Did the Auto Bailouts Break the Constitution?

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GM IPO looks like a success even if it broke the law (Shannon Stapleton/REUTERS)

A new report says the bailout of GM and Chrysler was illegal and may have broken the constitution. Does it matter? Maybe.

The question over the auto bailout’s legality is one of those debates about the financial crisis and the government’s response that keeps coming up. The point is effectively moot for now. The auto bailout is a done deal. Last year, the Supreme Court decided not to hear the case regarding Chrysler and to let the government sponsored reorganization of that company and sale go through. Hopefully, we won’t have to debate whether we need to bail out an auto firm or any other for some time. Yet, the constitutionality may still matter. Here’s why:

The new look at the auto bailout and its legality come from Dennis Berman at the Wall Street Journal. In his weekly column, Berman talked to a number of constitutional scholars to ask them whether they thought the bailouts, both of the banks and the car companies was legal. Berman gives the impression that it is clear on the part of academics. The bank bailout: Thumbs Up. The auto bailout: Thumbs Down. The debate centers around the wording of the legislation that gave birth to TARP, which was used to bail out both the banks and the car companies. From Berman:

That assistance was originally designated by Congress to go to “financial institutions” as “established and regulated” under U.S. law. The law makes express mention of banks, credit unions, insurers and broker-dealers.

It doesn’t, however, come close to naming industrial companies as beneficiaries. And that appeared to make it a different matter for Prof. Metzger, who wondered aloud about the legality of instances when “the executive branch engages in aggressive interpretation of statutory authority in ways that Congress prohibited.”

Prof. Prakash said the auto bailouts were illegal, arguing that the Bush and Obama administrations said TARP didn’t cover autos “until they decided they did.” It is one thing to broadly interpret an emergency, another to violate specific language.

Clear cut, yes? Actually, no. Berman seems to ignore that others before him have looked into the legality of the auto bailout and come up with a more mixed conclusion. The Congressional Oversight Panel did a report more than a year ago about in September 2009 on the auto bailout and looked into the same issue. In that report, the COP said that earlier cases have given the President broad leeway in interpreting laws, especially when it comes to the government’s role in the economy:

In such circumstances, the court noted it had “long recognized that considerable weight should be accorded to an executive department‟s construction of a statutory scheme it is entrusted to administer, and the principle of deference to administrative interpretations.”338 This deference, known now as “Chevron deference,” reflects the judiciary‟s respect for the specialized and superior skill and knowledge that an executive agency brings to its area of expertise. A court will therefore honor an agency‟s interpretation of such a statute as long as the interpretationrepresents a reasonable accommodation of conflicting policies that were committed to the agency‟s care by the statute,” and will not disturb such interpretation “unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.”

So there is at least some argument that the auto bailout was legal. Here’s the problem, though. This debate misses the point, and I am afraid takes away from the real question about the bailouts. Should the government in times of economic turmoil step in to support the nation’s largest banks and companies? I suspect Berman and others who keep bringing up this question of whether the bailouts were legal believe the government should always stay out of the private sector. So they are going to use whatever argument they can find to make the bailouts look wrong. But that distracts people from the real issue.

The fact is the bailouts worked and appear to have worked well. The economy pulled out of recession, and is, slowly, recovering. Tens of thousands of jobs were saved in the banking and auto industry. GM has gone public again, and its stock is doing well. Yesterday, the Treasury finally exited its investment in Citigroup with an amazing $12 billion gain. Even AIG is looking like it is worth something again. In fact, if anything, the government should have done more and not less. If it had completely taken over some of the banks, and fully scrubbed their books of bad loans, then maybe the financial sector would be in a better position to make more loans. Saying the bailouts were unconstitutional is may be an artful way to cut off the debate about how government should react to an economic crisis, but it misses the real debate. Probably because the debate over whether the bailouts worked isn’t really a debate anymore.

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