October 25, 2008

Democracy, the Treasury and the Federal Reserve

As the financial crisis unfolds, it may be important to discuss not only various technical solutions to the current mess, but also what the recent events tell us about the functioning of "democracy" in Washington, DC. 
I put "democracy" into quotation marks because it appears that the long decline of Congress relevance vis-à-vis the President, the Treasury, and the Federal Reserve has now possibly reached a non-return point.
These are the remarks of Sam Peltzman, Professor Emeritus of Economics at the University of Chicago, a couple of weeks ago, commenting on the bailouts:
The Federal Reserve and the Treasury (...) have the demonstrated ability to act without serious democratic restraint. 
How else can one interpret the sudden revelation that $29 billion of the full faith and credit of the 
US Treasury had been committed to the Bear Stearns transaction, or the equally sudden 
undebated and unvoted announcement that $85 billion of government funds had been loaned to 
AIG? If there is any principle that emerges from these announcements – and non- 
announcements like the decision not to rescue Lehman Brothers – it seems to be that amounts at 
least as large as $85 billion can be appropriated, or not, at the discretion of official Washington.

As the Constitution reserves to Congress, and Congress alone, the power of appropriating public money, it appears that another legacy of the Bush administration will be the ultimate irrelevance of Congress in serious matters like war or economic catastrophe. This irrelevance is duly reflected in the current standing of Congress in the court of public opinion, where its current approval rate is about as good as Wall Street's credit, around 8% of approval. However, this is a profoundly unhealthy situation, and Barack Obama will be wise in reflecting on it, resisting the temptation of using the quasi-dictatorial powers he will inherit from George W. Bush, even for good purposes.