I just finished Jane Mayer's The Dark Side. The sub title of the book is polemic, but basically it is a recent journalistic history of the internal legal battles within the White House and Pentagon over what was legally permissible during interrogation. The issue for the United States was that it had always abided by the Geneva Conventions, and the military had procedures and mechanisms to divide civilians out from soldiers, saboteurs and terrorists. This was blown away by Cheney's and Bush's 'get tough on terror' policies that enabled torture.

The legal mechanism for destroying all executive legal precedent for the Geneva Conventions was David Addingtons doctrinaire and political approach to the formerly independent OLC. The Office of Legal Counsel. It is a small legal department in the Executive which acts like a mini-supreme court in the Executive an writes memos and guidance on what is constitutionally and legally permissible for the Executive to do.

Like all the White House and Executive under the Bush Administration this independent office was politicized. John Yoo being the main perpetrator of giving Addington and Cheney exactly what they wanted in terms of legal advice. To make it worse, these legal memos were then made secret, so that the CIA and military had no real legal guidance over what they could do. Instead they were given legal advice such as 'take the gloves off' from the likes of Rumsfield, Tenet and Cheney.

To the FBI's credit under Mueller, they refused to torture. But the CIA appeared to be willing to do it and take it to abnormal lengths. Renditions were popular - they did exist during the Clinton Administration too - and suspects, real and imaginary, were sent to hellholes in Syria, Poland, Afghanistan and tortured.

The policy did not change despite the Supreme Court ruling against the legal policies of the Bush Administration. More independent lawyers such as Comey and Goldsmith fought against the secret and legal memos, but in each case where Cheney and Addington came up against people acting in conscience they replaced the person - usually when they resigned - with someone politically pliable. Gonzalez and Bradbury.

The Bush Administration proved it was not particularly good at governance in multiple areas, the war on terror was no exception. The Bush Administration at its highest levels, including the President, Vice President, Secretary of Defense, the head of the CIA, the Attorney General, etc all embraced the policies that the United States will torture suspects for information and will not have habeas corpus available to them. The latter a simple political right from the 13thC, the former supposedly banned from civil and moral society.

It is sad the United States willingly and openly stooped so low. Worse, it did it all for nothing. Torture did not work, there was no good information from it, and it made many people who should have been publicly prosecuted in a court of law for their crimes against humanity impossible to take before a court because they had been tortured. It was a catastrophic failure of judgment, morality and governance by the Bush Administration.

One of the failures of regulation in the Bush era has been that it over-looked fraud. It appears that it enabled fraud as well:

The backdating let IndyMac restore its risk-based capital ratio to the 10 percent "well-capitalized" minimum threshold in the first quarter. It also enabled the lender to avoid complying with a law that requires banks to get an FDIC waiver to accept brokered deposits

According to the article the Office of Thrift Supervision allowed other companies to do it as well. So rather being regulatory oversight, they enabled fraud to occur.

In responsible government heads are supposed to roll for incompetence, questionable decision making and for flat out disregard of legal process. There are a lot of people in the Bush Administration that should be resigning in shame. It is not happening however, given how incompetence and failure has been rewarded under Bush, this is not a surprise. Pretty sad that government has sunk to that low.

The financial sector of the economy has done pretty well for itself over the last ten years with the packaging of debt in multiple ways that made it more affordable for consumers. That is at an end now. Arnold Kling writes:

For all of the Depression Mania, there is a lot of the U.S. economy that does not have to shrink. Manufacturing is pretty lean to begin with. Housing construction is already much lower than it has been in years. Unlike the 1930's, we have some very big sectors (health care, education, other government employment) that are unlikely to develop massive layoffs. The one sector that definitely needs to contract is the financial sector.

Historically, the financial sector is larger now than it was twenty years ago. Yves Smith notes:

In 1980, financial firms accounted for 8% of S&P; earnings. During the peak of our last stock market cycle, their profits were over 40% of the total. ... There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system has to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated.

The problem with all the bail-outs and TARP money being thrown around is that ineffective and unproductive banks are being maintained when they should not be. Despite all the government backed guarantees we don't really know who the healthy banks are.

The financial organizations which stayed out of the CDO mess should now be gorging on the carcasses of the failed banks/insurance/etc and buying up their profitable businesses for pennies on the dollar. But this isn't happening because of the government interventions.

Public money is propping up a fat, bloated, unproductive and unsustainable industry that should be somewhere from half to a quarter of the size it is now.

Governance matters, and bad governance has a habit of sticking around despite the best efforts to remove its effects. Paul Fritjers writes:

The structures now being built in the US or Europe (direct interference) to regulate the financial markets may be with us much longer than we would like.

State of exception governance or crisis governance is not easily eradicated. Australia is stuck with the legislation form the exception governance of the latter Howard years such as the Northern Territory intervention and the Migration Act Amendment. The linger as tools future national governments can use to act arbitrarily.

The same with the Bush Administration's approach to this financial crisis, the entirety of it is being handled in the US Treasury as an executive issue. As Paul Fritjers noted the policy from the US Executive is direct interference and the redistribution of wealth from taxpayers to the financial and banking industries.

That legislation and policy will linger long beyond this crisis and we will see future economic bumps dealt with in socialistic manners rather than letting the weak banks fail and the strong ones snap them up and take them over for pennies on the dollar. A close relationaship with the executive has now become an essential part of the financial industry's wealth and ongoing health. They now have a political face as well as an economic one.

Marc Faber: "I think gold will be a relatively good investment under any kind of scenario until the US government bans the ownership of Gold in the United States. They are very good at changing the rules of the game - now banning short sales [of financial and other US equities]."

There is a loss of faith in government that seems to be spreading. For instance John Hempton: "Creditors now face confiscation of their rights by the US Government without oversight or audit or even process. ... The trust needed to make capitalism work has been removed."

And the Cunning Realist: "If all that proves insufficient, expect literally anything: national bank holidays, market shutdowns, restrictions on gold ownership, and capital controls."

It is doom and gloomish but the Bush Administration has governed on exception and as if the constitution, conventions and political mores do not apply to them. Governance has been particularly bad under the Bush Administration for a multitude of reasons; of which this capacity to act arbitrarily is a significant one.

The Bush Administration is the worst in US history in my opinion. It lacks legitimacy despite being backed by the democratic process. It is a shame, the US is a wonderfully politically spry and capable country which deserves better.

Bush has proven excellent at getting elected but he, and his administration, couldn't govern their way out of a wet paper bag.

The idea of specialism takes into account that there will be information asymmetry. The specialist will be able to understand more in their field than a generalist, plus the specialist will be able to make sense of more information relating to that speciality that a generalist may miss, or not understand.

That is all fine but it breaks down in democratic politics as the generalists get a say - even if indirectly - and since the majority determines who is in government, not to mention what constitutes social stability, specialism needs to walk a fine line in explaining actions to the general population. So when you see legislation that contains language like this:

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency

It is not good. Not only is it a blank check, and not only does it make no attempt to explain the treasuries actions or put it under scrutiny, it is also classic state of exception stuff; where the legislative aids the executive in subverting the doctrine of judicial review. This means law becomes politics and the judicial has to fight to maintain its relevancy. It is not good.

We are seeing subsidy after subsidy of taxpayer money being thrown to the financial sector in what is a trillion dollar wealth transfer from the American public to those that have poor business acumen. This is the worst of all worlds. The failed businesses are being propped up, the US government is buying junk at market price without equity and when everyone knows it is worth pennies ... what a failure of government.

It is like New Orleans and Katrina all over again; just this time in the financial sector and not the emergency response arm of the Administration.

We are seeing arguments that it is the end of neo-liberalism, but really it should be an argument for the end of bad governance. Apparently there were regulatory mechanisms in place to stop the over the top leveraging of the firms like Lehmann Brothers, but that was foregone - due to bad governance.

So incompetent it is scary, the US fed has allowed banks to fund their liabilities in subsidiaries with depositors funds. From naked capitalism:

"Note that many banking experts, post the S&L; crisis and now, recommend the reverse, "narrow banking", which requires banks to invest depositors' funds only in the very safest assets. This is the exact opposite of the sort of regulatory measures needed to improve the health of the banking system. Expediency trumps soundness.

What a horribly useless Administration and Federal Reserve. If this mess wasn't picked up during Greenspan's early tenure and the Clinton Administration, then it should have when the Bush Administration came into office. The political and fiscal incompetence is seeping into criminal - especially when it is other people's money such as taxpayers and depositors. (more)

Naked Capitalism cynically argues that to maintain the pretense of the United States being free market a bank must be allowed to fail - and soon. This will offset the lending window the Federal Reserve established and the using of approximately five trillion of US taxpayer money to capitalise Fannie Mae and Freddie Mac since they were on the brink of insolvency.

After Freddie and Fannie, Paulson cannot be perceived to be rescuing another firm, particularly a private company that plays no special role (as far as most people are concerned) in things they care about, like housing. Unlike Bear, Lehman is not a big credit default swaps protection writer. That was the exposure that led the powers that be to worry about a systemic failure. Even though Bear and Lehman are similar in size, their business mix differs in ways that makes Lehman dispensable. In fact, Paulson almost needs to let a financial player fail to prove that he is not a toady of the industry.

So Lehman is the most likely candidate for being allowed to fail. The free marketers in the media and administration can point to Lehman and say, "See, the market works, banks can and do fail. We don't bail them out." Except of course when they do. I suspect Yves Smith will be correct about the politics surrounding the free market pretense.