« Puerto Rican Debt and Force Majeure | Main | From the Vault: Lee Buchheit on "How to Restructure Greek Debt" Videos »

The Bailout Cronyism and Corruption Have Already Begun

posted by Adam Levitin

We need to bail out the economy, and it's not going to be cheap. The government is going to have to carry the economy for 18-24 months. There's no way of avoiding that. But we don't need to be stupid or corrupt about the way we do it. And stupidity and corruption is unfortunately so hardwired into the Trump administration's DNA that it is being reflected in virtually every proposal out of the administration. 

Start with Treasury's ill-advised proposal to send checks out to every man, woman, and child in the United States. Beside being operationally difficult and misdirecting much of the aid, it is first and foremost a political move. These are serious times. They call for serious responses, not political maneuvers.  

And now, we learn that Treasury Secretary Steven Mnuchin is proposing turning to Goldman Sachs executives to provide assistance in administering the bailout. It's hard to think of anything more politically tone-deaf other than perhaps delegating the bailout to Wells Fargo.

More importantly, Goldman is objectively not the right institution to help. Goldman does virtually no small business lending, and their consumer lending is a small portfolio of loans to affluent individuals. It’s not even at the top of the bracket in commercial lending generally. Goldman is primarily an investment bank that does M&A and securities underwriting; they're not known as commercial bankers. The challenges in the bailout response are restructuring and commercial banking issues, including a lot of operational problems. That's just not where Goldman's strengths lie. So why Goldman? Just more cronyism.

This should be a bright flag to ever member of Congress that Steven Mnuchin cannot be trusted to lead the bailout efforts. If he does, we're looking at something a lot worse than HAMP 2.0. A key part of any bailout is going to be its governance. There's inevitably going to be a fair amount of discretion involved in the bailout efforts. We need the bailout to be led by serious people. Sadly, there are not many serious people in any position of authority in the Trump administration. That suggests that Congress needs to come up with a governance structure for any bailout funds that is new and independent of the Trump administration.

I don't mean by this that it needs to be a bunch of people who share my political views. There are plenty of competent and serious people from both parties who aren't in the Trump administration. Hopefully this is a time that Senator McConnell recognizes that he can't turn the keys over the Trumpists; the effectiveness of a bailout is going to depend on whether Congress gets the governance structure right. We need to take a serious problem serious and not see it as an opportunity for self-enrichment and political gain. 



Don't get me wrong. I am anything but pro-crony and a critic-of-public-record in my state. Texas government in all branches of state government (including judiciary) is replete with cronies, but Governor Abbott is now getting good and necessary messages out to the public, and the SCOTX has imposed an eviction moratorium (with some exceptions). That said, kindly permit me to take issue ...


Just because something is operationally difficult doesn’t mean it SHOULD NOT be done. Much less that it MUST NOT be done. The question, much rather, is whether there are any better alternatives, and how to make do with limited resources, if they are indeed limited.

It’s clear now that this is true of health care resources (incl. tests, respirators, supplies and personnel), but not of money, which is a societally agreed-upon and governmentally-enforced fiction. Let's face it, money is created by governments, and no longer dependent on mining and coining of metal, or even on cotton-reinforced paper. It's much more easily created--not even manufactured--than simple commodity items such gloves and face shields, not to mentioned trained doctors and nurses. And much faster, if need be. By fiat and ex e-machina, if only the political will can be mustered.

While it may be debatable whether a spigot-opening “whatever it takes” approach is the way to go--as espoused by some political leaders in Europe--it is hardly debatable that the spread of infections should be slowed and reduced.

Rather than throwing in the zinger IT’S THE VIRUS, STUPID, into the academic discourse, let me politely and constructively suggest that the immediate challenge is the containment of the ongoing epidemic.


It is now clear that the U.S. is unprepared to meet the surge in demand for acute medical care, and the fact that different states are engaging in a bidding war is disconcerting, but predicable, absent federal government intervention in the market (short of command and control of industry). - Officially practiced price gauging?

The only other variable in the causal chain of the disaster is behavior modification at the mass level to contain the spread. That poses a challenge in terms of political communication and persuasion (short of draconian measures of compulsion such as mandatory shutdowns and enforced quarantines). Alas, this even greater imperative of achieving behavioral modification at the mass level continues to be mismanaged.


Unfortunately, President Trump is personally associated with the message about social distancing and such, rather than just the CDC or some amiable not-obviously political doctor or Surgeon General.

People who hate President Trump will have an aversion to follow this recommendations and advice EVEN IF THE CONTENT OF THE MESSAGE IS SOUND and even if the MESSAGE does reflect the best approach as determined by WHO and a bevy on US-based epidemiological and medical experts.

It seems to me that the same dynamic may be at work when well-meaning academics oppose direct payments to those most badly affected (or everybody), on the ground that such payments cannot be targeted precisely enough.

So what?

What’s the alternative? Is there ever a “perfect” policy? Not to mention in times of unprecedented crisis? And what available alternative is politically viable when Republicans in the Senate have to approve it?


An eviction moratorium can obviously be an effective policy measure for apartment dwellers in addition to mortgage-paying home owners (and can be implemented locally), but it’s not a panacea: First, it is only a stop-gap (the payment obligation is not wiped out); Second, it does not put food on the table in the interim; nor does it help with insurance premium payments and other recurring expenses; at least not in the case of those who have gone from paycheck-to-paycheck to zero-income status.

Bottom line: A particular (partial) policy remedy should not be rejected out of hand -- much less called STUPID -- just because it has Trump support, regardless of how Trump would score on an IQ test.

A particular idea or proposal (here a partial policy remedy or measure) should be evaluated on its own merits, based on clearly identified normative and empirical criteria, and should also take into consideration the priority order of normative values, and the urgency of the need to do something, compared to nonaction.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.