Many have expressed outrage that 73 American International Group (AIG) employees received $165 million in bonuses after the company received a $170 billion bailout package. President Barack Obama has urged Treasury Secretary Timothy Geithner to pursue all legal avenues in order to get the bonuses back. Congressional leaders have passed emergency legislation meant to tax the bonuses away. On March 19, 2009 the House passed a bill (HR 1586), by a margin of 328-93, which imposes a 90 percent tax on bonuses given to employees with family incomes above $250,000 at AIG and other companies (including Fannie Mae and Freddie Mac) that have received at least $5 billion in government bailout money. Top members of the Senate Finance Committee, Max Baucus and Charles Grassley, have introduced similar legislation which will impose a 35 percent tax on non-retention bonuses—year-end bonuses, performance bonuses, and others—if they exceed $50,000. The Baucus-Grassley proposal will be imposed both on the company and on the recipient of the bonus.²

Presentation by Bert Ely of a paper titled: "Bad Rules Produce Bad Outcomes: Underlying Public Policy Causes of the U.S. Financial Crisis."  The paper first discusses those aspects of behavioral economics that relate to the financial crisis.  The paper then discusses numerous public policy causes (eleven at last count) of the crisis and offers specific recommendations for ameliorating those causes.  Ely asserts that causes include the Internal Revenue Code, which incents overleveraging and undersaving; banking regulation, specifically regulatory capital requirements; fair-value accounting; the First Amendment protection the credit-rating agencies enjoy; the role the housing GSEs play in mortgage finance; mispriced deposit insurance; the overpromotion of home ownership (including criticism of CRA); the residual effects of Glass-Steagall; monetary policy; the existence of OTC credit-default swaps where there is no insurable interest; and FDIC regulations which discourage the use of covered bonds to finance fixed-rate mortgages and other long-life financial assets.  A panel of experts will respond to the presentation.

Article I of the Constitution provides that the legislative powers granted by the Constitution are vested in the Congress.  As a result, basic lawmaking policy decisions must be made by Congress and cannot be delegated either to an executive branch agency or to the private sector.  There must be an “intelligible principle” in the legislation to guide the actions of those who would implement the law.  But are there such restrictions on the power of the Treasury Secretary in deciding how to spend the bailout funds?

Another less noted constitutional problem surrounds actions by the Federal Reserve to spend trillions of dollars off budget, as it were.  The Fed’s quasi-governmental status is itself arguably an issue of some constitutional concern. Article I, section 8 of the Constitution specifies that Congress has the power to borrow money on the credit of the United States and to coin money and regulate the value thereof.  And Article I, section 9 expressly provides that “No Money shall be drawn from the Treasury, but on Consequence of Appropriations made by law.”  Should the Fed be able to spend money backed by the full faith and credit of the United States, without an appropriation from Congress?

Finally, there is the long-ignored requirement that Congress can spend tax revenues only for purposes of the “common defense” and “general welfare.”  While our common discourse today might view a massive bailout of the financial services industry (or of the automobile industry or the various states and cities) as serving the general welfare, did the founders have something distinctly different in mind when they chose that language, namely, to limit Congress’s spending power to matters of national welfare as opposed to regional or local welfare (or as opposed to the welfare of a particular sector of the economy)?

These matters warrant much greater attention and deliberation than they received at the time, but it is never too late to consider the constitutionality of actions by the government.

After discussing the extent to which credit risk has been nationalized directly or indirectly through loans or credit guarantees provided by various federal agencies (Treasury, the Fed, the FDIC, the GSEs, etc.), the panel will discuss specific options for denationalizing credit risk through the termination of credit guarantees, the run-off of lending by Treasury and the Fed, the privatization or liquidation of Fannie and Freddie, and regulatory and statutory changes which could spur increased saving and the resumption of lending by private-sector financial intermediaries in a manner that is much less likely to lead to another financial crisis.