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The U.S. Constitution vests all the “legislative powers” it grants in Congress. The Supreme Court allows Congress to delegate some authority to executive officials provided an “intelligible prin- ciple” guides such transfers. Congress quickly wrote and enacted the Emergency Economic Stabilization Act of 2008 in response to a financial crisis. The law authorized the secretary of the Treasury to spend up to $700 billion purchasing troubled mortgage assets or any financial instru- ment in order to attain 13 different goals. Most of these goals lacked any concrete meaning, and Congress did not establish any priorities among them. As a result, Congress lost control of the implementation of the law and unconstitutional- ly delegated its powers to the Treasury secretary. Congress also failed in the case of EESA to meet its constitutional obligations to deliberate, to check the other branches of government, or to be accountable to the American people. The imple- mentation of EESA showed Congress to be large- ly irrelevant to policymaking by the Treasury sec- retary. These failures of Congress indicate that the current Supreme Court doctrine validating dele- gation of legislative powers should be revised to protect the rule of law and separation of powers. Lawless Policy TARP as Congressional Failure by John Samples _____________________________________________________________________________________________________ John Samples is director of the Center for Representative Government at the Cato Institute and the author of The Struggle to Limit Government: A Modern Political History (Cato Institute, 2010). Executive Summary No. 660 February 4, 2010
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Lawless Policy: TARP as Congressional Failure

Jan 16, 2022

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Page 1: Lawless Policy: TARP as Congressional Failure

The U.S. Constitution vests all the “legislativepowers” it grants in Congress. The SupremeCourt allows Congress to delegate some authorityto executive officials provided an “intelligible prin-ciple” guides such transfers. Congress quicklywrote and enacted the Emergency EconomicStabilization Act of 2008 in response to a financialcrisis. The law authorized the secretary of theTreasury to spend up to $700 billion purchasingtroubled mortgage assets or any financial instru-ment in order to attain 13 different goals. Most ofthese goals lacked any concrete meaning, andCongress did not establish any priorities among

them. As a result, Congress lost control of theimplementation of the law and unconstitutional-ly delegated its powers to the Treasury secretary.Congress also failed in the case of EESA to meet itsconstitutional obligations to deliberate, to checkthe other branches of government, or to beaccountable to the American people. The imple-mentation of EESA showed Congress to be large-ly irrelevant to policymaking by the Treasury sec-retary. These failures of Congress indicate that thecurrent Supreme Court doctrine validating dele-gation of legislative powers should be revised toprotect the rule of law and separation of powers.

Lawless PolicyTARP as Congressional Failure

by John Samples

_____________________________________________________________________________________________________

John Samples is director of the Center for Representative Government at the Cato Institute and the author of TheStruggle to Limit Government: A Modern Political History (Cato Institute, 2010).

Executive Summary

No. 660 February 4, 2010

Page 2: Lawless Policy: TARP as Congressional Failure

Introduction

The Emergency Economic StabilizationAct of 2008 created the Troubled Assets Re-lief Program, which is authorized to spendup to $700 billion buying financial instru-ments from banks and other institutions.Congress considered, wrote, and enactedEESA in nine days in the early fall of 2008.Those days passed in an atmosphere of crisis—if not panic. A few weeks earlier, the federalgovernment had seized Fannie Mae andFreddie Mac, two government-sponsoredenterprises tied to home mortgages, afterweeks of speculation that the two might fail.Two weeks prior to passing the law, LehmanBrothers investment bank failed because oflosses on mortgage securities, and MerrillLynch, the nation’s largest brokerage, accept-ed a merger with Bank of America to avoidbankruptcy. A day later, federal officials tookcontrol of American International Group, aglobal insurance firm threatened by creditdefault swaps tied to mortgage investments.On September 25, as Congress consideredEESA, the nation’s largest savings and loanassociation, Washington Mutual Bank, col-lapsed and was sold by federal regulators toJP Morgan Chase.1

In confronting this crisis, the executivebranch and the Federal Reserve acted on itsown authority up to a point. Yet by mid-September, the Federal Reserve chairmanconcluded that Congress should be involvedto authorize additional spending to militateagainst the crisis.2 Bernanke believed the Fedwas “already doing all that it can with thepowers we have” and in any case, historyshowed that “all parts of government” need-ed to be at work to successfully resolve afinancial crisis.3 Later, addressing PresidentBush, Bernanke stated that Treasury, not theFed, should be dispensing funding and thatwould require congressional approval.4 Thatthey sought authorization for TARP showsthat Federal Reserve officials and members ofthe executive branch were operating at whatthey took to be the limits of their authority.

The evidence does not suggest either Fed orTreasury officials knowingly acted ultra viresin combating the crisis.5 They sought legiti-macy for their actions through law.

Unfortunately, the story of EESA is a storyof congressional failures.6 The U.S. Constitu-tion establishes a government of delegatedand divided powers. Congress is a separatebranch that should check and balance the oth-er branches to limit government. The Framersalso hoped Congress would deliberate aboutlaws rather than simply follow the passions ofthe moment. Finally, the Constitution gavethe legislature the power to make laws. Thefirst section of the first Article of the U.S.Constitution vests “all legislative powers” inCongress. These powers cannot be transferredto any other person or body. The Constitutionempowers Congress to make law but not tomake legislators.7 As the Supreme Court hasacknowledged, “the system of governmentordained by the Constitution mandates thatCongress generally cannot delegate its legisla-tive power to another Branch.”8

This stricture notwithstanding, Congresshas frequently granted power to the executivebranch or independent agencies. The SupremeCourt has validated such grants, providedCongress lays down “by legislative act an intel-ligible principle to which the person or body[exercising delegated authority] is directed toconform.”9 This nondelegation doctrine led tothe Supreme Court overturning part of theNew Deal legislative program which, in turn,actuated a presidential threat to the judiciaryand subsequently a more compliant judicia-ry.10 Consequently, for much of the time sincethe New Deal, “the courts have failed to over-turn even egregious instances of standardlessdelegation.”11 It remains true, however, thatthe nondelegation doctrine and the “intelligi-ble principle” test have not been overturnedand remain good law.

In the so-called Benzene Case,12 JusticeWilliam Rehnquist explicated the nondelega-tion doctrine. First, he argued the doctrine“ensures to the extent consistent with orderlygovernmental administration that importantchoices of social policy are made by Congress,

2

The story ofEESA is a story of

congressionalfailures.

Page 3: Lawless Policy: TARP as Congressional Failure

the branch of our Government most respon-sive to the popular will.” Second, Congressmust provide an intelligible principle “toguide the exercise of the delegated discretion.”Third, such a principle provides the judiciarywith “ascertainable standards” to assess thevalidity of a delegation.”13

I focus here on the first part of Rehn-quist’s analysis. Congress can choose theends and the means of public policy. Of thetwo, the ends would be more important sincethe goals of a policy should determine itsmeans. The goals of a policy would also beessential to administrators as a guide to exer-cise delegated discretion and to judges as ameans of assessing the validity of the grant ofpower. Congressional control over the goalsof a policy thus advances the rule of law.

Rehnquist notes the importance of Con-gress, the branch closest to the popular will,in making important policy choices. Con-gress, and the voters who elect its members,are interested in and as capable as anyone elseof choosing among such goals and the gener-al values they embody.14 In this way, congres-sional determination of the goals of policiesserves democratic values.

Rehnquist’s analysis implies that ifCongress is to make the “important choices”for policy, it should determine tradeoffsamong goals and the values they embody.15 IfCongress stipulates a hierarchy of ends for apolicy, both those who implement the law(agency personnel) and those who enforce thelaw (judges) would have a foundation to assessthe constitutionality of a delegation. IfCongress simply sets out the ends of policyand assigns no priorities among them, neitherthe holder of discretion nor a court wouldhave a guide to implementing or assessing thelaw. Moreover, in this latter case, Congresscould not be said to have made the importantchoices affecting a policy. The choice might bemade by the recipient of a delegated power tothe detriment of both the rule of law and pop-ular control of government.

The first section of this analysis will showhow Congress failed to fulfill these constitu-tional obligations prior to passing EESA. The

second section will examine how its failure tolegislate deprived Congress of influence overthe implementation of EESA. The conclud-ing section explores the implications of thiscase study for Congress and for constitution-al doctrine.

Enacting TARP

What should we have expected fromCongress regarding the financial crisis of2008? Article I of the Constitution vests “alllegislative powers” in Congress. We shouldexpect Congress to exercise those powersrather than delegate them to others. Congressis one branch of American government, a partof a system of checks and balances designed tolimit political power and its abuses. We shouldexpect Congress to check and limit the otherbranches of government. Congress is alsomeant to be a deliberative institution thatcarefully considers its legislative duties.Finally, Congress is part of a republican gov-ernment and thus should be accountable tothe people of the United States. On each ofthese counts, Congress came up short withregard to EESA.

The Rule of Law

The EESA authorizes the secretary of theTreasury to “establish the Troubled Asset Re-lief Program (or ‘TARP’) to purchase, and tomake and fund commitments to purchase,troubled assets from any financial institution,on such terms and conditions as are deter-mined by the secretary, and in accordance withthis Act and the policies and procedures devel-oped and published by the secretary.”16 Itdefines “troubled assets” as “residential orcommercial mortgages and any securities,obligations, or other instruments that arebased on or related to such mortgages, that ineach case was originated or issued on or beforeMarch 14, 2008, the purchase of which theSecretary determines promotes financial-market stability” and “any other financial

3

We should expect Congressto check and limit the otherbranches of government.

Page 4: Lawless Policy: TARP as Congressional Failure

instrument that the Secretary, after consulta-tion with the Chairman of the Board ofGovernors of the Federal Reserve System,determines the purchase of which is necessaryto promote financial-market stability, butonly upon transmittal of such determination,in writing, to the appropriate committees ofCongress.”17

Congress stipulates that the secretary maypurchase any mortgage asset or any financialinstrument that promotes financial-marketstability.18 The section of the law defining“troubled assets” places two insignificant con-straints on the secretary’s discretion. The sec-retary is told to consult with the Fed chairmanbefore purchasing financial instruments notrelated to mortgages. This admonition cannotbe enforced; it is more advice than law. Thesecond constraint requires the secretary totransmit his reasons for buying nonmortgageinstruments to the appropriate congressionalcommittees. Here Congress is trying to con-trol their newly empowered agent. The secre-tary is required to inform the legislature of hisdecisions about troubled assets after the fact.19

EESA does not say what Congress might doafter receiving this information; it is assumedthat disclosure to the legislature in itself con-strains the power of the secretary.

This section also marks the first appear-ance of a goal for the policy and thus ofCongress’s attempt to state an “intelligibleprinciple” to guide the secretary. The secre-tary’s goals in purchasing assets will be:

• “promoting financial-market stability” • protecting “home values, college funds,

retirement accounts, and life savings”• preserving “home ownership”• promoting “jobs and economic growth”•maximizing “overall returns to the tax-

payers of the United States”20

Some of these purposes show up again inSection 103, entitled “Considerations.” Incarrying out the law, this section admonishesthe secretary to take into consideration, inaddition to the purposes of the law alreadystated, the following goals:

•minimizing the national debt• keeping families in their homes• stabilizing communities • efficiency of spending• avoiding several kinds of discrimination

in determining which firms are eligibleto participate in TARP • subsidizing firms “serving low- and

moderate-income populations and oth-er underserved communities” that wereharmed by the collapse of Freddie Macor Fannie Mae21

• stabilizing counties and cities22

Finally, at another place, Congress sets out afinal goal:

• prevent unjust enrichment of financialinstitutions23

The law offers a baker’s dozen of intelligibleprinciples to guide the spending of $700 bil-lion dollars by the secretary of the Treasury.Many of these “intelligible principles” are lit-tle more than slogans—lacking any concreteindications of what they might mean or howthey might constrain the secretary. Two ofthe goals, however, have concrete directions.

The final goal—preventing unjust enrich-ment of financial institutions—comes closestto serving as a useful guide to the secretary.The secretary is directed to “take such steps asmay be necessary to prevent unjust enrich-ment of financial institutions participating ina program established under this section,including by preventing the sale of a troubledasset to the secretary at a higher price thanwhat the seller paid to purchase the asset.”Congress then exempts purchases from someinstitutions from this rule.24 The secretarydecides what “steps” will be taken to enforcethis rule. But in buying troubled assets, thesecretary may not pay more for them than theseller did. That stipulation constrains the sec-retary’s discretion, albeit in a minimal way.

The law also offers some specific guidanceabout the fifth goal, maximizing the returnfor taxpayers. The law specifies that the sec-retary should receive in exchange for buying

4

Many of these“intelligible

principles” are little more than

slogans.

Page 5: Lawless Policy: TARP as Congressional Failure

a troubled asset a warrant to buy common orpreferred nonvoting shares (if the firm inquestion has securities traded on a nationalexchange). Other firms would give the feder-al government stock or a senior debt instru-ment. The secretary would receive such stockor debt “to provide for reasonable participa-tion by the secretary, for the benefit of tax-payers, in equity appreciation in the case of awarrant or other equity security, or a reason-able interest rate premium, in the case of adebt instrument.” Judging what is reasonableremains the job of the secretary, who bothsets the price to exercise a warrant and deter-mines exceptions to these rules.25

Had Congress set a single goal or “intelligi-ble principle” for EESA, the courts or a con-gressional committee would have been betterplaced to oversee and control executive discre-tion in implementing the law. Yet in EESA, asin many laws, Congress set out multiple goals.Congress did not attempt to establish anyhierarchy among the 13 goals in EESA.Perhaps promoting financial-market stabilitymerits pride of place over the others, but thatis just a guess; the legislation does not estab-lish that priority. Perhaps “considerations” arenot purposes and thus should occupy lesserweight in the secretary’s judgment, but that isalso a guess. Two of the purposes of the law arelisted among its considerations; perhaps aconsideration is a purpose by another name.(Promoting financial-market stability is men-tioned second among the considerations,which may suggest it ranks behind maximiz-ing returns for taxpayers.) The secretary has alist of goals, and the authority to purchaseassets. He has no guidance from Congress onhow to weigh goals when tradeoffs must bemade. From that list of goals and his ownjudgment about tradeoffs, the secretary mustconcoct an intelligible principle for makingdecisions— a principle he alone will formulate.In that regard, he is exercising the power tomake laws, a power the Constitution reservesto the Congress. In EESA, Congress enactedgoals aplenty, but they provide at best the rawmaterials of an “intelligible principle.” Thosegoals, however, could not guide implementa-

tion of the law nor serve as a proper standardfor evaluating the delegation of power andresources in the law. The raw materials of aintelligible principle were not enough to pre-serve the rule of law or separation of powers inthis case.

Neither Check nor Balance

The Framers of the U.S. Constitutionsought to both empower and to constrain thefederal government. Voters would enforce onekind of restraint on political power, but theballot alone was not adequate to the task.Hence, the power of the federal governmentwould be divided among its various branchesor “departments.” Those who administeredeach branch should have “the necessary consti-tutional means, and personal motives, to resistencroachments of the others.”26 Each branchshould be expected to resist the efforts of otherbranches to gradually concentrate power.Congress thus had an affirmative obligationunder the American system to resist any effortsby the executive branch to engross its ownpowers. This might be called Congress’s struc-tural obligation in the American system.

Treasury Secretary Paulson initially pro-posed allowing his office to purchase “mort-gage-related assets” in order to enhance mar-ket stability and protect the taxpayer. In theproposal, the secretary was also charged withregular reporting to Congress about his use ofthe authority. The secretary’s actions would beexempt from judicial review.27 Congress didnot simply rubber-stamp Secretary Paulson’soriginal TARP proposal; congressional leaderswere concerned about the proposal’s grant ofpower to the Department of the Treasury andthe Federal Reserve. Yet, despite these con-cerns, Congress failed to check the executive inthe final law.

This failure to check the executive branchis most clear in the exercise of authority thatshould be dear to the legislative branch:spending public money. The law limits thesecretary’s authority to purchase troubledassets to $250 billion. However, that ceiling

5

The secretary isexercising thepower to makelaws, a power theConstitutionreserves to theCongress.

Page 6: Lawless Policy: TARP as Congressional Failure

may be broached if the president certifies thatit need be; the new limit will be $350 billion.Thereafter, if the president “transmits to theCongress a written report detailing the planof the Secretary” to buy more troubled assetsbeyond the $350 billion, the secretary may doso unless Congress agrees to a joint resolu-tion disapproving of the plan.28

The law offers an illusion of congressionaloversight and control over the spending ofthe $700 billion. Where Secretary Paulsonhad originally wished to spend the entiresum, Congress broke up the $700 billion intothree tranches. The second and third trancheappear to require additional decisions to goforward with spending. In fact, the presidentneed only certify the need for the secondtranche and file a plan for spending the thirdtranche. It is up to Congress to stop thespending of the third tranche by passing ajoint resolution of disapproval within 15days. Even if both houses of Congress passeda joint resolution of disapproval, the presi-dent would have to sign it; if he refused tosign, Congress would have to override hisveto.29 The executive who requested the mon-ey was unlikely to agree to a resolution pre-cluding his request. Congress could thus onlystop the release of the third tranche if two-thirds of both houses agreed to override thepresident. Even a Republican president wouldlikely maintain enough support to sustain hisveto of a resolution of disapproval. In sum,Congress was passive regarding the crucialquestion of spending public money on TARP.And EESA sets out nothing more than an illu-sion of legislative control of public spending—an illusion spun by Congress itself.

Congressional weakness here becomesclear if we consider the path not taken.Congress could have stipulated that the thirdtranche could only be spent after a joint reso-lution of approval by both chambers. Theresult would be something more like the gov-ernment foreseen by James Madison. Theexecutive would get part of the powers itsought, but Congress would participate in ameaningful way in the ongoing project. Byrequiring a positive affirmation on the final

tranche, Congress would also have boughttime to investigate the need for the TARP pro-gram and the success or failure of the initialspending. Instead, Congress put on itself theburden of proof to stop the spending and theprogram.

Congress made a show of resisting the ini-tial proposal, but in fact, EESA actually grantsmore power to the secretary than Paulson’soriginal bill. The first draft proposed givingthe secretary the power to purchase only“mortgage-related assets from any financialinstitution having its headquarters in theUnited States.”30 EESA, as noted earlier, givesthe secretary the power to buy both mortgage-related assets and “any other financial instru-ment that the Secretary, after consultationwith the Chairman of the Board of Governorsof the Federal Reserve System, determines thepurchase of which is necessary to promotefinancial-market stability.” Paulson went toCongress asking for a broad power to buy onekind of asset and came back with the authori-ty to buy “any financial instrument.” Congressdid, as noted earlier, require the secretary toobtain warrants for future purchases of assetsand to not buy assets at a higher price than theseller paid for them initially. On the whole,however, Congress empowered rather thanconstrained the secretary.

Deliberation

In a representative democracy, the legisla-ture should refine the voice of the people, lead-ing to legislation that serves the public good.31

Deliberation by the legislature—developingalternatives, collecting and evaluating infor-mation, weighing consequences and refiningbills—offers a means to that end. The Consti-tution itself promotes deliberation. A lawmust pass both houses of Congress and besigned by the president. Members of Congressare accountable to different constituenciesand are elected to varied terms. The institu-tional design fosters a lawmaking process thatmoves slowly, especially in response to publicsentiment, and encompasses many interests

6

EESA sets outnothing more

than an illusionof legislative

control of publicspending—an

illusion spun byCongress itself.

Page 7: Lawless Policy: TARP as Congressional Failure

and viewpoints.32 Congress deliberated poorlybefore passing TARP.

It will be said that Congress had to actquickly on EESA. To have deliberated wouldhave been to risk the welfare of the nation.Certainly the Bush administration pushedhard for Congress to act quickly on the EESA.On September 16, the Reserve Primary Fund,a $65 billion money market fund, reportedthat its customer accounts had fallen to 97cents on the dollar largely because of thedecline of its investments in Lehman securi-ties.33 Administration officials feared a run onmoney market funds as part of a generalbanking panic.34 Chairman Bernanke andTreasury Secretary Paulson quickly went toCongress with a bailout plan for the financialsector in hand. Bernanke told members onthe evening of Thursday, September 18: “If wedon’t do this, we may not have an economyon Monday.”35 His presentation to the Houseand Senate leaders on Thursday evening re-flected his fear and fostered theirs. A contem-porary news report conveys the tenor of themeeting:

We are facing a financial crisis on mul-tiple fronts, the Fed chairman said. De-spite our actions over the past severalmonths, investors are still losing confi-dence. There’s a run on the money-market funds. The last two big invest-ment banks are under siege. Thesituation is severe, he said, and the Fedis out of tools. If the problem isn’t cor-rected, the United States could enter adeep multi-year recession akin toSweden or Japan in the early 1990s. Weare headed for the worst financial crisis in thenation’s history. We’re talking about amatter of days.36 [emphasis added]

The next day the chairman of the FederalReserve told House Republicans on a confer-ence call: “If we don’t get this, it will be noth-ing short of a disaster for our markets.”37

In the end, Congress accepted Bernanke’sdemand for rapid action and concocted andpassed EESA within two weeks. It did so

because members accepted the administra-tion’s view that a bill must be passed quicklyor the nation faced an economic calamity.Not everyone in Congress agreed. Some com-pared the administration’s warnings that theeconomy would collapse unless Congressmoved the bill to warnings they receivedregarding the invasion of Iraq. Rep. GeneTaylor (D-MS) asked, “Where have I heardthis before? ‘The Iraqis have weapons of massdestruction, and they’re ready to use them.’I’m in no rush to do this.”38 ProminentRepublicans also questioned the rush tojudgment. Mike Pence (R-IN) remarked:“This is going way too fast. The Americanpeople don’t want Congress to make hastewith the financial recovery legislation; theywant us to make sense.” Sen. Richard Shelby(R-AL) argued for a different path: “Congressmust immediately undertake a comprehen-sive, public examination of the problem andalternative solutions rather than swiftly passthe current plan with minimal changes ordiscussion. We owe the American taxpayer noless.”39 Some experts doubted the need forquick action. Alan Blinder, an economist atPrinceton University, remarked, “I totally dis-agree that this needs to be done this week. It’smore important to get it right.” A petitionorganized by the economist John Cochraneof the University of Chicago also criticizedCongress for moving quickly without allow-ing more time for debate.40 Allan Meltzer, aneconomist at Carnegie Mellon, was blunterabout the demand for speed: “This is scaretactics to try to do something that’s in theprivate but not the public interest. It’s terri-ble.”41 Those members of Congress andexperts did not prevail. But their views makeit clear that Congress had plausible reason todeliberate in late September on EESA andchose instead to rush to judgment.

Consider the four ways Congress failed todeliberate regarding this matter:

Alternatives. Congress identified and con-sidered three alternatives (apart from the sta-tus quo) to deal with troubled assets. Secretaryof the Treasury Hank Paulson proposed thefirst alternative in a bill that ran 849 words—

7

Congress acceptedBernanke’sdemand for rapid action andconcocted andpassed EESAwithin two weeks.

Page 8: Lawless Policy: TARP as Congressional Failure

approximately two book pages. It delegatedconsiderable discretion to the Secretary of theTreasury to deal with the problem.42 The sec-ond alternative appeared to be quite differentfrom Paulson’s original proposal. It com-prised over 18,000 words and contained lan-guage that appeared to constrain the secre-tary’s judgment. That version was rejected bythe House of Representatives on September29, 2008. The third version of TARP was iden-tical to the second version, save for an addi-tional title increasing the sum covered byFederal Deposit Insurance and a small changerelated to the pay of the Special InspectorGeneral.43

Each of these measures proposed to givemembers of the executive branch broad pow-ers to purchase troubled assets. These mea-sures agree about what should be done aboutthe bailout and did not represent alternativesfor policymakers. Beyond that agreement,the three proposals seemed to be of twokinds: one that granted broad authority tothe secretary of the Treasury and another(comprising the congressional bills) that con-strained that authority. In fact, as shown ear-lier, this appearance was deceiving. Paulson’sversion appears to have imposed more con-straint as to means on the secretary than theother two versions of EESA. In any case, thelanguage in the second and third versionsthat appeared to limit the secretary’s discre-tion actually put few constraints on him.44

Congress sought to add rules on executivecompensation and spending on foreclo-sures.45 The second and third versions addedseveral conditions to the law: an oversightboard appointed by Congress, limits on exec-utive compensation at firms receiving fund-ing, and warrants that give the governmentstock in banks.46 In sum, Congress consid-ered only one alternative (buying troubledassets), which took two forms.47 As we shallsee, Congress had little capacity to enact itslimited goals concerning executive compen-sation and foreclosures.

Experts of different political outlooks pro-posed alternatives that fundamentally differedfrom the Treasury plan. Some argued that the

federal government should offer loans tobanks with their troubled mortgage debt serv-ing as collateral. Others argued the govern-ment should act as a well-endowed hedgefund that purchased higher quality mortgagesecurities and other bank assets.48 Liberalsargued that the federal government shouldrestructure mortgages to preclude foreclo-sures and support the housing market.Conservatives called for a temporary cut in thecapital gains tax and suspending accountingrules in order to direct funds to capital mar-kets.49 Each of these alternatives was proposedby individuals or organizations from thebroad mainstream of American politics.Congress did not consider any of these pro-posals in any depth prior to enacting TARP.

Information. Members of Congress collectinformation in several ways. They hear fromconstituents and from groups whose interestsbear on their reelection. Staff members andcongressional agencies provide research andfindings. Congress also holds hearings by spe-cialized committees and subcommittees tolearn more about issues or bills. Debates incommittees or on the floor of the House orSenate may also provide some members withnew information about an issue. During theprocess of enacting EESA, members ofCongress received a great deal of informationfrom their constituents, information thatindicated widespread opposition to the billprior to September 29 and more supportthereafter.50 More reliable measures, like sur-veys, suggested that the public was ambiva-lent about the bailout.51 Congress largelyignored the formal process of eliciting infor-mation about troubled assets and policy alter-natives. Congress held two days of committeehearings, one on each side of Capitol Hill.Even these limited hearings provided limitedinformation. Fed Chairman Ben Bernanke’stestimony to the Senate Banking Committeewas nine paragraphs long.52 Paulson andBernanke were the main sources of informa-tion to congressional leaders. Congress alsodebated the versions of TARP on seven differ-ent days, one day for each $100 billion autho-rized for spending by the law.53 The policy

8

Congress largelyignored the

formal process of eliciting

informationabout troubled

assets and policyalternatives.

Page 9: Lawless Policy: TARP as Congressional Failure

committees of both parties did issue reportson the bill to inform members; these reports,however, appear to be largely summaries ofthe provisions of the bill.54

Consequences. Congress did not try veryhard to estimate the policy consequences ofTARP. Members assumed that affirming thestatus quo would lead to an economic cata-strophe, an outcome they had learned aboutfrom the secretary of the Treasury and thechairman of the Federal Reserve System.Congress delegated the task of estimating theconsequences of the actual bill to the secretaryof the Treasury, who was expected, in part, todeliberate with the chairman of the FederalReserve to determine how buying particulartroubled assets might affect a multitude ofgoals or some tradeoff among them. Congresspresumably struggled hard to estimate thepolitical consequences of voting for or againstthe bill. The politics of the situation appearedto pose a choice between an oncoming eco-nomic catastrophe and an electorate enragedby bailing out banks. This stark choice hardlycontributed to sensible deliberation aboutpublic spending.

Refinement. Deliberation includes refin-ing provisions of a law by carefully drafting abill.55 Congress did add a few conditions toSecretary Paulson’s initial proposal as notedearlier. The final law shows little effort atdraftsmanship. The Secretary is given thepower to buy two kinds of financial instru-ments, the first being a proper subset of thesecond. Much of the second version of thebill adds “considerations” and other verbiagethat have little practical import. Congressand the Bush administration drafted TARPin no more than nine days: two weekends anda single workweek. The lack of refinementseems a consequence of the failure of deliber-ation.

Congress did a poor job of deliberatingregarding EESA. Its leadership deferred toleaders of the executive branch and failed toshow a seemly skepticism about the bailout. Inthe end, Congress resorted to less seemlymethods to pass the law. After the initial rejec-tion of EESA, congressional leaders purchased

the necessary votes for passage by offeringfunding for projects favored by members whohad voted “no” earlier. In other words, theleaders bought the passage of EESA by wast-ing perhaps $150 billion on what were essen-tially bribes.56 Vote-buying, not deliberation,brought victory on October 3.

Failure of Accountability

One purpose of EESA was providing publicaccountability for the purchase of troubledassets.57 Congress seemed responsive to theelectorate in both votes on EESA. The firstvote taken on September 29 failed in theHouse of Representatives. Afterwards, mem-bers of both parties said prior to the first vote“those who voted ‘no’ had encountered toomuch hostility for the bill among their con-stituents, and were worried that a vote in favorwould be political suicide.”58 The same day ofthe negative vote, the Dow Jones IndustrialAverage dropped 778 points. Public opinionseemed to shift thereafter: “Congressionaloffices reported a shift in angry calls from con-stituents, with some now demanding that law-makers take some corrective action—a distinctchange from the outpouring of public opposi-tion that contributed to the defeat of theplan.”59 Four days after the rejection, Congresspassed EESA.

Yet there is more to accountability in arepublic than simply enacting what the peo-ple want, especially in a moment of crisis andnear panic. Voters should be able to holdCongress responsible for legislating andapportion credit or blame in a later election.

It would be difficult to hold Congressaccountable for the bailout under TARP. Byidentifying many goals for the law, membersof Congress could always blame a shortcom-ing on the incompetence of the secretary ofthe Treasury.60 If financial markets did notstabilize, the secretary could be blamed fornot achieving a goal of the law. If financialmarkets stabilized but taxpayers resented thecosts, members could note that the law haddemanded protection for taxpayers. And so

9

Congress did nottry very hard toestimate the policyconsequences ofTARP.

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on. In a sense, the responsibility for the suc-cess or failure of the law had gone to the secretary—along with the vast power delegat-ed by Congress. The secretary (and the execu-tive branch) more generally appeared willingto accept this responsibility. In contrast,Congress wished to avoid being blamed forwhat might go wrong in a difficult projectundertaken a month before a national elec-tion.

Voters might enforce some accountabilityon the executive branch which is, after all,headed by an elected official. But the incum-bent in 2008 was not running for reelection.His successor might well run in 2012. By then,the TARP program would likely be a minorfactor in a presidential race. In 2009 and 2010,the public would find it hard to follow thework of the technocrats at Treasury on a com-plicated matter like the bank bailout.Congressional delegation of power attenuatedaccountability over TARP.

For its part, Congress defined accountabil-ity as oversight of delegated authority. One ofthe main instigators of TARP, Sen. Chris-topher Dodd said, as the bill was being writ-ten: “We need to offer some assurance to theAmerican taxpayer that Congress is watching.One of the things that got us into this messwas the lack of accountability and the lack ofoversight that was occurring, and I don’t thinkwe want to repeat those mistakes with a pro-gram of this magnitude.”61 EESA created aFinancial Stability Oversight Board chargedwith reviewing the policies of the secretary.62

Members demanded and obtained an over-sight board for the program.63

The Financial Stability Oversight Boardcomprised the secretary of the Treasury, thechairman of the Fed, the director of the FederalHousing Finance Agency, the chairman of theSecurities Exchange Commission, and the sec-retary of Housing and Urban Development.64

This group is a curious choice to oversee theimplementation of EESA on behalf of Con-gress acting as representatives of the Americanpeople. Two of the members, the secretary andthe Fed chairman, were formulating andimplementing the policies that would be

reviewed. The chairman of the Securities andExchange Commission was involved at timeswith policymaking, though not at crucialpoints. The director of the Federal HousingFinance Agency regulated Fannie Mae andFreddie Mac. The HUD secretary oversees pub-lic housing and related policies. This groupmight have served as a broadly informed dis-cussion and policymaking group. (In fact, itdid not, since actual policymaking fell to agroup of four senior officials, includingBernanke.)65 But it could hardly provide inde-pendent oversight to policymaking and imple-mentation undertaken by its members.

The Congressional Oversight Panel createdby EESA consisted of five members appointedby the leaders of both parties in Congress.They were charged with issuing reports evalu-ating the secretary’s use of authority grantedunder the law; the impact of troubled assetpurchases on the financial markets and finan-cial institutions; whether the informationgleaned by transactions had contributed tomarket transparency; and—as a catchall—“theeffectiveness of foreclosure mitigation efforts,and the effectiveness of the program from thestandpoint of minimizing long-term costs tothe taxpayers and maximizing the benefits fortaxpayers.”66 The other agent of oversight—theSpecial Inspector General—was empowered“to conduct, supervise, and coordinate auditsand investigations of the purchase, manage-ment, and sale of assets by the Secretary of theTreasury under any program established bythe Secretary” under the authority delegatedby the law.67

In the EESA, Congress authorized a largesum to be spent by the secretary of theTreasury, at his discretion, to achieve a multi-tude of ill-defined and conflicting goals.Congress hoped to compensate for its failureas a legislature by appointing three panels tooversee the secretary and to guard againstpossible criminal conduct. Such oversightmay be better than none at all, but Congressmight have written a law with clear goals andpriorities, a law that would guide and con-strain the executive branch—thereby laying afoundation of political accountability. In-

10

Congressionaldelegation of

power attenuatedaccountability

over TARP.

Page 11: Lawless Policy: TARP as Congressional Failure

stead, Congress largely said to the executivebranch: “Here is a problem, deal with it.”68

Having done that, how well did Congress fol-low up in overseeing the exercise of authoritythat had been delegated to the secretary ofthe Treasury?

Implementation

The enactment of EESA did little to fosterconfidence in capital markets. Both the DowJones Industrial Average and the broader S&P500 Index dropped 22 percent in the first eightdays of October 2008. Overseas markets expe-rienced similar drops.69 Shortly after the bail-out bill passed in the United States, Britishofficials announced plans to directly buy equi-ty stakes in some of their troubled banks.70 ByOctober 11, eight days after EESA passed, theNew York Times reported that the Bush admin-istration had dropped the plan to buy trou-bled assets in favor of buying equity in banks.“We can use the taxpayer’s money more effec-tively and efficiently, get more for the taxpay-er’s dollar, if we develop a standardized pro-gram to buy equity in financial institutions,”Treasury Secretary Paulson said.71 Later,Treasury would emphasize that credit marketconditions had become much worse whileCongress passed EESA and in the week there-after. Secretary Paulson and Chairman Ber-nanke decided “the fastest, most direct waywas to increase capital in the system by buyingequity in healthy banks of all sizes. Illiquidasset purchases, in contrast, require muchlonger to execute.”72

As we saw, the discussions prior to passingEESA assumed that the secretary of theTreasury would use his new authority to pur-chase troubled assets. Paulson’s change ofpolicy did not violate EESA, an indication ofthe breath of the delegated authority given byCongress to Treasury. Indeed, EESA allowedthe secretary to purchase “any financialinstrument” that might, in his view, con-tribute to market stability. Paulson’s quickswitch to re-capitalizing banks confirms theunchecked discretion given to the executive

branch. As Sen. Jack Reed later said, “We[Congress] authorized the program but thespecific beneficiaries, the specific details wereworked out by Treasury.”73

The switch to recapitalization opened upnew possibilities for spending the $700 billionauthorized by EESA. Congress had imposedfew restraints on spending the money. If theTreasury secretary had discretion to buy bankshares, why not funds for other troubled busi-nesses? After all, the secretary was authorizedto buy “any other financial instrument . . . topromote market stability” provided he con-sulted with the Fed chief and informed Con-gress. Advocates were soon pressuring Treasuryto stretch TARP over insurance companies,transit agencies, and auto companies.74 In lateOctober, two troubled auto companies—General Motors and Chrysler—began pressingtheir case for subsidies from the U.S. govern-ment, initially to attract private investors to amerger of the two. EESA would be a source forthe subsidies. Treasury initially resisted. ATreasury spokeswoman said such funds“should be focused on financial institutions.”75

But Congress had not debated recapitalizationeither, and shares in the car companies (or theirfinancial services subsidiaries) were certainlyfinancial instruments. The language of EESAdid not preclude bailing out auto companies.For a time, the Treasury secretary preventedthe government from taking this path.

The floundering automakers persisted.They and members from Michigan arguedthat TARP money should go to the financialarms of the automakers who would, in turn,provide credit for purchasing cars, therebyreviving the industry. The New York Timesreported that the Bush White House “indicat-ed some agreement with this argument.76

Soon related businesses joined the argument.The chairwoman of the National AutomobileDealers Association proclaimed, “A well-capitalized, financially sound dealer networkis essential to the success of every automobilemanufacturer. Any government interventionshould include provisions to preserve the via-bility of dealers.”77 EESA had been in force fora month.

11

The enactment of EESA did little to fosterconfidence incapital markets.

Page 12: Lawless Policy: TARP as Congressional Failure

The separation of powers and a Senaterule acted as a brake on the bailout of theauto companies for a time. The House waswilling to enact the bailout. To allocate themoney to the automakers, however, Congresswould have to overcome a filibuster in theSenate. The votes were not there in the mid-dle of November, largely because many GOPsenators opposed the bailout.78

In early December, the auto industry as awhole announced its worst month in sales in26 years. General Motors reported it wouldbecome insolvent soon without federal subsi-dies; its November sales had fallen over 40 per-cent from a year earlier. The Speaker of theHouse, Nancy Pelosi, said that bankruptcy wasout of the question for the automakers andthat a deal for support would be forthcom-ing.79 In mid-December, Pelosi proved to becorrect. The Bush administration announcedthat part of the EESA money would subsidizetwo failing auto manufacturers, GeneralMotors and Chrysler. Both would sign emer-gency loan agreements with Treasury andthen immediately have access to $4 billion.General Motors could then lay claim to over$9 billion more in January and February of2009, if Congress released the final tranche ofEESA funding.80 At this point, the term “anyfinancial instrument” included both shares inan auto financing company and loans toGeneral Motors and Chrysler.81 Congress hadnot considered bailing out the auto compa-nies while passing EESA. The authority it didgrant, however, proved to be broad enough tofund this bailout.

Meanwhile, as the auto companies slowlywon their battle, Treasury announced anothereffort to stabilize the financial markets. In lateNovember, this time the government provideda backstop for assets owned by Citigroup toprevent its failure. The plan opened the possi-bility of $290 billion in losses for taxpayers.82

The new plan involved a portfolio of troubledassets at Citigroup. The bank would take first$29 billion of losses in the portfolio on itsown. After that, various agencies of the UnitedStates government will absorb 90 percent ofany additional losses.83

By the end of November 2008, the Treasurydepartment had embraced three differentbailouts under EESA: the original troubledassets model, the recapitalization of banks,and the asset guarantee for Citibank. TheBush administration itself was well on the wayto a fourth model in the bailout plan forGeneral Motors and Chrysler. The executivemade use of the wide discretion offered byEESA.

Unlike the Treasury, Congress did littleabout its goals of limiting executive compen-sation and reducing foreclosures. By mid-October, Treasury had come up with guide-lines on executive compensation. Banks thatreceived public money “will have to followsome general rules on paying their top fiveexecutives. They will be restricted from offer-ing golden parachutes, as rich severancepackages are called, and they will have to paymore taxes if an individual’s compensationexceeds $500,000.” Barney Frank was quotedas saying the plan did not go far enough.84

Congress did nothing to act on his dissatis-faction.

Similarly, in late November, it was report-ed that “Treasury and Fed officials are underintense pressure from Congress to spendmoney on reducing foreclosures,” the othergoal set by Congress for the law.85 InsideTreasury, however, it appeared that whateverwas being said, Congress did not really wishto spend money on preventing foreclosuresbecause “members understood the pooroptics of having the government write checkswhen some would find their way into thehands of ‘irresponsible homeowners.’”86

Both of these congressional concerns con-tinued to fester even if Congress cared moreabout executive compensation. Both concernscould have been addressed initially if Congresshad written a law that actually guided theimplementation of EESA. Congress couldhave specifically required both compensationguidelines and spending to assist the indebt-ed. Of course, had Congress actually written aclear law, they would have had to establishcompensation guidelines (and run the risk ofmaking the crisis worse) or spend directly on

12

Congress had not considered bailing out the

auto companieswhile passing

EESA. Theauthority it didgrant, however,

proved to bebroad enough to

fund this bailout.

Page 13: Lawless Policy: TARP as Congressional Failure

preventing foreclosure (and run the risk ofbeing blamed for wasting tax dollars on spec-ulators). The EESA delegation allowed Con-gress to have its cake and eat it too. They couldcomplain about Treasury’s obstinacy (therebyclaiming credit for wanting to help) whileavoiding any concrete actions and attendantrisks.

A pre-existing congressional oversight unit,the General Accountability Office, movedquickly. A few days after the law passed, GAOhad put together a 20-member team to overseethe actions of Treasury under EESA.87 ButGAO was the exception. Most oversight bodiesmoved slowly. By late November, a federalprosecutor from New York, Neil M. Barofsky,had been nominated to be special inspectorgeneral for TARP, but he had not been con-firmed.88 The oversight panel began weakly.Congress did not appoint all its membersuntil November 14. The panel first met onNovember 26, more than seven weeks afterEESA passed in Congress. In early December,the panel had only had a few briefings withTreasury officials; the panel’s head noted thatshe and its other members “were still in theearly stages of their research.” ElizabethWarren, the head of the panel and a Harvardprofessor of law, testified about the difficultiesfaced by Congress and the panel. She notedthat lawmakers “have just been stunned bythese economic and financial developments.There wasn’t time even to develop a coherentlist of questions to ask Treasury about whatit’s doing and what it plans to do—andwhether either of those are likely to addresswhat’s going wrong. Our role is to make surethat the right questions are asked as early aspossible.” The first report of the oversight pan-el thus laid out “the central questions thatTreasury should be addressing as it spends thetaxpayers’ money.” Warren also said the panelwould be advising Congress on policy over-sight, not procedural oversight.89 But it wasnot until early December that the panel wasplanning to set standards for evaluatingTreasury’s work. Meanwhile, for two monthsTreasury Department officials had been mak-ing policy and spending hundreds of millions

of dollars without an intelligible principle orcoherent set of goals from Congress. In fact, byearly December most of the money Treasurywould spend on banks on TARP had alreadybeen committed.90

On December 2, 2008, GAO reported onthe program of capital injections into banks.Their first recommendation was “work withthe bank regulators to establish a systematicmeans of determining and reporting in a time-ly manner whether financial institutions’activities are generally consistent with the pur-poses of [recapitalizing the banks] and helpensure an appropriate level of accountabilityand transparency.” The second recommenda-tion was to “develop a means to ensure thatinstitutions participating in CPP [the capitalinjection program] comply with key programrequirements (e.g., executive compensation,dividend payments, and the repurchase ofstock).”91

Just over a week later, the CongressionalOversight Panel issued its first report. Itbegan by noting the dire economic circum-stances and reporting that the federal gov-ernment had spent $1,900 for each Americanfamily under EESA. But the report offerednothing about how Treasury had spent over$200 billion. Instead, as Elizabeth Warrenhad promised, the panel laid out three majorquestions for its work: “who got the [TARP]money, what have they done with it, how hasit helped the country, and how has it helpedordinary people?”92 These questions were fol-lowed by 10 questions, which yielded, in turn,more questions. In all, the panel posed over40 questions for the TARP program.93 Thepanel did not stop there: the pages posingthese questions were followed by 21 pages ofnarrative and analysis explicating issues relat-ed to TARP. These pages mark the first timeany part of the legislative branch had publiclyposed difficult questions about the programand the future plans of Treasury officials.

The panel’s analysis is revealing. Amongthe questions posed was: “What is the scope ofTreasury’s statutory authority?”94 If Congresshad actually provided Treasury with an intelli-gible principle to carry out EESA, why would

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The EESA delegationallowed Congressto have its cakeand eat it too.

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Congress’s own panel be querying Treasuryabout the limits of its authority under the law?If the guidance had been set out in the law, thepanel (and the public) could have answeredthe question by consulting the law. Instead,the oversight panel’s question suggests thespecification of the executive’s authority is notat all apparent from the law. A second reportasked Treasury whether its authority covered“other businesses, such as commercial realestate, manufacturers of consumer products,and other businesses not directly involved infinancial services.”95 The panel’s questionsindicate both the extent of EESA’s delegationto the executive and the lack of control exer-cised by Congress from the start.

On December 10, the House FinancialServices committee held hearings on howTreasury was implementing the bailout.Echoing the GAO report, members insistedthat Treasury monitor what banks did withthe federal money that they received. Membersalso demand that Treasury tie more strings tothat capital to make sure it would be used toprovide credit to homeowners, small business-es, and consumers. And they demanded thatTreasury develop a plan to prevent foreclo-sures.

Congress also tried to get some leverageover the bailout. Representative Frank warnedTreasury officials that Congress was unlikelyto approve the next $350 billion installment inthe overall $700 billion bailout programunless it was convinced the Treasury was effec-tively measuring the lending by participatingbanks. Neil Kashkari, the interim secretary ofthe Treasury for financial stability at Treasury,agreed to a request from lawmakers that hesummon bank executives to explain how theyare using federal money. He also argued thatTreasury’s action had produced market stabil-ity. However, Kashkari maintained thatimposing foreclosure conditions on banksreceiving capital might keep them out of thebailout and be counterproductive.96

In winter, as in fall, Treasury focused onmarket stability. The primacy Treasury ac-corded market stability may be seen in theirresponse to the first report of the oversight

panel. The panel had asked for Treasury’sstrategy in implementing EESA. The depart-ment responded by mentioning three purpos-es: market stability, preventing foreclosures,and protecting taxpayers. The next sentence,however, mentions only one purpose: “Themeasures taken by Treasury under theEmergency Economic Stabilization Act arepart of a comprehensive strategy by Treasuryand the federal regulators since the onset ofthe crisis to stabilize the financial system andhousing markets, and strengthen our finan-cial institutions.”97 Market stability was anessential means, in Treasury’s view, to all othergoals, not least “helping American families.”98

In a sense, little had changed from October toDecember. Congress had many goals in mindfor the bailout and little willingness or abilityto make Treasury pursue its purposes. Con-gress had added a great deal of language inEESA about its goals and concerns. But thelaw itself had done little to change Treasury’sundertaking.

The second report of the oversight panelnoted that Treasury did not respond to mostof the questions posed by its first report. Thepanel could see no “evidence that Treasuryhas used TARP funds to support the housingmarket by avoiding preventable foreclo-sures.” It also cast doubt on the propriety ofthe policies pursued by Treasury, especiallythe shift from buying troubled assets forrecapitalization. The panel argued thatTreasury should set up metrics to measurethe effects of their policy. Indeed, its reportmade it clear that Congress would be depen-dent on Treasury for the data and analysisassessing the effects of the agency’s activity, ifTreasury undertook such an evaluation. Thepanel also found many of Treasury’s respons-es irrelevant to TARP: the favorable policyconsequences cited by Treasury did not comefrom spending EESA money. Throughoutthe second report the panel indicated astrong preference for foreclosure relief andconcluded that this policy goal had receivedlittle attention from Treasury.99

The panel asserted that Congress had clear-ly intended for Treasury to focus on foreclo-

14

The oversightpanel’s question

suggests the specification of

the executive’sauthority is not atall apparent from

the law.

Page 15: Lawless Policy: TARP as Congressional Failure

sure relief. Indeed, it was one of the 13 goalsmentioned in the law. As we have seen, howev-er, whether “foreclosure relief” actually mat-tered is open to question. Moreover, ifTreasury was correct that imposing foreclo-sure conditions on share purchases wouldundermine the goal of fostering market stabil-ity, then there was an unavoidable tradeoffamong the goals in the legislation, andCongress had provided no guidance in mak-ing that tradeoff. Within its broad delegationof authority, Treasury could legitimately makea choice between stability and foreclosurerelief without violating EESA. The panel wasreading its own (and perhaps Congress’s) pre-ferred tradeoff back into the law, but EESA isjust a list of goals, not a guide for choice inimplementation, and certainly not a standardthe oversight panel could enforce.

By early 2009, Congress seemed willing tobecome more active. Treasury had used up thefirst half of the bailout authority. It thendelayed asking for more. Meanwhile, Repre-sentative Frank was at work drafting a bill torequire the Treasury to spend money onreducing foreclosures and mortgage rates. Itwould have required the new administrationto develop a plan by March 15 to use at least$40 billion of the $350 billion to preventhome foreclosures.100 Frank’s fellow Demo-crats wanted tougher caps on executive com-pensation and more pressure on the bailed-out banks to lend.101 Both moves seemed toreflect a more assertive Congress, but bothalso bespoke prior failures. Congress had donelittle to constrain the executive in the first twomonths of the bailout. The COP’s work inDecember had not elicited a serious responsefrom Treasury, much less a change in policy.Treasury had selected a goal and a means tothat end; Congress and its panel complained—to little effect.

Obama’s economic team set about per-suading lawmakers that the new administra-tion would make better use of the bailoutmoney than the Bush administration had.102

The outgoing president, on behalf of theincoming one, asked Congress to release theremainder of the TARP funds. Treasury

argued that the banks needed more money.Obama’s advisers believed that denying thenext tranche of funding might jeopardize thestability of the banking system. LawrenceSummers, Obama’s leading economic advis-er, promised to devote $50 billion to $100 bil-lion “to a sweeping effort to address the fore-closure crisis.” He also promised to havegreater transparency about capital injections;to measure the effects of federal spending onoverall lending; to set conditions, includinglimits on executive compensation; and tofocus on increasing the flow of credit. AsSummers worked with Congress, the FederalReserve chairman made it clear that most ofthe remaining $350 billion would have to goto the continued task of stabilizing the banksif they were to renew lending at normal levels.On January 15, 2009, the Senate narrowlydefeated a resolution disapproving the releaseof the remaining funds. The victory cameafter a week of intense advocacy by the Senateleadership.103 The House later passed a reso-lution of disapproval, an impotent move giv-en the earlier Senate vote.104

Had Congress received much in exchangefor releasing the third tranche of money?Congressional Quarterly provided a concise sum-mary of Congress’s weak bargaining positionover the remaining funds:

Even if the Senate had passed the mea-sure and the House had followed suit,there was little chance that it actuallywould have halted the release of thesecond half of the funds. Joint resolu-tions must be signed by the presidentto take effect, and Obama had vowedto veto it.

No one believed a Democratic Senate wouldgreet an incoming Democratic president witha legislative defeat.105 Thus, the Obama ad-ministration had little reason to make morethan cosmetic compromises with the legisla-ture. Summers’s letter set out conditions thatwere general enough to be compatible withcontinuing discretion by Treasury in the useof TARP funds.

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EESA is just a list of goals, not a guide for choice in implementation.

Page 16: Lawless Policy: TARP as Congressional Failure

Barney Frank succeeded in getting theHouse to pass HR 384, which set conditionsfor the second half of the bailout money,including foreclosure mitigation and condi-tions related to housing, minorities, and smallbusiness. The bill, passed as an amendment,also allowed retroactive application of restric-tions on executive compensation to firms thathad already received bailout money.106 Frank’snew bill suffered from some of the same prob-lems plaguing EESA. Even if Frank’s bill hadpassed the Senate, Treasury would still havehad significant discretion. Yet the bill did setout two specific conditions: it prohibits firmsreceiving TARP money from giving bonuses toits 25 most highly compensated employees,107

and it also directs Treasury to quickly commitbetween $40 billion and $100 billion “for thepurposes of foreclosure mitigation.”108 Frankwas attempting to write Summers’s promisesinto law. The Senate referred the bill to theFinance Committee, where it languished with-out action.

In late January, reports of large bonuses atsome firms excited political passions. TheObama administration vowed to curb thebonuses and to reduce compensation at thebanks.109 The new president announced in ear-ly February that firms receiving assistancecould pay no more than $500,000 annually toexecutives; no bonuses would be permitted.110

The House Financial Services Committee heldhearings focused on questioning the heads ofseveral banks that had received public support.Some accounts suggested the hearings wereless populist in tone than might have beenexpected, given all that had happened. Rep.Barney Frank recognized that the bankers werecrucial to overcoming the economic problemsof the nation, and most members focused onrenewing lending.111

A policy on foreclosure, however, remainedoff the administration’s agenda. Frank com-plained, “The secretary said the administrationwould present details of their foreclosurereduction plan in a few weeks, which is toomuch time.”112 Congress had complained forsome time about putting foreclosure into thebill. Now with a new administration, nothing

seemed to be happening. It is difficult to inter-pret the non-action on foreclosure. Congressmay have been happy to be deprived of thechance to vote on foreclosure relief for the rea-son indicated earlier—taxpayers might notappreciate rewarding speculation. On the oth-er hand, many Democrats in Congress wantedto take up the cause of “the victims of thebanks.” Treasury’s inaction on foreclosureallowed members of Congress to complainabout foreclosures while doing nothing in real-ity about them.

Congress apparently did care more aboutexecutive compensation than foreclosure relief.The difference in concern may be rooted invotes. Foreclosure relief would run the risk ofalienating taxpayers—a large group of voters.Limiting bankers’ pay might alienate bankerswho received public money, and perhaps, theirshareholders; in total, these two groups com-prised few voters. Congress soon acted on itsfrustration about pay. The stimulus bill ofmid-February proscribed cash bonuses andalmost all other incentive compensation forthe five most senior officers and the 20 high-est-paid executives at firms that were receivingfunds from TARP. The restrictions were similarto those announced by the Obama administra-tion, but they were expected to apply to morepeople and to reduce bonuses more than theadministration’s plan. Leaders of these firmscould not receive bonuses larger than one-thirdof their annual salary. Any bonus would haveto come as restricted stock which could not beliquefied until the TARP payments had beenrepaid. Senate Democrats took this stepdespite opposition from the Obama adminis-tration. Obama’s economic advisers arguedthat the restrictions would drive needed talentout of the firms in question just as they wererequired to deal with the continuing financialcrisis. The advisers also predicted that therestrictions might encourage the affected firmsto pay back government money to avoid suchregulations.113

In fact, by early March, some banksalready wished to repay the TARP money.Bank officials were concerned that Congressor the administration could, at any time, set

16

Treasury’s inaction on foreclosure

allowed membersof Congress to

complain aboutforeclosures while

doing nothing inreality about

them.

Page 17: Lawless Policy: TARP as Congressional Failure

new conditions for having received TARPmoney. Some of the conditions—like modify-ing mortgage contracts or delaying evic-tions—might be popular but could force thebanks “to take steps that could lead togreater losses.”114

The struggle over bonuses reached itszenith in mid-March. The federal governmenthad supported AIG, which had lost enormoussums of money because of credit defaultswaps. The firm had contracts with executivesthat called for large bonuses in late 2008 andin March of 2009. When the latter round ofpayments became known, a public outcry fol-lowed to the point that the new president wascalled upon to instruct the Treasury secretaryto cut off future bonuses.115 As the furor builtover the bonuses, Congress acted. DemocraticHouse leaders in Congress proposed a bill toimpose a 90 percent tax on bonuses paid outsince January 1 by any company that hadaccepted more than $5 billion in governmentbailout funds. Senate leaders had proposed a35 percent tax on recipients of the AIG bonus-es, and a 35 percent tax on the company.116

The House would eventually pass a tax billintended to confiscate the bonuses.117 The billthen moved the Senate’s Finance Committeewhere its progress stopped.

Later developments contravened the “re-surgent Congress” theme. The House FinanceCommittee approved a bill prohibiting anyfirm receiving TARP funding from paying“unreasonable or excessive” compensation.The concrete meaning of “unreasonable orexcessive” was left to federal banking regula-tors.118 The House, in the end, delegated awayits populist fury. About the same time, thesame committee rejected an amendment byRepublican Jeb Hensarling of Texas to changelanguage in a bill to require, rather than per-mit, the EESA inspector general to review theTreasury secretary’s use of authority underTARP to minimize negative effects on taxpay-ers.119

As Congress acted out an illusion of highpolitical drama, the Congressional OversightPanel continued its ineffectual struggle withthe executive branch. The panel’s February

report argued that Treasury had paid toomuch for the assets purchased under TARP;its valuation of various capital injections andthe support given to AIG and Citigroup indi-cated that Treasury paid about 44 percentmore for the relevant warrants than they wereworth.120 Until this point, the panel had askedquestions about Treasury’s actions. Now theywere becoming more assertive in questioningthe wisdom of Treasury’s decisions. TheFebruary report also indicated that Treasuryhad not provided additional informationsought in both earlier reports by the panel.Secretary Geithner was queried again and areport on his answers was promised forMarch.121 Treasury replied in late February.The panel found little satisfaction: “Treasuryleft many questions unanswered.” The panel“must insist that Treasury address outstand-ing questions from previous oversight re-ports.” Another letter had been posted to theTreasury secretary; the next report wouldupdate the panel’s one-way correspondencewith the executive branch.122 The questionsfor which the March letter sought answers hadbeen posed over three months earlier.

The next report of the panel would againnote that Treasury had never really respond-ed to the panel’s initial question about itsstrategy. Finally giving up getting directanswers from Treasury, the panel relied inlarge part on Treasury officials’ public state-ments to discern the answer to its questionabout strategy.123 It is difficult to avoid theconclusion that Treasury was ignoring thepanel and that panel members could do littleto increase their influence over the program.Instead, their April report offers a generalpolicy analysis of the options and possibleconsequences of Treasury’s work. The reportis interesting, but it is a profession of impo-tence about changing the policy in questionthrough oversight.124 The May effort by thepanel reported more promises of a “completeresponse” from Treasury, along with 10,000pages of undigested documents that werekeeping staff busy.125

In late March, Treasury offered anotheriteration of TARP called the Public-Private

17

As Congress acted out an illusion of highpolitical drama,the CongressionalOversight Panelcontinued its ineffectual struggle with theexecutive branch.

Page 18: Lawless Policy: TARP as Congressional Failure

Investment Program. It sought to lend mon-ey to private investors to buy up toxic assets.(It had proven to be too expensive, Geithnersaid, for the government to buy the assetsoutright per the original EESA plan.) Most ofthis debt (85 percent) would be insured bythe FDIC. However, the FDIC has, in its char-ter, a “provision clearly limits its ability toborrow, guarantee, or take on obligations ofmore than $30 billion.”126 The PPIP mightinvolve obligations of $1 trillion. The FDICgot around the charter by counting only loss-es as liabilities for purposes of the provision.The agency and its accountants then project-ed no losses from the loans. Hence, the termsof the charter could be met and the loansguaranteed. All of this happened without anyoversight or influence from Congress, eventhough taxpayers will be stuck with the lia-bilities if the program does not work aspromised.127 The program eventually beganin early July and was expected to be muchsmaller than originally announced, involving$50 billion rather than $1 trillion.128

On the surface, Congress appeared to beout of the action in 2009 apart from amend-ing the stimulus bill to enact pay caps.Treasury made policy, and some members ofCongress complained but did little apart fromthe executive compensation caps. Yet Con-gress was active. As TARP went forward, mem-bers of Congress did what they do well: pro-vide constituent service. In late January 2009,the Wall Street Journal reported that severalmembers, including lawmakers from Ohioand Alabama, had sought to steer bailoutfunds to banks in their states. Five banks inAlabama received funding, an outcome re-flecting the status of their representatives,both of whom were ranking members on therelevant committees in both chambers. Stateofficials in Arizona, dismayed by their lack ofTARP money, vowed to take up the advocacygame. In Ohio, an initial refusal to bail out aCleveland bank led to a political brouhahathat apparently influenced funding decisionsat Treasury; Ohio banks later received over $7billion. Barney Frank admitted that he hadwritten a provision into EESA to help a bank

from Massachusetts. He also said that he hadlater spoke to regulators to urge that the bankbe considered for a capital injection. Frankargued he had been “very public” about hissupport for the bank. He saw no problem withTreasury posting a log of communicationswith members of Congress. Lawmakers want-ed voters, he continued, to know about suchefforts.129 This conclusion need not be limitedto particular cases reported in the media. Amore systematic study of the effects of politi-cal influences on capital injections discoveredthat congressional representation, as well as abank’s presence on the board of the FederalReserve, was strongly correlated with receivingTARP money.130

Conclusion

By mid-April, Goldman Sachs had returnedto profitability and planned to raise privatecapital to pay back the $10 billion receivedfrom the government and exit the TARP pro-gram. Leaving the program would free the firmfrom government controls that came with themoney, not least the limits on executive com-pensation.131 Goldman Sachs was not the onlybank hoping to get out of TARP. By June 17,2009, recipients had repaid $70 billion of capi-tal purchases by the government.132 During thespring and summer of 2009, several banksrepaid sums to the Treasury and bought backthe relevant warrants. As a result, the Treasuryrealized a reasonable return on investmentfrom these banks. This did not mean the entireprogram would turn a profit. It did suggest thepossibility that the bank portion of EESAcould show a positive return.133 A part of thisoutcome may be credited to Congress. Thecongressional version of EESA differed fromthe initial Paulson proposal by requiringTreasury to receive a warrant in exchange forpublic investment in a bank.134 The auto com-panies, in contrast, had received over $70 bil-lion from the government. CBO estimated that$40 billion of the first $55 billion representedlost value.135 As of June 2009, the banksappeared to be a better outlay than the car

18

A study of theeffects of political

influences on capital injections

discovered thatcongressional

representation, aswell as a bank’spresence on the

board of theFederal Reserve,

was strongly correlated withreceiving TARP

money.

Page 19: Lawless Policy: TARP as Congressional Failure

companies. Both cost less than the $150 to$175 billion spent to procure congressionalvotes in favor of EESA on October 3, 2008.136

In hindsight, the original bill proposed byTreasury Secretary Paulson would have beensuperior in some ways to the EESA. Paulson’sproposal suffered from at least one severedefect: it attempted to preclude judicial reviewof the Treasury secretary’s action. However, hisinitial proposal had two advantages. Paulsonproposed delegating less authority than theEESA had proposed: he sought only the pow-er to buy “mortgage-related assets.” It is possi-ble, although by no means certain, that hadPaulson’s proposal become law, Congresswould have had to amend it to empower theSecretary to capitalize the banks or to subsi-dize the auto companies, which would haverequired more deliberation about those poli-cies from Congress. Finally, the money wastedbuying votes to enact EESA would presum-ably have been saved had Paulson’s bill rapidlybecome law.

This alternative scenario posits a hypo-thetical Congress willing to take jointresponsibility with the executive for dealingwith the financial crisis. EESA, however, hasmultiple goals and weak congressional con-trol over the authorized sums. As noted sev-eral times in this account, Congress triedrather hard to avoid responsibility for theconsequences of EESA. Responsibility fell, aswe saw, to Treasury and the Federal Reserve.Both had an attenuated relation to the votersthrough the president that appointed them.

The enactment and implementation ofEESA showed how far Congress has comefrom the centrality accorded the legislature inthe Constitution and in republican theory. Itis not just, as one commentator put it, thatCongress “with its howls of rage, its chaotic,episodic reaction to the crisis, and its shame-less playing to the crowds” was out of con-trol.137 Congress showed itself to be a bit play-er in a multi-hundred billion dollar dramathat appeared to implicate the economicfuture of the nation. Throughout the TARPsaga, Congress had two priorities: limits onexecutive compensation and funding to pre-

clude foreclosures.138 Treasury resisted thelimits on executive compensation until Con-gress passed limits on bonuses as part of thestimulus bill in February. Congress also even-tually goaded the administration into settingaside $50 billion for foreclosure mitigation. Bymid-June 2009, CBO reported that none ofthis money had been disbursed.139 The con-gressional panel set up to oversee the TARPprogram started late and was ignored byTreasury. It is hard to argue that the oversightpanel had any influence at all on the imple-mentation of the policy for a year after its pas-sage.

We might summarize the TARP story asfollows. Fed and Treasury officials diagnoseda financial panic and responded within thelimits of their powers as they saw them.Secretary Paulson then proposed thatCongress allocate $700 billion to be used to“promote market stability” while protectingthe taxpayer. Congress appeared to resist andenacted a law that set out many more goalsfor EESA. Afterwards, Treasury and the Fedspent much of the allocation “promotingmarket stability.” In that sense, Treasury andthe Fed simply acted on Paulson’s originalproposal. Congress did not affect the tellingof this tale; the story we have was written bythe Federal Reserve and the Department ofthe Treasury. Justice Rehnquist stated in theBenzene case that Congress should make the“important choices” about policy. In the caseof EESA, Congress made no importantchoices about the policy. That failure byCongress arose from its defective grant ofpower to the executive in this case.

The Supreme Court demands that delega-tions of congressional authority be accompa-nied by an intelligible principle to constrainexecutive discretion. Such a principle suppos-edly preserves congressional control over law-making, the separation of powers, and therule of law. In this case, Congress specified 13goals or intelligible principles for EESA.What Congress did not do was assign priori-ties to its many goals for EESA. The tradeoffsamong goals and values were delegated to theexecutive along with money and power.

19

In hindsight, the original billproposed byTreasury secretary Paulsonwould have beensuperior in someways to the EESA.

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Congress did become involved in policy-making beyond granting plenary power to theexecutive to buy assets. Members fought hardto ensure that banks in their districts receivedtheir due share of the bailout money.Congress’s policymaking, in sum, involved thenormal distributive politics of the pork barrelrather than policies seeking a more generalgood. Congress also sought to impose limitson executive compensation in firms funded bythe bailout. As we saw, Congress did amendlegislation to enact such limits. A year after thebailouts, however, the relevant federal officialwas still seeking to apply such limits. In gener-al, the policy seems more a response to publicanger about bailouts than a serious effort tomake public policy.

The TARP case casts a harsh light onCongress. The institution intended shape andcontrol federal policymaking was weak andhelpless in the face of a crisis. It transferred itspowers to the executive with little constrainton their exercise. Members sought, above all,to avoid responsibility for economic problemsa month before an election. The executive, incontrast, was willing to assume power in thecrisis along with the concomitant and attenu-ated responsibility of acting. Not surprisingly,Congress’s goals for TARP were ignored withimpunity by the executive. The Framerssought to both separate and balance powers.In the TARP case, power was neither separatednor balanced. The executive held a unifiedauthority that was unchecked.

How might we restore the constitutionalbalance? Not much may be expected ofCongress based on what happened withEESA. Congressional leaders and membersshowed no desire to meet their institutionalobligations to deliberate, to check the execu-tive, or to properly legislate. Congress avoidedits obligations because members wished toavoid hard choices that might alienate somevoters.140 In contrast, the executive and thehead of the Federal Reserve initially showedmore respect for the Constitution and forCongress than members of Congress did fortheir own institution. In any case, it is not thejob of the executive to help Congress meet its

institutional obligations. The courts have thattask.

Chief Justice Rehnquist’s opinion in theBenzene case provides a legal foundation forrenewed scrutiny of congressional delegationsof power. The Supreme Court has longdemanded that Congress set out an intelligi-ble principle to guide grants of power to theexecutive. That demand, however, has oftenrequired little more than setting out a goal orgoals for the policy. Congress should berequired to do better as suggested by Rehn-quist’s opinion. Each grant of power to carryout a law should contain an intelligible princi-ple that indicates the hierarchy of goals andvalues served by the law. By establishing thathierarchy, Congress would make the mostimportant choices regarding the law. An intel-ligible principle of this kind would also beworkable. It would inform the discretion ofthose who carry out the law and the judgeswho pass on its validity in implementation.Congress would also, of course, have the pow-er to specify the means to reach its goals andvalues. This concept of an intelligible principlewould ensure that Congress fulfilled its con-stitutional obligation to legislate (and not del-egate power), thereby affirming the rule of law.

In EESA, Congress did not set out an intel-ligible principle. Instead, Congress set out anunordered plethora of goals and gave the exec-utive plenary power to buy any asset to achievethese unspecified ends. Inevitably, theTreasury secretary made the important choic-es regarding the federal government’s re-sponse to the financial crisis. The courts couldhardly fault Treasury for doing so; judges hadlittle guidance to assess Treasury’s perfor-mance. Indeed, Congress itself had no clearbasis to oversee the implementation of EESA.Having failed to meet its constitutional oblig-ations to legislate, Congress could hardly com-plain of having no leverage over the policy out-comes. The Supreme Court should haveprecluded all this by requiring Congress tofashion an intelligible principle that resolvedthe conflict of values at stake in this situation.

Had Congress or the Court taken theConstitution seriously, the government re-

20

The TARP casecasts a harsh light

on Congress.

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sponse to the financial crisis would have beendifferent. Congress could have begun and end-ed its work with the original Paulson proposal.As noted earlier, that proposal set out twogoals (market stability and taxpayer protec-tion), rather than 13 goals. It would have beeneasier for Congress to fashion an “intelligibleprinciple” for a law with two goals. Congresscould have stipulated that the primary goal ofthe bill was restoring market stability. It couldalso have constrained pursuit of that goal byestablishing a Special Prosecutor for fraud andby setting out an overall spending limit. Con-gress could also have required that Treasuryonly buy troubled assets to the point that theprobable losses to taxpayers from economiccontraction equaled the probable losses frompurchasing assets. With that principle in law,Treasury could then make judgments at themargin about purchases. Congress, in turn,would have had a standard by which to exerciseoversight of Treasury’s work. Congress wouldhave retained, as Rehnquist demanded, themost important choices regarding the policy.

Congress could have added additionalgoals like foreclosure relief or “justice” (i.e.,limiting executive compensation). Had theytried to do so, members would have had toconsider how Treasury should make tradeoffsbetween these goals and market stability ortaxpayer protection. As we saw, Treasury offi-cials apparently subordinated limiting com-pensation to the goal of market stability.Congress might have made the same decisionor not. Under the U.S. Constitution, however,that decision belonged to Congress, not theexecutive. This path not taken under the guid-ance of a real “intelligible principle” wouldhave had another advantage. Given greaterclarity about ends and means, Congress andthe informed public might have been betterplaced to assess the consequences of the bill.141

Even those who support the politics pur-sued by the executive under EESA should bealarmed by Congress’s institutional decline asrevealed in this episode. The facts of this casesuggest that, in a crisis, our republican consti-tution has given way to unified technocraticpower obscured by empty rituals of legislation

and oversight.142 Absent a reform and revivalof the Court’s intelligible principle test, we willhave more TARP laws that diminish congres-sional authority, blur the separation of pow-ers, and undermine the rule of law.143

Notes1. Thomas J. Billitteri, “Financial Bailout.” CQ Re-searcher 18, no. 37 (October 24, 2008): 865–88, http://library.cqpress.com/cqpac/cqresrre2008102400,p. 878. Phillip Swagel provides a view of the devel-oping crisis from inside the Treasury Department.See Swagel, “The Financial Crisis: An Inside View,”Brookings Papers on Economic Activity, Spring 2009,Conference Draft.

2. James B. Stewart, “Eight Days: The Battle toSave the American Financial System,” New Yorker,September 21, 2009, p. 73.

3. Ibid., p. 75.

4. Ibid., p. 76.

5. It is a separate question whether the officialsactually had such authority. Subsequent to thecrisis, no court has ruled that they did not.

6. Congress failed in other ways. The United StatesConstitution sets up a government of defined, enu-merated, and limited powers. If the people do notgrant a power in the Constitution, the federal gov-ernment may not legitimately exercise it. TheConstitution does not grant federal officials thepower to buy “troubled assets” or to “become a gar-gantuan mortgage broker.” EESA is not a law “nec-essary and proper” for carrying out any enumerat-ed powers. Judging by the meaning of theConstitution, Congress did not have the power toenact EESA, and the law is unconstitutional. SeeGary Lawson, “Burying the Constitution under aTARP,” Boston University School of Law WorkingPaper no. 09-3.

7. John Locke, Two Treatises of Government, ed. PeterLaslett (New York: Mentor Books, New AmericanLibrary, 1965), section 141. “Fourthly, The Legis-lative cannot transfer the Power of Making Laws toany other hands. For it being but a delegated Powerfrom the People, they, who have it, cannot pass itover to others.”

8. Mistretta v. United States 488 U.S. 361 (1989) 730.

9. J. W. Hampton Jr. and Co. v. United States, 276 U.S.394, 409 (1928). See also Mistretta v. United States,730–31.

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10. The cases were Panama Refining Co. v. Ryan, 293U.S. 388 (1935), A.L.A. Schechter Poultry Corp. v.United States, 295 U.S. 495 (1935), and Carter v.Carter Coal Company, 298 U.S. 238 (1936).

11. David H. Rosenbloom, Building a Legislative-Centered Public Administration: Congress and theAdministrative State, 1946–1999 (Tuscaloosa, AL:University of Alabama Press, 2000), p. 28.

12. Industrial Union Department, AFL-CIO v. AmericanPetroleum Institute 448 U.S. 607 (1980). The caseinvolved judicial evaluation of government regula-tion of occupational exposure to benzene. Ibid., p. 611.

13. Ibid., pp. 685–86.

14. Don K. Price, America’s Unwritten Constitution:Science, Religion, and Political Responsibility (Cam-bridge, MA: Harvard University Press, 1985), p.141. Price implies that while members of theCongress and the public are not experts abouttechnical matters—the means to reach ends—theyare competent about choosing ends—in partbecause such choices are not a matter of expertise.

15. Ibid., p. 143. See Price’s discussion of the im-portance of “conflicts among competing goods.”

16. Emergency Economic Stabilization Act of2008 (hereafter EESA), Sec. 101 (a)(1).

17. EESA, Sec. 3.

18. Since the second category (any financialinstrument) comprises the first category (mort-gage instruments), the first is logically redundant.

19. Other sections of the law also require disclo-sure: “The Secretary is required to publish guide-lines for TARP, which must include Mechanismsfor purchasing troubled assets; Methods for pric-ing and valuing troubled assets; Procedures forselecting asset managers; Criteria for identifyingtroubled assets for purchase.” EESA, Sec. 101 (d).

20. EESA, Sec. 2. Later, the law stipulates that afterfive years, “the Director of the Office ofManagement and Budget, in consultation with theDirector of the Congressional Budget Office, shallsubmit a report to the Congress on the net amountwithin the Troubled Asset Relief Program underthis Act. In any case where there is a shortfall, thePresident shall submit a legislative proposal thatrecoups from the financial industry an amountequal to the shortfall in order to ensure that theTroubled Asset Relief Program does not add to thedeficit or national debt.” Sec.134. Congress essen-tially directs the president to ask Congress downthe road to make a law about TARP. This formal

(and virtually empty) admonition hardly counts asa guide to implementing TARP.

21. Barney Frank (D-MA) later acknowledged in-terpolating this section on behalf of a Massa-chusetts bank that had heavily invested in shares ofFannie Mae and Freddie Mac. See Damian Palettaand David Enrich, “Political Interference Seen InBank Bailout Decisions—Barney Frank Goes to Batfor Lender, and It Gets an Infusion,” Wall StreetJournal, January 22, 2009, p. A1.

22. EESA, Sec. 103.

23. EESA, Sec. 101(e).

24. Ibid.

25. Sec. EESA, Sec. 113(d).

26. James Madison, “Federalist no. 51,” in TheFederalist, ed. Jacob Cooke (Middletown, CT:Wesleyan University Press, 1961), p. 349.

27. “Text of Draft Proposal for Bailout Plan,” NewYork Times, September 20, 2008.

28. EESA, Secs. 115 (a) and (c).

29. United States Senate, “Joint Resolution,” http://www.senate.gov/reference/glossary_term/joint_resolution.htm.

30. “Text of Draft Proposal,” Sec. 2(a).

31. Madison, The Federalist no. 10, p. 63.

32. Paul J. Quirk, “Deliberation and DecisionMaking” in Institutions of American Democracy: TheLegislative Branch, eds. Paul J. Quirk and Sarah A.Binder (New York: Oxford University Press, 2005),pp. 314–17.

33. Stewart, p. 70.

34. Billitteri, p. 878.

35. Ibid.

36. Lori Montgomery, Neil Irwin, and David Cho,“A Joint Decision to Act: It Must Be Big and Fast,”Washington Post, September 20, 2008, A1. Theauthors cite three people present at the meeting asthe source of Bernanke’s statements. It should benoted, however, that a later account, apparentlybased on an interview with Bernanke, said the FedChair “didn’t want to be accused of exaggeratingthe danger” during the meeting. See Stewart, p. 77.

37. Carl Hulse and David M. Herszenhorn, “Be-hind Closed Doors, Warnings of Calamity,” New

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York Times, September 20, 2008, p. 5.

38. Lori Montgomery, Paul Kane, and Neil Irwin,“Bailout Proposal Meets Bipartisan Outrage; Law-makers Balk as Officials Press Case for QuickAction,” Washington Post, September 24, 2008, p. A01.

39. David M. Herszenhorn, “Talks on Bailout PlanAdvance, Despite Anger and Skeptics in Congress,”New York Times, September 23, 2008.

40. Neil Irwin and Cecilia Kang, “Away from WallStreet, Economists Question Basis of Paulson’sPlan,” Washington Post, September 26, 2008, p. A1.

41. Peter S. Goodman, “Chilly Review fromExperts,” New York Times, September 23, 2008, p. 1.

42. “Text of Draft Proposal for Bailout Plan.”

43. See EESA, Sec. 136 and Sec. 121(b)(6).

44. For example, the original Paulson proposalidentified only two goals for the authority dele-gated by the bill (“Text of Draft,” Sec. 3) and clear-ly required the Secretary to report to Congressabout the use of the delegated authority in rela-tion to the goals (called “considerations”) (“Textof Draft,” Sec. 4). The greater focus of the originalproposal arguably would have permitted greateraccountability from the secretary.

45. In the September 17 meeting, where Bernankeconvinced the congressional leadership of theneed for action, Congressman Barney Frank said,“This cannot be seen as just a Wall Street bailout.Something has to be done also about executivecompensation and foreclosures.” Stewart, p. 77.

46. David M. Herszenhorn, Stephen Labaton, andMark Landler, “Democrats Set Conditions asTreasury Chief Rallies Support for Bailout,” NewYork Times, September 22, 2008, p. A1.

47. Late in the game, House Republicans withdrewsupport from the Paulson plan in favor of theirown alternative involving insurance backed by thegovernment, which was said to better protect tax-payers. This alternative appears to have had littleinfluence on enacting TARP. See David M. Hersz-enhorn, Carl Hulse, and Sheryl Gay Stolberg, “Dayof Chaos Grips Washington; Fate of Bailout PlanUnresolved,” New York Times, September 26, 2008,p. A1; and John H. Cushman Jr., “Will House Re-publicans Get What They Want?” New York Times,September 26, 2008, p. A1. The Republican alter-native, however, had little influence over the finallaw. “Frank said he was willing to add an insuranceoption if it secured Republican votes . . . It’s noproblem to add something that’s not going to domuch.” Lori Montgomery and Paul Kane, “Law-

makers Get Down to Details of Drafting Bill,”Washington Post, September 27, 2008, p. A1.

48. As it turned out, even before Congress passedEESA, Secretary Paulson had told his staff “tostart drawing up a plan for using some of the$700 billion to recapitalize the banking system—something that Congress was never told and thathe had publicly opposed.” See Joe Nocera andEdmund L. Andrews, “The Reckoning: Strugglingto Keep Up as the Crisis Raced On,” New YorkTimes, October 23, 2008.

49. See Anthony Faiola and David Cho, “Alterna-tive Solutions Diverge from Administration’s Approach,” Washington Post, September 24, 2008, p. A1.

50. For the opposition see Sheryl Gay Stolberg,“Lawmakers’ Constituents Make Their BailoutViews Loud and Clear,” New York Times, September25, 2008, p. A27. “A financial industry lobbyist saidhe’d stopped in a bunch of offices and was told sev-eral times that calls and letters were running 100 to1 against the plan.” Quoted in Binyamin Appel-baum, “Rescue’s Rush Puts Lobbyists in a Crunch,”Washington Post, September 25, 2008, p. D5. For themore supportive public mood after the initial rejec-tion of the bill, see Carl Hulse and Robert Pear,“Senate to Vote Today on Bailout Plan,” New YorkTimes, September 30, 2008.

51. In the CNN poll, 62 percent of voters said thatthe federal government should intervene in thefinancial crisis. Any mention of taxpayers’ moneymakes voters skeptical: the Los Angeles Times/Bloomberg News poll asked, “Is it the government’sresponsibility to use taxpayers’ money to bail outprivate firms whose collapse could harm the econ-omy?” The answer was “no,” 55 percent to 31 per-cent . . . Do Americans believe that a rescue planwill treat taxpayers fairly just because Congressand the president agree on it? “No,” by 65 percentto 34 percent in the CNN poll. But do they thinkit will help the economy? “Yes,” by 55 percent to 42percent. A CNN/Opinion Research Corp. poll re-leased on October 6 found that nearly 6 in 10Americans thought an economic depression waslikely. Billitteri, p. 868.

52. Mark Landler and Steven Lee Myers, “BuyoutPlan for Wall Street Is a Hard Sell on CapitolHill,” New York Times, September 24, 2008.

53. See the legislative history at 8 CIS PL 110343;110 CIS Legis. Hist. P.L. 343.

54. See 8 CIS PL 110343; 110 CIS Legis. Hist. P.L.343.

55. Quirk, p. 317.

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56. See Steven M. Davidoff, “The Bailout Half-time Report,” New York Times, July 9, 2009.

57. EESA, Sec. 2(D). I did not include this amongthe goals of the law since it is inherent in all legis-lating.

58. Carl Hulse and David M. Herszenhorn,“House Rejects Bailout Package, 228–205; StocksPlunge,” New York Times, September 29, 2008.

59. Carl Hulse and Robert Pear, “Senate to VoteToday on Bailout Plan,” New York Times, Septem-ber 30, 2008.

60. Patrick M. Garry notes “Congress has numer-ous reasons for making vast delegations of powerto administrative agencies. Members of Congressoften want to escape responsibility for makinghard choices. Furthermore, as a way of claimingcredit and escaping blame, they ‘have a strongincentive to enact vague laws that leave the opera-tive details to someone else.’” See Garry, “TheUnannounced Revolution: How the Court hasIndirectly Effected a Shift in the Separation ofPowers,” Alabama Law Review 57 (2006): 703.

61. David M. Herszenhorn, Stephen Labaton, andMark Landler, “Democrats Set Conditions asTreasury Chief Rallies Support for Bailout,” NewYork Times, September 22, 2008.

62. EESA, Sec. 104(a)1.

63. Montgomery, Kane, and Irwin.

64. EESA, Sec. 104(b).

65. David Wessel, In Fed We Trust: Ben Bernanke’sWar on the Great Panic (New York: Crown Business,2009), electronic book, chap. 6.

66. EESA, Sec. 125(A).

67. EESA, Sec. 121(c)(1).

68. See Theodore J. Lowi, The End of Liberalism:Ideology, Policy, and the Crisis of Public Authority (NewYork: Norton, 1969), p. 126.

69. Billitteri, p. 878. Floyd Norris, “Plan B: FloodBanks with Cash,” New York Times, October 9, 2008.

70. Carter Dougherty and Landon Thomas, “TwoCountries Plan Rescues as European LeadersContinue to Talk,” New York Times, October 8,2008; and Landon Thomas Jr. and Julia Werdigier,“Britain Takes a Different Route to Rescue ItsBanks,” New York Times, October 9, 2008.

71. Edmund L. Andrews and Mark Landler, “White

House Overhauling Rescue Plan,” New York Times,October 11, 2008. “The Treasury proposal to recap-italize banks stems from the realization that as thestock market keeps tumbling, and as mortgage-related securities on banks’ balance sheets alsoplummet, it has become harder for banks to raisefresh capital from investors. The government con-cluded it would be able to deliver capital faster andwith greater assurance if it did so directly. Theswitch may also reflect growing doubts about theTreasury’s plan to purchase mortgage-relatedassets . . . the concept is untested, experts said, andthe deteriorating market conditions had furtherdimmed its prospects.” Mark Landler and Ed-mund L. Andrews, “As Crisis Spreads, GlobalApproach Weighed,” New York Times, October 10,2008.

72. Department of Treasury, “Responses toQuestions of the First Report of the CongressionalOversight Panel,” December 30, 2008, pp. 4–5;Philip Swagel argues that Paulson could not haveobtained support from Congress to capitalizebanks in late September. Swagel, p. 38.

73. David M. Herszenhorn, “About Those Chargesof Bailout Bias,” New York Times, December 6, 2008.

74. “Because the bailout law gave wide latitude toMr. Paulson, Washington’s interest groups mobi-lized to take advantage.” See Edmund L. Andrewsand Eric Dash, “Insurers Are Getting in Line forPiece of Federal Bailout,” New York Times, October24, 2008; Mark Landler, “New Terrain for Panelon Bailout,” New York Times, November 3, 2008;and Edmund L. Andrews and Eric Dash, “InsurersAre Getting in Line for Piece of Federal Bailout,”New York Times, October 24, 2008.

75. Bill Vlasic, “Federal Aid Seen as Vital to aMerger in Detroit,” New York Times, October 24,2008.

76. Edmund L. Andrews and Bill Vlasic, “WhiteHouse Explores Aid for Auto Deal,” New YorkTimes, October 27, 2008.

77. Mark Landler and David D. Kirkpatrick,“Lobbyists Swarm the Treasury for Piece of Bail-out Pie,” New York Times, November 11, 2008.

78. “Senator Richard C. Shelby of Alabama, thesenior Republican on the banking committee,said he would not support legislation to aid theauto companies and seemed prepared to let oneor all of them collapse. ‘The financial straits thatthe Big Three find themselves in is not the prod-uct of our current economic downturn, butinstead is the legacy of the uncompetitive struc-ture of its manufacturing and labor force,’ Mr.Shelby said in a statement. ‘The financial situa-

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tion facing the Big Three is not a national prob-lem but their problem.’” See David M. Hersz-enhorn, “Chances Dwindle on Bailout Plan forAutomakers,” New York Times, November 13,2008. See also Bill Vlasic and David M. Herszen-horn, “Auto Chiefs Fail to Get Bailout Aid,” NewYork Times, November 20, 2008.

79. Bill Vlasic and David M. Herszenhorn, “Pur-suing U.S. Aid, G.M. Accepts Need for DrasticCuts,” New York Times, December 2, 2009.

80. David E. Sanger, David M. Herszenhorn, andBill Vlasic, “Bush Aids Detroit, but Hard ChoicesWait for Obama,” New York Times, December 19,2009.

81. By the middle of 2009, the federal governmentwould provide $21 billion in loans to GeneralMotors, $15.5 billion in loans to Chrysler, and$12.5 billion in an investment in preferred stockin GMAC. See Congressional Budget Office, TheTroubled Asset Relief Program: Report on Transactionsthrough June 17, 2009 (Washington: CongressionalBudget Office, June 2009), p. 4.

82. Louise Story, “Awaiting Reaction to a Third Tryat Bailout,” New York Times, November 23, 2008.

83. “Bad Assets Don’t Just Disappear,” New YorkTimes, November 25, 2008.

84. Reed Abelson, “Banks’ Bailout Unlikely toCrimp Executive Pay,” New York Times, October 15,2008.

85. Edward L. Andrews and Mark Landler, “Hintsof Relief from the Siege,” New York Times, Novem-ber 21, 2008.

86. Swagel, p. 16.

87. Diana B. Henriques, “First Audit Said to CiteSome Snags with Bailout,” New York Times, No-vember 25, 2008.

88. Diana B. Henriques, “New Yorker Nominatedto Monitor U.S. Bailout,” New York Times, Novem-ber 14, 2008.

89. Diana B. Henriques, “Bailout Monitor SeesLack of a Coherent Plan,” New York Times, Decem-ber 1, 2008.

90. CBO.

91. United States Government AccountabilityOffice, “Troubled Asset Relief Program: AdditionalActions Needed to Better Ensure Integrity, Ac-countability, and Transparency,” (Washington:December 2008), p. 9.

92. See “Questions about the $700 Billion Emer-gency Economic Stabilization Funds,” The FirstReport of the Congressional Oversight Panel for EconomicStabilization, December 10, 2008, pp. 1–6.

93. Ibid., pp. 9–10.

94. Ibid., p. 30.

95. COP, Second Report, p. 12.

96. Diana B. Henriques, “Blunt Advice for Treasuryon Progress of the Bailout,” New York Times,December 10, 2008.

97. See Department of Treasury, “Responses toQuestions of the First Report of the CongressionalOversight Panel,” December 30, 2008, p. 1, http://www.treas.gov/press/releases/reports/123108%20cop%20response.pdf. The response mentions sev-eral small programs dealing with foreclosures. Ingeneral, the report suggests Treasury’s policy prior-ity was market stability, in part because foreclo-sures would have become worse if, for example,Freddie Mac and Fannie Mae had not been stabi-lized.

98. Department of Treasury, “Responses,” p. 8.

99. See the table setting out responses fromTreasury to the questions in the first report of thepanel at COP, Second Report, pp. 14ff. See also,David Barstow, “Treasury’s Oversight of BailoutIs Faulted,” New York Times, January 9, 2009.

100. In December, members of Congress wouldcomplain that the bailout was not forcing banksto modify mortgage terms to avoid foreclosures.“A Treasury spokeswoman, Michele A. Davis, saidthat the department was not required to establisha loan modification program.” Charles Duhigg,“Fighting Foreclosures, FDIC Chief Draws Fire,”New York Times, December 10, 2008.

101. Edmund L. Andrews, “Treasury Has Spent$350 Billion of Bailout Fund,” New York Times,December 19, 2008.

102. David M. Herszenshorn, “Obama Lobbiesfor Release of Second Half of Bailout,” New YorkTimes, January 11, 2009.

103. Phil Mattingly. “Senate Votes to ReleaseBailout Funds.” CQ Weekly Online (January 19,2009), pp. 129–130, http://library.cqpress.com/cqweekly/weeklyreport111-000003012959; and Ed-mund L. Andrews and Eric Dash, “Banks in Needof Even More Bailout Money,” New York Times,January 13, 2009.

104. “TARP Phase Two: Whatever Might Work,”

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CQ Weekly Online (February 23, 2009), p. 404,http://library.cqpress.com/cqweekly/weeklyreport111-000003058066.

105. Mattingly.

106. See H.R. 384, TARP Reform and Account-ability Act of 2009. For the vote, see “For theRecord,” CQ Weekly (January 19, 2009), p. 146.

107. H.R. 384, Sec. 102, (e)(2).

108. Ibid., Sec. 201.

109. Sheryl Gay Stolberg and Stephen Labaton,“Obama Calls Wall Street Bonuses ‘Shameful,’”New York Times, January 29, 2009.

110. Phil Mattingly, “Salary Cap Added to BailoutTerms,” CQ Weekly Online (February 9, 2009), p. 308, http://library.cqpress.com/cqweekly/weeklyreport111-000003027318.

111. Louise Story, “Lawmakers Question Bankerson Bailout,” New York Times, February 11, 2009.

112. Edmund L. Andrews and Stephen Labaton,“Bailout Plan: $2.5 Trillion and a Strong U.S.Hand,” New York Times, February 10, 2009.

113. Edmund L. Andrews and Eric Dash, “Stimu-lus Plan Places New Limits on Wall St. Bonuses,”New York Times, February 14, 2009.

114. Stephen Labaton, “Some Banks, FeelingChained, Want to Return Bailout Money,” NewYork Times, March 10, 2009.

115. Edmund L. Andrews and Jackie Calmes,“Obama in Effort to Undo Bonuses at A.I.G.,”New York Times, March 16, 2008.

116. Mary Williams Walsh and David M. Herszen-horn, “A.I.G. Seeking Return of Half of ItsBonuses,” New York Times, March 18, 2009.

117. Carl Hulse and David M. Herszenhorn, “HouseApproves 90% Tax on Bonuses after Bailouts,” NewYork Times, March 19, 2009.

118. Kate Davidson and Benton Ives, “Limits onExecs’ Compensation Move in House,” CQ WeeklyOnline (March 30, 2009), p. 730, http://library.cqpress.com/cqweekly/weeklyreport111-000003087460.

119. The amendment was defeated by a vote of26–37. Kate Davidson, “Bill Advances to IncreaseTARP Oversight,” CQ Weekly Online (March 16,2009), p. 622, http://library.cqpress.com/cqweekly/weeklyreport111-000003075252.

120. COP, February Report, p. 7.

121. Ibid., February Report, p. 3.

122. Ibid., March Report, p. 85.

123. Ibid., April Report, p. 10.

124. Two members of the panel objected to thedrift from overseeing implementation to offeringoptions for an alternative strategy: “First and fore-most, the Panel is charged with evaluating theeffectiveness of Treasury’s use of the new author-ity granted it under the Emergency EconomicStabilization Act. It is not our role to design orapprove Treasury’s strategy, nor should thePanel’s mission be expanded to encroach on thatauthority . . . to the extent that the Panel reportfocuses more on alternatives and less on evalua-tion of current activities through objective met-rics, we have missed an opportunity to closelyengage with our primary task.” See CongressionalOversight Panel, April Report, p. 88, AdditionalViews of Richard H. Nieman and John E. Sununu.

125. COP, May Report, p. 67.

126. Andrew Ross Sorkin, “‘No-Risk’ Insurance atthe FDIC,” New York Times, April 6, 2009.

127. Benton Ives and Phil Mattingly, “Two-Pronged Strategy to Remove ‘Toxic’ Assets,” CQWeekly Online (March 30, 2009), p. 729, http://library.cqpress.com/cqweekly/weeklyreport111-000003087464.

128. Charlie Gasparino, “Treasury Set to UnveilPPIP; Ross, GE Capital Participate,” CNBC.com,June 30, 2009.

129. See Damian Paletta and David Enrich,“Political Interference Seen In Bank BailoutDecisions—Barney Frank Goes to Bat for Lender,and It Gets an Infusion,” Wall Street Journal, January22, 2009, p. A1; and Charlie Savage, “Geithner SetsLimits on Lobbying for Bailout Money,” New YorkTimes, January 27, 2009.

130. Ran Duchin and Denis Sosyura, “TARPInvestments: Financials and Politics?” Universityof Michigan, Ross School of Business WorkingPaper no. 1127, July 2009, p. 17.

131. Louise Story, “Goldman Posts Profit andPlans Share Sale,” New York Times, April 13, 2009.

132. Congressional Budget Office, The TroubledAsset Relief Program, Table 1, p. 2.

133. See Zachery Kouwe, “As Banks Repay BailoutMoney, U.S. Sees a Profit,” New York Times, August

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31, 2009. Later analysis confirms that the moneylent to banks will show a slight profit for the gov-ernment. See Jackie Calmes, “Treasury ForecastsSmaller Loss from Bank Rescue,” New York Times,December 7, 2009, p. A1.

134. The initial proposal did say “the Secretaryshall take into consideration means for . . . pro-tecting the taxpayer.” See the original version ofEESA.

135. CBO, June 2009, 4. See Davidoff, “The BailoutHalftime Report.”

136. Ibid.

137. Joe Nocera, “The Problem With FloggingA.I.G.,” New York Times, March 20, 2009.

138. As noted earlier, it is not clear that Congresswas entirely serious about spending money onforeclosure prevention in the fall of 2008. It mightalso be noted that precluding debt relief was onereason for strengthening the national govern-ment at the 1787 Constitutional Convention.

139. CBO, p. 4.

140. This explanation of congressional behavior isnoted in Ronald J. Krotoszynski Jr., “Reconsideringthe Nondelegation Doctrine: Universal Service, thePower to Tax, and the Ratification Doctrine,”Indiana Law Journal 80 (2005): 239.

141. Earlier Court decisions striking down overlybroad delegations of legislative authority “ex-pressed concern not only with the delegations’broad subject matters, but with the absence of

transparency and procedural regularity.” HeidiKitrosser, “The Accountable Executive,” MinnesotaLaw Review 93 (May 2009): 1743.

142. Gary Lawson argued that “to abandon open-ly the nondelegation doctrine is to abandonopenly a substantial portion of the foundation ofAmerican representative government.” Gary Law-son, “Delegation and Original Meaning,” VirginiaLaw Review 88 (April 2002): 332.

143. More experiences similar to EESA wouldimply that Article I, section 1 of the Constitutionis no longer valid. Some commentators take thisview regarding crises: “the conditions of theadministrative state make it practically inevitablethat the executive and the agencies will be themain crisis managers, with legislatures and courtsreduced to adjusting the government’s responseat the margins and carping from the sidelines.Congress and the courts suffer from cripplinginstitutional debilities as crisis managers; legisla-tors and judges are aware of this, and do whatthey have no real choice but to do, which is dele-gate sweeping power to the executive to cope withthe crisis.” Eric A. Posner and Adrian Vermeule,“Crisis Governance in the Administrative State:9/11 and the Financial Meltdown of 2008,” Uni-versity of Chicago Law School John M. Olin Lawand Economics Working Paper no. 440 (2ndSeries), p. 16. In this view, the United States maybe said to have entered a “state of exception” inthe fall of 2008. On the concept of the “state ofexception,” see Carl Schmitt, Political Theology: FourChapters on the Concept of Sovereignty, trans. GeorgeSchwab (Cambridge, MA: MIT Press, 1985), pp.5–6. Schmitt denies that a “state of exception” canbe constrained by law.

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STUDIES IN THE POLICY ANALYSIS SERIES

659. Globalization: Curse or Cure? Policies to Harness Global Economic Integration to Solve Our Economic Challenge by Jagadeesh Gokhale (February 1, 2010)

658. The Libertarian Vote in the Age of Obama by David Kirby and David Boaz (January 21, 2010)

657. The Massachusetts Health Plan: Much Pain, Little Gain by Aaron Yelowitz and Michael F. Cannon (January 20, 2010)

656. Obama’s Prescription for Low-Wage Workers High Implicit Taxes, Higher Premiums by Michael F. Cannon (January 13, 2010)

655. Three Decades of Politics and Failed Policies at HUD by Tad DeHaven(November 23, 2009)

654. Bending the Productivity Curve: Why America Leads the World in Medical Innovation by Glen Whitman and Raymond Raad (November 18, 2009)

653. The Myth of the Compact City: Why Compact Development Is Not the Wayto Reduce Carbon Dioxide Emissions by Randal O’Toole (November 18, 2009)

652. Attack of the Utility Monsters: The New Threats to Free Speech by Jason Kuznicki (November 16, 2009)

651. Fairness 2.0: Media Content Regulation in the 21st Century by Robert Corn-Revere (November 10, 2009)

650. Yes, Mr President: A Free Market Can Fix Health Care by Michael F. Cannon (October 21, 2009)

649. Somalia, Redux: A More Hands-Off Approach by David Axe (October 12, 2009)

648. Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis? by Jagadeesh Gokhale and Peter Van Doren (October 8, 2009)

647. Why Sustainability Standards for Biofuel Production Make Little Economic Sense by Harry de Gorter and David R. Just (October 7, 2009)