions is not a distinction between structure and rights but a distinction between a culture that respects constitutional democracy and one that does not. Brezhnev knew he could ignore the Soviet Constitution because he knew that he would still command the loyalty of the Communist Party and the Soviet Army. American Presidents know that if they push too hard on the Constitution, the government, the People, and civil society will eventually push back. Or at least they're supposed to.

Posted by Mike Dorf

Wednesday, September 17, 2008

Who Wants to be Vice President?

I am currently reading a fascinating book about the systematic ways in which human beings behave irrationally. Entitled "Sway: The Irresistible Pull of Irrational Behavior," authors Ori Brafman and Rom Brafman convey a series of anecdotes and social psychology experiments that demonstrate the biases that drive people regularly to make decisions that are comically foolish, at best, and tragically misguided, at worst. In one portion of the book, the authors discuss the game show "Who Wants To Be a Millionaire?" On the assumption that readers are familiar with this game, I will give only a brief description here: The contestant is asked a series of multiple-choice questions, and if he answers the requisite number correctly, he wins a million of whatever the local currency is (dollars, pounds, etc.). When he feels stumped, he can ask for a lifeline. A lifeline takes a number of forms (from which the contestant may choose), but the relevant option for our purposes is the one in which the contestant asks for a polling of the game show audience.

The game show has been extremely popular around the world, though it originated in the U.K. In a French episode, which the authors of Sway describe, one of the earlier questions posed is this: Which of the following revolves around the earth? Is it (a) Mars, (b) the moon, (c) the sun, or (d) Venus? The contestant was stumped (perhaps because he skipped out on that day in elementary school, perhaps because he was too nervous to be on a TV game show) and asked for a lifeline. He chose to poll the audience. The French audience was "split" on the question. Many of them chose Mars, but a larger number chose the sun. Taking the audience's cue (relying on the wisdom of crowds -- a phenomenon explained well in a different book by James Surowiecky bearing the unsurprising name "The Wisdom of Crowds"), the contestant chose "(c) the sun." The authors ask their readers rhetorically whether perhaps there is something deeply wrong with the French educational system but conclude that, no, a different dynamic is afoot.

The French audience bursts out in laughter when the contestant (following the audience's advice) answers the question incorrectly, exposing the fact that people actually knew the correct answer but were deliberately deceiving the contestant? Why would they do that? Before answering, consider what happens when the game is played in the U.S. The polled audience in the U.S. is said to be correct 90% of the time, and the people in the audience appear earnestly to pass along their perceptions of the correct answers with the contestant.

Finally, consider what happens in Russia. It turns out, say the authors, that in Russia, the audience tends to give the wrong answers to the questions, regardless of the ease or difficulty of those questions, and regardless of how much the audience actually knows.

What accounts for this behavior? Is not the entire point of being part of the audience to help the contestant on stage? Aren't the Americans the only ones who are playing the game correctly? The answer is yes, if one is obeying the rules of the game. Audiences are specifically instructed to answer the questions to the best of their knowledge. They violate the rules if they do otherwise (much like a jury that nullifies). The authors hypothesize, however, that different cultures have different visceral reactions to what is taking place in the game and therefore respond in ways that might violate the game's rules but conform to their own respective sense of fairness.

In France, on this theory, the audience believes that a person who is going to become a millionaire must merit that victory. If a question is very difficult, and the wisdom of crowds is properly sought, the audience will help. But if the question is easy and the contestant is still unable to answer it, then the audience concludes that he does not deserve to become a millionaire. They therefore, independently of one another, deliberately manipulate him into answering the question in a manner consistent with his revealed abilities. In Russia, the authors go on, people tend to believe that everyone should have more or less the same amount of earthly riches. Wealthy people (and poor people as well) are viewed with suspicion. For a single individual to become a millionaire by exploiting the wisdom of the group thus signifies an oligarch attaining wealth on the backs of the people. Finding this prospect unappealing, the audience deliberately misleads the contestant.

In the U.S., finally, people are completely comfortable with disparities of wealth and believe, moreover, that if someone becomes wealthy, then he generally deserves to be wealthy. Americans, in other words, are -- as a general matter -- neither suspicious nor resentful of wealthy people in their midst. The audience is therefore free to identify with the contestant and to do whatever it can to help him become a millionaire. After all, if he wins, the audience loses nothing, and it can take altruistic pride in having assisted in the victory.

All of these are, at best, oversimplifications of the various cultures that have hosted the program "Who Wants to be a Millionaire?" Nonetheless, they may help explain the "Sarah Palin" phenomenon -- not the pseudo-feminist aspect of it (on which I have posted here) but the resistance of many viewers to the likelihood that she is truly not up to the job, as evidenced, for example, by her performance during her interview with Charlie Gibson. People may choose to assume that if someone is running for president (or vice president with an actuarially heightened chance of becoming president), that person must be qualified for the job. Accordingly, voters can afford the luxury of focusing on the more "fun" aspects of the contest -- personality, style, and presentation. When the candidate is unable to answer basic questions about foreign policy, for example, the audience is prepared to help out the "contestant" (either by saying what she "must have" meant -- "the Bush doctrine could refer to spreading democracy, not just to preemptive self-defense, so she was just trying to get Gibson to narrow his question rather than exposing her utter cluelessness" -- or by focusing on how nasty and mean the interviewer was and how impressively "confident" the contestant was). Americans may be identifying with Sarah Palin and thus wanting her to succeed, living vicariously through her just as they might through a contestant on "Who Wants to be a Millionaire?"

It's probably fair to say that when we are discussing a game show, the Americans' approach is the most generous and appropriate. If one believes that the entire game is an unjust usurpation of the means of production, then one should probably not be part of the studio audience for such a game. If one looks down at very uninformed contestants, then perhaps a more fully merit-based game like Jeopardy would be a better choice. But when the victorious contestant will become Vice President and perhaps President if she wins, it might behoove us to emulate countries in which the populace is less generous and far more probing in the face of legitimate efforts to dethrone an impostor.

By Sherry F. Colb

Tuesday, September 16, 2008


A new report just out on Common Cause warns that we should expect troubles in at least one of the ten (10!) swing states this go around. As Rick Hasen has long been pointing out on his Election Law Blog, the election administrator's prayer now is "Lord, let this election not be close."

For those of us who trust more in injunctions than prayers, though, we'd rather know where to report in the event. Given the strikingly small margins of victory in swing states in recent elections (less than 6,000 in NM in 2004) and the high probability that whoever wins this one will do so by a slim margin of electoral votes, my question is this: who on the Democratic side is coordinating the legal army's deployment to the front(s)? I've heard that much more of the crucial litigation is taking place beforehand this time around. But I still have this nagging suspicion that much more is yet to come. So who's got the sign-up sheet?

Posted by Jamie Colburn

Suddenly, the mattress looks like a pretty good place to keep my money

Here's the recent tally:

1) When Bear Sterns is in trouble, the federal govt subsidizes its acquisition by JP Morgan Chase.

2) When Fannie Mae and Freddie Mac are in trouble, the federal govt takes them over outright.

3) When Lehman Bros. is in trouble, the executive branch of the federal govt does nothing, leaving the bankruptcy court to sort things out.

4) When Merrill Lynch is in trouble, the federal government watches closely, and then breathes a sigh of relief as Bank of America buys it. (Bank of America shareholders are likely making a different kind of sound.)

5) When AIG is in trouble, the federal government jawbones other banks to lend it some dough (after NY State permits AIG to dip into its subsidiaries' reserves).

Is there a rationalizing principle for this bewildering combination of actions and inactions? Each move can be explained as individually sensible: Taking over Fannie and Freddie made sense given that they were already quasi-governmental; taking no action on Merrill was appropriate given the willingness of the private sector to come forward; etc. But one senses that Ben Bernanke and Hank Paulson don't have an overall set of principles guiding their decisions.

And yet, operating almost by feel, Bernanke and Paulson are probably the two most capable high-ranking Bush appointees (which is not necessarily to say they'll be able to prevent a worsening of the current financial situation). By contrast, SEC Chairman Chris Cox (remember him?) does appear to have a guiding philosophy, or rather ideology: namely, the markets are just about always just fine, so government doing anything will almost always make things worse.

The emerging post-Ike narrative has it that the Administration learned from Katrina that cronyism is no substitute for professional management, and there's a lot to that. But the contrast between the creative improvisation by Bernanke and Paulson, on the one hand, and free-market ideology by Cox, on the other, should serve as a reminder that heck-of-a-job cronyism was only part of the story of the errors of the Bush Administration. It explains, for example, how the Administration bungled the Iraq occupation. The other, and probably larger, piece of the story of the Bush Administration (at least prior to the 2006 midterm election) was ideologically driven bungling. If the Cheney/Wolfowitz branch of the Bush White House had not decided to go into Iraq in the first place, Paul Bremer never would have had the chance to disband the Iraqi army.

And no, of course I'm not saying that Chris Cox is responsible for the financial crisis, except to the extent that he, as a Congressman, was quite enthusiastic about deregulating financial services. Plenty of Democrats were also enthusiastic, so this is a bipartisan mess. Still, if we go back and look for the single person most responsible for financial services deregulation, it would be hard to find a better candidate than John McCain's good buddy, economic guru, and former campaign co-chairman, Phil Gramm. That would be bad news for McCain's campaign, but only in a reality-based election.

Posted by Mike Dorf

Monday, September 15, 2008

Risk, Consent, Abortion, and Child Support

My latest FindLaw column elaborates on the question of whether consent to an amniocentesis -- which risks a spontaneous abortion -- is tantamount to consent to an abortion, if the pregnancy is lost. I conclude that it is not, but I raise the issue of whether the pro-life position -- that women consent to any resulting pregnancy when they have intercourse -- is perhaps inconsistent with that conclusion. In the process, I discuss a variety of examples in which we do or do not treat risk-taking as consent to foreseeable consequences, and I identify some of the factors that appear to distinguish the two sets of examples.

In this post, I want to take up the distinct question of whether it is unfair to demand child-support from biological fathers who did not choose to have a child but only to have intercourse and who may, in fact, have unsuccessfully encouraged their partners to terminate their pregnancies.

As I have written elsewhere, I do not think that a simple genetic connection is enough, alone, to trigger child-support obligations (e.g., if a man is compelled against his will to donate sperm, he should not be held liable to support the resulting offspring). And we routinely allow men to give up paternal obligations when they donating to a sperm bank (and even to earn money in the process). It does therefore seem that if we hold a man financially accountable for 18 years when his sexual liasons ultimately result in the birth of a child, we may be doing to him what those who would compel women to remain pregnant against their will wish to do to women. Is this fair?

I am conflicted about it. On the one hand, if a man is utterly uninterested in his offspring, a part of me wishes there were some way to say that he is not truly their father and therefore bears them no financial obligations. Some advocates within the father's rights movement have called this idea the right to a "financial abortion" (about which I wrote here). Yet another part of me feels that if a child has financial needs, it is not too much to ask that the person who helped give rise to those needs do his small part in satisfying them. No one, after all, is forcing the man actually to care for his children or to spend time with them against his will, never mind donating blood or a kidney if they should need it for their survival.

I do think there is a significant difference between compelling a woman to remain pregnant against her will and compelling a man (or a woman, for that matter) to contribute financially to a physically separate child. In the first case, the State has turned the woman into a reproductive slave for the term of her pregnancy. In the second, it has simply asked for the distribution of resulting financial costs to the most responsible parties. The man can be viewed as paying damages for his part in creating the child's needs, but a compulsory pregnancy would be more like ordering "specific performance" of particular, personal, and bodily-integrity-challenging duties.

Some will say, of course, that there is more to lose in the case of actual abortion than in the case of financial abortion -- even without a father's financial support, at least the child is alive. This is true, but it misses the point. If a child needs a kidney transplant to survive, then the stakes are at least as high as they are in the case of pregnancy. Yet, to my knowledge, we have no law that requires a father to donate a kidney to a child, even if the alternative is the child's death. Though he took risks that helped create the need for a kidney (or any other medical need that might call for a close relative's intervention), we draw the line at bodily integrity.

Posted by Sherry F. Colb

Spam,Spam Spam Spam Spam Spam, Glorious Spam

Last week the Supreme Court of Virginia held that that state's anti-spam law was overbroad. The opinion contains an interesting and pretty sophisticated discussion of First Amendment overbreadth doctrine (in which I have long had an academic interest). The core substantive decision, however, rests on the conclusion that an anti-spam law that makes it a crime for any person "to falsify or forge electronic mail transmission information or other routing information in any manner in connection with the transmission of unsolicited bulk electronic mail" violates the right to anonymous speech.

The U.S. Supreme Court has held that anonymous speech is protected by the First Amendment, and the Va Supreme Court worries that in applying to non-commercial as well as commercial spam, the VA statute infringes the right to speak anonymously. The VA Supreme Court writes that "were the Federalist Papers just being published today via e-mail, that transmission by Publius would violate the [VA] statute."

The conclusion that the VA statute forbids anonymous speech rests on the assumption that there is no way to speak anonymously without falsifying or forging routing information. But this seems false. A spammer whose identity appears as "spammer" or "anonymous" would be anonymous. True, he'd have to then falsify routing info, violating the statute, but this isn't especially effective anyway. The spammer in the case, one Jeremy Jaynes, was tracked down. And there are certainly websites that permit one to send anonymous emails that don't involve falsifying router info. It's just that the router info doesn't lead back to the sender, unless the hosting service decides to comply with a criminal investigation and reveals it.

Most fundamentally, if someone is handing out physical pamphlets that purport to be authored by "Publius," the audience will know this is a pseudonym, and individuals can decide for themselves whether they want to receive it. But email that appears to come from a friend or co-worker is not pseudonymously or anonymously authored in any real sense.

Bottom Line: Give the VA S Ct credit for rightly caring about anonymity on the web, but take points away for not recognizing that anonymity can be protected without necessarily sheltering spammers.

Posted by Mike Dorf

Saturday, September 13, 2008

Eggs in the Age of Enlightenment

Imagine my surprise on Thursday evening when, at the ServiceNation forum on public service, John McCain decided to talk about Locke's political theory and its impact on American law and society. It sounded kind of elitist to me, but it would have been nice if he'd at least made some sense.

Here are the two clips:

1) "I do believe we’re a unique nation, and blessed with certain in alienable rights that we want to extend to the rest of the world. But I think that we probably still have that opportunity."

(I've used a transcript from CNN, which misrendered "inalienable" as "in alienable".)

2) "We’re the only nation I know in the world that really is deeply concerned about adhering to the principle that all of us are created equal and endowed by our creators with certain rights. And those we have tried to bring to the world. And we have not so much militarily, but through example, through leadership, through economic assistance."

Let's put aside until another time the psycholinguistics of what McCain was trying to do throughout his half of the forum, and focus instead on his reference to one particular concept in American legal history: the concept of "inalienable", or natural, rights. The use of the words "inalienable" and "creator" is deft, for two reasons. First, I would venture to guess that most Americans have heard the phrase to which McCain alludes, even if they don't know where it comes from. (It's in the preamble of the Declaration of Independence: "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. . . .") Since the phrase is so firmly entrenched in our collective gut, it's not subject to argument or dispute. Second, they invoke the idea of a mission from God.

Now, the folks who drafted and debated that passage (Thomas Jefferson, Benjamin Franklin, and George Mason among them) got their inspiration from the Englishman John Locke (who didn't weave it out of whole cloth), so there was nothing uniquely American about the idea when it was put to paper in 1776. But didn't McCain miss Locke's whole point? The "natural rights" idea is that there are certain core human rights that are God-given, and not derived from government; that government essentially lacks jurisdiction to deprive people of those God-given rights ("it becomes necessary for one people . . . to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them"); that one legitimate purpose of the social contract by which people form governments is to protect the exercise of those God-given rights ("That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed"); and that if the offenses to natural rights have been repeated and serious enough, then it is not only the right, but the obligation, of people to restore their rights ("But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.")

To put it bluntly, one underlying premise of the Declaration of Independence is that these "unalienable rights" are not some kind of American export. They're something that people are born with everywhere in the world, but they need to grab it for themselves when they've finally said "Enough!" McCain's mistakes were in thinking that we have a monopoly on those rights, and that it is our obligation to export them. The real concept is that everyone has always had those rights and will always have those rights, but if they want to exercise those rights then they have to take action on their own. So, while under this political theory a case can be made for dissidents to overthrow governments that interfere with the exercise of natural rights, that same theory does not support the case for intervening in places where we're not invited, nor does it support the moral case be made for refusing to lend assistance to dissidents when asked to do so (i.e., there's no justification for turning a blind eye to dissidents in China or Saudi Arabia).

Furthermore, I am confident that the people of many, many other countries (the G-7 and the EU, for example) would take issue with McCain's accusation that they're not "concerned" about equality and that the US is both unique and superior on human rights issues. McCain's statement in this regard was simply ignorant jingoism.

Lastly, despite the fact that Locke's political theory and its expression in the Declaration of Independence are nice history, we shouldn't forget that after 1776, the government rapidly retreated from the principles embodied in that document, and instead crafted (after the failure of the Confederation) a constitutional structure that permitted government erosion of so-called "natural rights"; those "natural rights" simply do not find expression in mainstream American law. For McCain to refer to the concept as though it is viable and operative is simply misleading. Perhaps he is confused by the fact that we have a memorial by the Tidal Basin where the words (partially bowdlerized) are written in bronze. I went there a couple of weeks ago and noted that you can't park your car there because of Homeland Security concerns. Perhaps they should rename it the Monument to Irony. McCain's view is revisionist and counterfactual, although (regrettably) he is not outside the mainstream in his misunderstanding of US history.

(PS -- A note on the title of this post. In the movie Swingers (1996), the characters walk into a diner where there's a sign that says something like, "Breakfast served any time." One says to the waitress, "I'll have my eggs in the Age of Enlightenment.")

Posted by Craig Albert

Friday, September 12, 2008

Empirical Legal Studies

In 1897, Oliver Wendell Holmes, Jr. wrote in the Harvard Law Review: "For the rational study of the law the blackletter man may be the man of the present, but the man of the future is the man of statistics and the master of economics." Well, it appears that the future is finally here. Today and tomorrow, Cornell Law School is hosting (and NYU and Texas Law School are joining Cornell in organizing) the third annual Empirical Legal Studies Conference. I'm attending and participating in the conference, even though my own work is not especially empirical (with an occasional exception). Only a fool of a law professor would be completely uninterested in whether the world as imagined by legislators and judges corresponds with the world as it actually is.

Still, I want to quibble slightly with both Holmes and the ELS Conference organizers for their tacit but unmistakable suggestion that doctrinal analysis is not itself empirical. Holmes has a better excuse. He was reacting to Christopher Columbus Langdell's pretension that law, as understood via the case method, was an inductive science. Holmes' chief complaint was that Langdellians were analyzing the wrong data. One can have a completely self-consistent understanding of existing cases, but the body of rules that produces can still be socially harmful. As Holmes put it in the very line following his prophesy of a statistics-based future: "It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV."

The legal empiricists (at the ELS Conference and more broadly) who want to examine the real-world effect of various legal regimes follow admirably in Holmes's path. But a significant number of empiricists are Langdellians in an important sense: They aim to understand how cases are decided. What influence does ideology have, for instance? Do judges truly follow the rule of stare decisis? Etc. For many of these empiricists, the favored mode of analysis is the large-n study with statistical regressions. And much of what they discover is both real and interesting.

However, the fact that we can learn much about a phenomenon by large-n study does not mean that we can't also learn other things about that phenomenon by close observation. Traditional doctrinal work, if done well, is to large-n studies of judicial behavior, as participant-observer studies are to large-n studies of any social phenomenon. Thus, Billy Beane, Theo Epstein and Bill James can tell us a great deal about which pitchers are likely to perform well in a given season just by looking at their past records, even focusing on a small number of variables (for Beane per Moneyball, just strikeouts and home runs allowed). Still, additional interesting information can be gleaned from direct observation. E.g., that a pitcher will throw a curveball on a "fastball count," or that even though his fastball hasn't lost velocity, it seems to have less movement than in prior seasons. In principle, any of this information can be captured by an existing model or a by modified version of the model, but in practice, there are so many potentially relevant variables that no model can capture them all. Stats-minded baseball teams have been extraordinarily successful in recent seasons, but that doesn't mean that the game of baseball is fully captured by the statistical models.

And likewise for law. Sophisticated legal doctrinalists have insights about the law that the models don't capture, or at least that the existing models don't capture because no one had yet thought to look at them. Probably the most famous example in law is Learned Hand's claim that economic efficiency is the hidden logic of negligence. That was surely an overstatement, but it was an extraordinarily useful overstatement. Once Hand made the point, it could be tested empirically and subject to normative critique.

It's tempting to say that doctrinal work and empirical work complement each other, and they do, but my point here is that doctrinal work, if done well, itself has an empirical component, albeit a limited one. Langdell's mistake, in other words, was not in thinking that the common-law method of inducing general rules from particular cases is a kind of science; his mistake was in thinking that this is all that needs to be said or done (and it is not even clear that he made that mistake either).

Posted by Mike Dorf

Thursday, September 11, 2008

The "Palindox" of Sarah the Feminist

One of the very interesting dynamics that has emerged lately (and on which Ruth Marcus, among others, has written) is the topsy turvy nature of people's reactions to Sarah Palin's life choices. Democrats in general and feminists in particular have questioned the consistency of Palin's career ambition with her commitment to being a good mother. Republicans in general and opponents of feminists in particular have applauded the fact that a mother of five, including a special-needs infant, is able to ascend to the highest levels of government and power without taking time off for motherhood. My own sense is that both groups are being unfair and disingenuous but for different reasons.
Feminists appear to question Palin's commitment to family because they suppose -- correctly -- that if a woman who hailed from the liberal or left wing of the political spectrum were to make the choices that Palin has made, she would be excoriated rather than celebrated. At some level, women who have felt the need to apologize for their ambition and whatever "compromises" they have had to make to pursue their careers find the country's love affair with Sarah Palin maddening. If she can be embraced, they think, why can't I? And if I cannot, then I will not allow her to be either. Sarah Palin is, in that sense, like the little sister whom everyone considers adorable for doing precisely the same thing that the big sister was yelled at for doing in her time.
Right-wingers applaud Sarah Palin's confrontation with the glass ceiling because of the delicious irony. They do not especially care for the idea of giving women equal opportunity. They are, after all, the ones who brought us the 1992 Republican Convention, at which Pat Buchanan -- to much applause -- derided Hillary Clinton as a cross-dresser for her ambition. Like Clarence Thomas, however, Sarah Palin has an inspiring personal story that -- but for her politics -- concretely seems to personify dreams of her group's triumph over adversity. She was a "hockey" mom, a mother of five and nonetheless simultaneously pursued impressive accomplishments. Like Clarence Thomas as well, Sarah Palin has succeeded by championing positions that endear her to those who have expressed contempt for the struggles of people who otherwise resemble her. Sarah Palin is the Trojan Horse of the party that would turn back the clock on women's progress.
Another interesting feature of Sarah Palin's appeal that bears note is that her politics permit her to act -- proudly -- in ways that would be considered "mannish" in a left-leaning political woman. Imagine for a moment a right-wing politician referring to a group of feminists as "pit-bulls with lipstick"; would that likely be a compliment, as it was when Sarah Palin said it of "hockey moms"? (Incidentally, if Palin is a hockey mom, then I am a karate mom -- you heard it here first). Would the vicious and angry appearances of Laura Ingraham (who clerked for the Supreme Court at the same time as I did) or Ann Coulter be tolerated by the right-wing establishment if they were not fighting for causes better associated with sexist men than feminist women? For that matter, is it any accident that it is pro-life women who proudly call themselves "feminists for life," while pro-choice women are otherwise reluctant to use the "f" word and risk being characterized as "shrill" or "militant"? It is truly riveting to watch people who ordinarily mock claims of sexism queuing up to claim that Palin has been a victim of it.
To put the matter differently, the phenomenon of Sarah Palin may tell a story of how much the Trojan Horse and those like her can live the feminist dream if only they deny it to other women. And no, I will not apologize for calling Palin a horse, with or without lipstick -- I happen to love horses, as long as they are not made of wood and do not contain an army of gun-toting reactionaries.

Posted by Sherry Colb