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To the Edge

Legality, Legitimacy, and the Responses to the 2008 Financial Crisis


Philip A. Wallach


Washington: Brookings Institution Press, 2015

Paperback. x+319 p. ISBN 978-0815726234. $34


Reviewed by Alicia-Dorothy Mornington

Université Paris 1 - Panthéon Sorbonne




The rule of law is one of the most fundamental tenets of democracy. However, in times of crisis, governments often resort to discretionary measures. Such was the case in the U.S. when confronted to the 2008 economic crisis. In theory, the federal state should have stayed out of the banks’ discomfiture, yet in practice million-dollar bailouts were handed out, thereby bypassing constitutional law on financial independence.

Keeping investment banks afloat generated two types of polar opposite reactions – it was either perceived as an abuse of public trust and an unprecedented expansion of federal power or as a necessary measure to maintain financial stability. Wallach sets out to understand the impact of these policies in terms of legitimacy. It is not simply a question of whether the bailouts were strictly speaking legal, but whether the public and elites perceived them as legitimate.

Wallach takes legitimacy and the rule of law at heart. He describes his understanding of legitimacy as being non-normative, he takes it to be a positive social fact. When legitimacy of governmental action is tarnished by measures the public does not understand, the entire political system is at threat, which is why it is essential to strengthen perceived legitimacy. His object is that of the 2008 crisis but in fact his analysis goes much further than this. His book is animated by a staunch rejection of arbitrary rule. The challenge is, according to him, to reject Carl Schmitt’s thesis which has it that democracies, because of their adherence to the rule of law, will lack sufficient flexibility to react fast enough in times of crisis. In times of need, democratic governments should not bypass the law, argues Wallach. He makes a deontological claim as well a consequentialist one: arbitrariness backfires, as it fuels contestation. Wallach’s goal is to provide a blueprint for ensuring the preservation of the legitimacy. The author’s enterprise is not simply explanatory, he wishes to offer a way out of the classical problem of arbitrariness.

Wallach starts by providing a detailed account of how the Bush and Obama administrations reacted to Wall Street’s turmoil in chapters 3 to 6. He puts them on a continuum of interventionism and unplanned measures taken without attempting to legitimise them in the eye of the public. He uses the concept of ‘adhocracy’ to describe the state’s unpredictable pattern of response: unelected officials proceeding ad hoc, providing hurried responses based on obscure legal sources. There was no planned coherent reaction but only haphazard answers to complex legal challenges posed by the financial system’s ruin. Wallach is well documented and offers a persuasive presentation of the facts. He takes the reader through the initial bailout of investment banks and the Federal Reserve’s unparalleled interventionism. A question posed is whether the subsequent success of this ‘adhocracy’ (the estimated costs of the crisis were averted and much quicker than expected, too) in itself sufficed to legitimise it. The author’s answer is negative, because the public did not perceive it as such. The banks were saved, the financial system kept afloat, but perception of governmental action irremediably damaged. Wallach seeks to offer policymakers a model for legitimacy building that takes into account blunders made by the Bush and Obama administrations.

The most interesting part of the book can be found in chapters 6 and 7, where he offers propositions to foster legitimacy in times of crisis. He discusses the idea that government accountability on how taxpayers’ money is spent should be pushed for. As Wallach shows though, this is unsatisfying. There were accountability mechanisms at play, monitoring how much the bailouts cost. Yet opponents to the government’s interventionism still debated the numbers. The real issue is therefore rooted in legitimacy building, not accountability mechanisms which do not satisfy those who already distrust the government.

In chapter 7, Wallach reminds the reader how the Tea Party grew out of protest against the Obama administration’s plan to help underwater mortgage holders [187]. The movement muted into a national force, able to challenge the GOP in a series of primary victories and influencing the party’s doctrine. He also mentions the Occupy Wall Street movement and how it emerged from this legitimacy deficit. Wallach forces the reader to recognize the centrality of the question of legitimacy with regard to the 2008 crisis on the American political spectrum, given that it reshuffled the cards and created new party lines.

Wallach offers several pieces of policy advice in his conclusion: increasing transparency, involving Congress more, creating a ‘slush fund’ and giving the Treasury absolute discretion on how to use it, but requiring near-instantaneous reporting on how it would be used. Creating an emergency fund for banks facing meltdown makes consequentialist sense – there is a need for a practical and quick response. Yet we may ask why the question is not how to find ways to prevent such financial catastrophes in the first place. Pushing for stricter financial accountability and reforming banking methods could help prevent or minimize such crisis. Even if this were not the case, surely discussing the financial sector’s responsibility in this fiasco alongside that of the government’s is necessary. Yet Wallach is not interested in this discussion. He reasons ex post facto and never seems to question what caused the crisis. Wallach would retort that this is simply not the object of his book, and indeed much has already been said about reforming the financial sector since the crisis, but very little on the way it affected the perception of government legitimacy. This is why this book matters.

Unfortunately, Wallach rejoices too soon. The response to the crisis was indeed perceived as illegitimate. This is deeply worrying to him but, writing in 2014, he states that he is relieved its impact was so limited. In the wake of the populist turn in the 2016 presidential elections, his words have a chilling force: ‘the lack of attention to legitimation, while worrying in many ways, has not led to a broader social destabilization or a full-blown rejection of the government’s legitimacy – let alone to the rise of a charismatic leader claiming to speak on behalf of the whole people’ [41]. The presidential primaries have been marred by accusations against the so-called establishment both from the Democrat and Republican camps, with candidates claiming to embody the voice of the people against the corrupt financial sector and political class. Wallach’s words have a chilling echo. The recent populist turn unfortunately proves his point – legitimacy matters greatly and has been overlooked for far too long.


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