The Heritage Foundation - Leadership for America

Rule of law? Who needs it!

That seemed to be the message of the Obama Administration as it seeks to maneuver around restrictions imposed by Congress on bailout recipients. As the Washington Post describes, the Administration is laundering money to bailout recipients by “set[ing] up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.”

The end result of this scheming is that measures like caps on executive pay and limits on bonuses simply don’t apply to businesses receiving bailout bucks. That assumes, of course, that this maneuvering is legal. The University of Pennsylvania’s David Zaring, who worked on related issues in the Department of Justice, think not: “They are trying to create a loophole to ignore Congress, and I think the courts will think that it’s ridiculous.”

The Administration’s gaming is driven by pragmatism, to be sure. Congress imposed a bunch of counterproductive, micromanaging requirements to go along with government dollars, and these terms are scaring participants away from the government’s economic rescue programs. And meddling with the internal affairs of private companies is almost always bad policy.

But the worse policy is this never-ending parade of bailouts, which has injected an enormous amount of uncertainty and risk into financial markets. As the government extends its reach into more sectors of the economy, the uncertainty only grows. The result is paralysis: It’s dangerous to make an investment when the government may sweep in tomorrow and upset everything.

Outright evisceration of the rule of law, even for what seem to be pragmatic reasons, is even more dangerous, because it throws every transaction, every investment, every deal into question. Doing business becomes more risky and far more expensive. That’s why countries that don’t respect the rule of law are, by and large, very poor. The link between rule of law and prosperity is strong.

In the United States, Congress writes the laws, and it is the executive branch’s duty to execute them, even if they’re dumb and counterproductive. It may be that this system of government, or any system of government, is simply ill-equipped to bailout and then manage large sectors of the private economy—politics and profits just don’t mix. In that case, we should stop doing bailouts and act to unwind those already done.

Attempting an end-run around our laws, however, is no solution at all. It only risks far greater failure.