Skeel Speaks, NYT Takes Note, and Maybe Congress Listens?

The New York Times ran a front page story today on an issue discussed off and on here at VC, the possibility of creating a bankruptcy chapter for states.  It quotes David Skeel, who has been the leading intellectual mover of this idea, along with a number of other people, including various public employee union officials dismayed by the very concept.  It was not a long article, but decent straight-up reporting.  As I have mentioned in earlier posts, one of the most persuasive parts of the proposal to me is that bankruptcy allows judges a great deal of discretion – but that discretion is cabined within a highly specified range.  That seems to me of great importance in addressing financial shocks and crises. 

In the case of national security, in which government seeks to confront enemies, strategic ambiguity as to how crazy you might get – to reference the classic nuclear standoff debates – can serve a useful purpose.  Unbounded discretion in that situation, and ambiguity about scope, circumstance, and range of response can be of immense value in confronting true enemies.  In the case of financial crisis, one is not confronting enemies, but seeking to channel and contain and regulate the activities of those who are, in a word, friends.  Members of our political and social and economic communities, with whom we seek to find ways in which competition within the rules can create a whole that is greater than the mere sum of the parts.  In that case, strategic ambiguity, represented here by discretion without apparent boundaries or constraints, works in exactly the wrong way.  The effect is to ratchet up uncertainty and make planning for the future harder, and forces parties to seek to insure against the discretionary regulatory moves made by government.  Clear rules imposing clear moral hazard is more efficient for everyone.  That is what makes bankruptcy regimes – rule of law regime allowing for exercises of discretion within particular issues and ranges – attractive.  That is also true in a new bankruptcy chapter for states, though inevitably a new chapter in the code would leave many questions unanswered.

There is a risk, however, which should also be addressed.  Actors chosen for an extended role – bankruptcy judges drawn from private bankruptcy, at most municipal bankruptcy, now pressed into a new chapter of state bankruptcy – risk becoming transformed by the role itself.  We asked a certain kind of actor to take on a certain role because we had a good idea how the actor behaved in the old one, and we liked it.  We figured that the new role wouldn’t change the behavior of the actor.  But in many situations that is not the case. 

 Consider a comparison, once again, with national security law.  One reason to be leery of tasking district court judges with the role of directly supervising the military in national security missions abroad – who can be detained, who can be targeted with a missile, etc. – is that to be a federal district court judge is to be formed by a practice, and a practice designed for a specific social setting – domestic, within territorial borders controlled by the sovereign and its police, situations where the stakes are law enforcement mostly concerning individual crimes and their consequences for particular individuals, etc.  The court rules of procedure, evidence, testimony, etc., were not designed nor did they evolve with these vastly different situations in mind.  But federal judges are a product as much of those rules and their contraining force as of anything; their personal probity is not at issue, but the consistent application of the rule of law is, because that consistency depends upon adherence by judges generally to those shaping and constraining forces.  Confronted with a wholly new kind of task – decide to issue or not a “death warrant” to allow a drone missile strike against someone in Pakistan or Yemen, in advance – one of two things will happen.  Either the structure of rules takes front rank – the judge demands evidence in all the complexity of rules for domestic trials, for example, in which case the standard can never be met; this will presumably survive until enough people have been killed through failure to act.  Or else, faced with national security reality, the judge relaxes the various procedural constraints, reasoning quite correctly that they evolved for a different social ecology and cannot hold. 

But in so relaxing them, the judge has essentially altered his or her nature and role.  We no longer have a judge in whom we have faith because he or she is a person of integrity and probity, who reaches results based on good faith interpretation of existing rules; instead we have a judge whom we have entrusted with these tasks fundamentally because we think he or she is a person of integrity and probity.  That’s nothing to sneer at – quite the contrary – but the meaning of a federal judge in a constitutional system is more than that.  There’s a category mistake in running the two circumstances together – and the effort to extend one to the other is quite likely to alter the nature of the judging enterprise.  Not because the judge is less good or competent or anything – but because the nature of the thing to be judged is different, as a matter of social fact.

I have framed this in national security terms as an example.  It seems to me important in proposing something that has elements of a different “social fact” in proposing to extend the concepts of bankruptcy from traditional private bankruptcy plus municipalities, to states.  However “political” and politically fraught even a large-scale private bankruptcy is, to reconfigure the debtor-creditor relationships of a whole state, particularly a large one, inevitably involves large-scale social engineering.  It seems to me a political and social fact of the matter.  The risk might be that we ask bankruptcy judges to take on too much as a single task, because we task them with the state in toto.  It might begin to remind one uncomfortably of the 1970s and the move to task district courts with re-engineering other large public entities in the name of desegregation through busing.  It did not work out so well; the numbers of people involved, their opposed interests, their moves to alternatives to those envisioned by the courts and their planners … a whole raft of unintended consequences that propelled domestic neo-conservative (in its original domestic, not foreign policy, sense) skepticism aboutmassive social engineering for at least a generation. 

My initial, but revisable, conclusion is that even taking this caution into account, bankruptcy judges are best situated for the task.  Because the task is not going to go away – what can’t go on, won’t, in the famous expression – and bankruptcy judges dealing with a whole state is likely a far better outcome than piecemeal approaches, or political bailouts from Congress that cannot possibly bail out the existing promises, let alone provide any check on future unsustainable promises.  Someone will have to address something somehow.  But in designing how a system might work, anxious consideration of what might go wrong if this were considered not merely as bankruptcy, but in light of other social engineering projects involving public institutions – school desegregation or mental health deinstitutionalization or prison reform, etc. – from past decades would be a salutary exercise.  This is not a reason not to go forward – and please do not take me as saying that – but it is a reason not to be overly sanguine in saying that a state is just like a really, really, really giant corporation, or a really big municipality.  It’s not.

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