The Rule of Law and the Financial Crisis

David Skeel has a nice piece today in the WSJ on “A Nation Adrift from the Rule of Law.”  His piece agrees with many of the themes that I’ve also raised about the decline of the rule of law during the financial crisis and the negative consequences.  (A longer law review version of my argument with more examples is available here).

I agree with virtually everything that David says in his piece but with one small quibble– for the reasons suggested in my essays, I am much less inclined to accept the Posner and Vermeule that rule of law violations are advisable in times of economic crisis.

In short, the Posner-Vermeule thesis (overgeneralized) boils down that during times of economic crisis we are better governed by discretionary standards rather than rules (such as the rule of law).  Most of my article (as well as the central thrust of David’s piece today) is designed to challenge that point.  But I think there is one additional conceptual flaw that underlies it: the assumption that economic crises are basically similar to national security crises.  I think they are different, for the reasons I outline in my essay, namely that whereas a national security crisis might be most efficiently addressed in the short-run by a centralized, coordinated government response responding to an economic crisis requires reestablishing equilibrium among billions of decentralized, uncoordinated actors.  It is far from clear that discretion, even in the short run (and leaving aside the potent long-term effects), would be an optimal vehicle for restoring equilibrium in this sense.  Once you add the long-term effects, especially the moral hazard and entrenchment effects, I think the case for discretion is exceedingly weak.

Having said that, I confess some ambiguity in the characterization of the point here: David characterizes their argument as rule of law violations being “inevitable” in times of crisis.  But I understand them to be making a stronger point, namely that rule of law violations are advisable in response to crisis.  Violations may well-be “inevitable” if prompted by opportunism, public panic, and judicial unwillingness to uphold the rule of law.  But that doesn’t mean that it is advisable to give politicians the power to suspend the rule of law in times of economic crisis, even if that is “inevitable” in some real sense.