U.S. Treasury’s Bailout Framework: Mockery of the Rule of Law

January 4, 2009

by Mario Rizzo

 

In an attempt to provide greater transparency and predictability the US Treasury has issued the basic “framework” that will determine whether a troubled “financial institution,” defined extremely broadly as the law allows (see my previous post), will receive governmental aid. Many commentators, including this one, have thought that the Treasury policy was in great need of clarification. Instead, what we have gotten is an extremely vague set of standards followed by a statement that targeted investments will be on a “case-by-case basis.”

 

Consider some of the criteria according to the Financial Times:

 

 

1. “the extent to which destabilisation of an institution could threaten the viability of creditors and counterparties”, whether “directly or indirectly”.

2. “whether the institution is sufficiently important to the nation’s financial and economic system” that a loss of confidence “could potentially cause major disruptions to credit markets, or payments and settlement systems, destabilise asset prices, significantly increase uncertainty, or lead to similar losses of confidence or financial market stability”.

3. “number and size of financial institutions that are similarly situated” or were “likely to be affected by the destabilisation of the institution”.

Some key expressions capable of elastic interpretation: “directly or indirectly,” “sufficiently important,” “major disruptions,” “significantly increase uncertainty,” and “similarly situated.”  

In what way does this enable us to exclude any “plausible” candidates with sufficiently strong pressure-group backing? In fact, I suggest that the (George) Stiglerian principle of policy by “concentrated benefits and diffuse losses” will be a better predictor of whom the Treasury will bailout than the Treasury’s standards.

Of course, some will argue that the nature of the problem – or should I say, the problem as perceived, precludes more precise and more predictable criteria. Again, this is another example of the incompatibly of planning and the traditional rule of law. (See F. A. Hayek, The Road to Serfdom, Chapter Six.)

One Response to “U.S. Treasury’s Bailout Framework: Mockery of the Rule of Law”


  1. Any poorly worded bit legislation obviously needs a ‘czar’ to make a decision. Obama may turn out to be the biggest concentrator of federal power since FDR.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: