Friday, January 25, 2008

Feds Preempted State Efforts To . . . Er, Preempt Subprime Mortgage Crisis

So says Nicholas Bagley at Slate. States like Georgia, New Mexico, and New York passed legislation that would have subdued the market in subprime mortgages, but a federal agency, the Office of the Comptroller of the Currency, which apparently draws its operating budgets from banks — and is therefore, in Bagley's eyes, unduly beholden to their interests — wrote regulations preempting these laws.

I'm not sure what to take from this.

There's much to be said for the states serving as "laboratories of democracy," that is, for state governments enjoying the authority to test out legislative solutions within their own borders. Varying state laws will produce varying results that can in turn inform public policy at the national level — or even among the states, as they look to one another for effective solutions to social ills. Massachusetts, for example, is a "laboratory" for mandatory-subscription universal health care. And we'll see how it goes. California hopes to impose its own program to alleviate or limit global warming. If the legislation isn't held preempted by federal law, we'll see where that goes, too.

The state-as-laboratory theory can't be absolute, however, because if 50 states pass 50 laws, companies that do business across the nation have to answer to 50 different legal standards, some of which may impose conflicting obligations. So there is a virtue as well to writing laws at the national level.

That's the backdrop to all this, and I suppose Bagley would conclude that the subprime crisis supplies a classic example of why certain matters ought to be left to the states. I've argued that this is all well and good, but that state governments have atrophied over the years — principally because all the action is happening at the federal level. State legislators are hacks; if they aren't, they're treating their jobs as stepping stones to something better. And legislation isn't the beginning and end of the matter: state legislation is interpreted and applied in state courts, and please, oh please don't ever get me started on the quality and dedication of state court judges. So Mr. Bagley will have to pardon my cynicism on this score: he himself writes that the AARP — a lobbying group — basically wrote the pioneering subprime regulations in Georgia. In retrospect, the AARP and the legislators it owns in Georgia (if they're writing laws there, just imagine who's running the show in Florida) may have had the right answer. But it's not the AARP's job to consider the long-term effects of subprime mortgages on the larger economy and the global financial markets, is it? My guess is Georgia got it right, in retrospect and by accident. This doesn't make me more confident in the ability of states to solve the nation's problems — except that maybe because there are so many of them, it's statistically more likely that one or more might stumble upon a right answer. But I suppose it's encouraging that at least three other states adopted Georgia's solution. Color me equivocal, then.

Which brings us to the federal government. Another "preemptive" strike, another disaster. Score it! Clearly it's far from optimal to have bankers so peculiarly positioned to dictate federal preemption legislation. One would hope the OCC would be more independent than it is. And there's the obvious irony that the OCC apparently made its case to The Federalist Society. One wonders how the OCC's position was received there: did it meet catcalls from the purported "states rights" folk in the Society, or did the Federalists nod agreeably, understanding as all good conservatives do that what is good for the short-term interest of the nation's banks must be good for America?