Is Paulson's bailout bill unconstitutional?

The law, lawyers, and the court.
Sept. 24 2008 1:43 PM

Wall Street Strip

Is Paulson's bailout bill unconstitutional?

Read more about Wall Street's ongoing crisis. 

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Secretary Paulson's proposal doesn't mess with habeas corpus. But its breathtaking sweep would prevent a litigant from raising constitutional objections to his actions. You could imagine, for example, a suit claiming that the Treasury Department had engaged in a taking of property without just compensation or had deprived people of property without due process of law (neither is allowed under the Fifth Amendment). Or a litigant could sue Treasury for acting so arbitrarily or irrationally that his actions violated the 14th Amendment's Equal Protection Clause.

In contrast, Sen. Dodd's proposal includes a well-balanced provision for judicial review. His proposal would subject the Treasury secretary to the normal standards customary in American administrative law. Courts would not be permitted to substitute their judgment for that of the secretary—that's the part about how Treasury would only be on the hook for a decision that was arbitrary, capricious, or an abuse of discretion. But courts could be called upon to police such an abuse or a departure from the rule of law. That, of course, is their traditional role.

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Those who advocate for a bailout this week often conjure the dismal economic history of the Great Depression. There's an apt legal parallel here as well. Many of the early laws passed at the behest of the Roosevelt administration during the New Deal were struck down by the Supreme Court precisely because they violated norms of checks and balances. While we have come to caricature those Supreme Court decisions as the shortsighted backlash of nine old curmudgeons who reflexively opposed the socialistic tendencies of the New Deal, perhaps it is worth remembering that the constitutional principles they invoked were grounded in the elemental balance struck by the framers. These principles are that Congress should pass laws based on intelligible policy judgments and not (literally) pass the buck to the executive branch, that executive-branch officials should administer laws subject to the guidance of Congress, and that courts exist to review the legitimacy of both.

I do not suggest that it is by any means certain that a court would strike down the Paulson bill as it's now written. But it is certain that this bill is in powerful tension with our system of checks and balances and that its constitutionality would be subject to grave doubt. Why take a chance? It was a lack of transparency and accountability that created the crisis in credit markets. That was itself a departure from the wisdom of the framers. Let's not depart again.

Rod Smolla is dean and Steinheimer professor at the Washington and Lee University School of Law.