Because AIG is a financial institution and the Fed, in the popular understanding of its function, “deals” with money and financial institutions, the matter, when noticed at all, has been given a short shrift. Baxter – recall he is the general counsel to the New York Fed – was not pushed on the subject in his testimony before a House Committee investigation of the crisis. And he used a lawyerly sleight of hand around the word “authorize” to skirt the issue:
On September 16, 2008, the Board of Governors authorized the New York Fed to lend up to $85 billion to AIG through a secured revolving credit facility.And then again:
In November 2008, the Board of Governors authorized the New York Fed to take a second step to alleviate these pressures.These statements are technically accurate, but they do not address the central point, which is: the Federal Reserve Board did not have the authority to authorize the New York Fed to bail out AIG.
This point is critical. The Board of Governors of the Federal Reserve is a creature of statute. It can engage only in activities for which it is specifically authorized and nothing else.
The Board, as one example, does not have the authority to have someone executed.
The Board, as another example, does not have the authority to grant Bernanke the right to ignore traffic laws.
Likewise, it does not have the authority to authorize the New York Fed to pay the outstanding balance on my mortgage.
And it does not have the authority to authorize the New York Fed to pay $180 billion to AIG and its various counterparties.
Yet, that is precisely what it did. The justification, as per Counselor Baxter, was preventing a catastrophic systemic collapse:
The policy decision to authorize a loan to AIG was a difficult one ... Nonetheless, the potentially far-reaching consequences of an AIG bankruptcy compelled policymakers to take affirmative action ... Last month, Chairman Bernanke observed that the Federal Reserve did not lend support to AIG for the Fed’s own benefit, “because it obviously has hurt the Federal Reserve in the public’s view. We did it because we felt that there was no other way to avoid what [many] have called the risk of a catastrophic collapse of the financial system.”You recognize the argument. It is Jack Bauer’s: had to torture the man, else Los Angeles would have been destroyed. (Just ask Antonin Scalia!)
The Fed, likewise, had to do it to save the system. There was no self-interest. Only selfless service, in consequence of which if Bernanke and the Fed are criticized, so be it. That is the fate of the true patriots. Just ask Jack Ryan!
This is the perverted reincarnation of the “general good” idea that the French Materialism in the West – and long before them, Sufis in the East – thought was the driver and the guiding principle of morality.
In its debased reincarnation, the greater good is now the least harm. It is no longer the question of bringing the greatest good to the greatest number of people but minimizing the damage from the catastrophic effects of some crisis. Crisis is the starting point and the driver of the narrative. Like bad weather in the opening scene of a play, it is given and must be accepted as such. And it sets the stage for what is to follow.
But the crises we are discussing are man-made. They are different from floods and hurricanes because they develop from, and within, the social system. By “develop" I mean that crises come about as a result of the logical progression of the events within a “live” system; the social body produces them the way the biological body produces cancer. They are the materialization of internal growth gone bad, the consequence of the body having turned against itself.
Countering crises, then, requires interfering with – disrupting, destroying and weakening – the regular functioning of the system. Because a civil society functions within the law and is sustained by it, it follows that countering social crises necessitates breaking the laws that hold the system in place. In this way, through crises, the focal point of the coming together of all internal contradictions of a system, we arrive at the final contradiction where the attempt to save the system from immediate collapse weakens its foundation and undermines its long term survivability. It is the old “destroying the village to save it” that has come back to haunt and taunt the inventor, not that a functionary like Baxter would know or even suspect that.
In speaking of the breakdown of laws, it is clear that I am not talking about common lawbreaking by ordinary citizens or the usurping of dictatorial powers by this or that strongmen. What I am discussing here is the dislocation of the legal system in its entirety, the wholesale unraveling of the Anglo-Saxon jurisprudence.
The chief characteristic of this phenomenon is that it is institutional and system-wide and yet, not organized. If it were organized, in the sense of being consciously directed from a political command center, it would be a revolution. But it takes place through sporadic events with no obvious connection to one another. Torturing a suspect to learn of the location of a “ticking bomb”, dismissing the Magna Carta as “quaint”, dispensing $180 billion without having the authority to do it – such are the instances of manifestations of a breakdown.
(Lawbreaking is an anti-social act, which is why the functionaries who are attracted to process are stigmatized. The public correctly recognizes them for the doers of the dirty work that they are. Even Hollywood and TV programs which must sell these new elements to the public must relegate them to a different, "anti-hero" category, separate from the traditional heroes.)
On the surface, these matters seem to be removed from finance. They are more in the realm of politics, social science and national security. But facts are not isolated to events.
In Decline of the West, Spangler writes: “What concerns us is not what the historical facts which appear at this or that time are, per se, but what they signify, what they point to, by appearing.”
I suggest we need to go even further. The important point is not what historical facts point to by appearing but why they appear in the first place. If that question is answered, the question of where the facts point to will be self-evident.
The culprit in the breakdown of the law is finance capital. Because it can no longer function – i.e., generate profit – within the historically established legal framework, it moves to dismantle the “whole intellectual edifice” in the attempt to create a "living space" for itself.
I am not overstating the case.
Observe this ruling by the three-judge panel of the United States Court of Appeals for the District of Columbia Circuit that found, according to the New York Times, the presidential war power to detain those suspected of terrorism [without trial] is not limited even by international law of war. Judge Janice Rogers Brown wrote: “War is a challenge to law, and the law must adjust.”
The law must adjust.
If that statement strikes you as nothing particularly out of the ordinary, you, too, have been softened by the assault of finance capital.
By way of comparison, look at this ruling of the Supreme Court in the 1866 in the Ex Part Milligan case, where a civilian detained during the Civil War had been denied a civilian trial. The justices of the Supreme Court described the rules applying to men in the military and went on to add:
All other persons, citizens of states where the courts are open, if charged with crime, are guaranteed the inestimable privilege of trial by jury. This privilege is a vital principle, underlying the whole administration of criminal justice; it is not held by sufferance, and cannot be frittered away on any plea of state or political necessity. When peace prevails, and the authority of the government is undisputed, there is no difficulty of preserving the safeguards of liberty; for the ordinary modes of trial are never neglected, and no one wishes it otherwise; but if society is disturbed by civil commotion-if the passions of men are aroused and the restraints of law weakened, if not disregarded- these safeguards need, and should receive, the watchful care of those trusted with the guardianship of the Constitution and laws. In no other way can we transmit to posterity unimpaired the blessings of liberty, consecrated by the sacrifices of the Revolution.
Comparing the two rules, one is compelled to ask: What changed in the past 150 years to give rise to these diametrically opposite views of the U.S. Constitution by professional judges?
The answer is that the position of civil society in the timeline of history changed. One ruling belongs to the era of construction and ascent, when immediately after the Civil War, the U.S. was poised to become a great industrial power.
The other belongs to the era of destruction and descent, where the established business models and economic theories and even the moral and ethical standards are no longer functional. So, the “system” in systemic risk is the civil society itself. Even those without a theoretical clue can somehow sense it. So, for its review of Paulson’s book, The Wall Street Journal chose the heading Present at the Destruction, the exact wording that I had used for one of the postings on this blog in a different context.
The unraveling of the system is a process. The Supreme Court justices in the Ex Part Milligan case understood this when they wrote about “transmitting to posterity ... the blessings of liberty”.
When the legal foundation of a system begins to decay, the transmission to posterity of the blessing of liberty slows down. This, the vile usurer of the Merchant of Venice understood better than all the Supreme Court justices and moral philosophers who were to follow him:
And by our holy Sabbath have I sworn
To have the due and forfeit of my bond
If you deny it, let the danger light
Upon your charter and your city’s freedom
If you deny me, fie upon your law!
There is no force in the decrees of Venice.
Look how modern his use of the word “freedom” is. He uses it in the context of enforcing a bond’s covenant. The Anglo-Saxon jurisprudence, I pointed out in Vol. 3 of Speculative Capital, has its foundation in “the commercial consideration of the early stages of capitalism in England. So the system had to be flexible to allow for commercial eventualities”.
When even this flexible system gives way under the onslaught of finance capital, more than the legal and financial system is in jeopardy: it is the social system that encompasses them.
That is the meaning of the systemic risk: the social system being unable to reproduce itself.