Subsidiarity and the Financial Crisis

Today's article of the day on the First Things "On the Square" site is my essay "Subsidiarity and the Financial Crisis." In it, I discuss one of the aspects of the debate about legislative responses to the financial crisis that is not receiving much attention in the press coverage of the financial crisis -- federal preemption of state consumer protection laws.  However, preemption questions are at issue in an important case currently before the Supreme Court, Cuomo v. Clearinghouse, and are one of the reasons that the two Republican members of the Congressional Oversight Panel on Regulatory Reform withheld their support from the Panel's recent Special Report on Regulatory Reform, which recommended abolishing federal preemption.  [Incidentally, I highly recommend that report for a succinct explanation of the regulatory failures leading to the current crisis; the dissenting minority includes its own report, providing a nice set of perspectives on these issues.]

In my First Things essay, I argue that the principles of subsidiarity and solidarity might be useful in analyzing this issue.  I write:

In applying the principle of subsidiarity, we are asked to give preference to governance at the most local level at which a government’s purposes can be achieved. To the extent that the government’s purposes in preventing future financial crises include assessing the appropriate limits to greed, or setting an appropriate line between the “hard sell” and outright fraud, perhaps this could be achieved more effectively at the state level, even at the cost of the uniformity and efficiency available at the federal level. The faces and tactics of the greedy and the fraudulent look different in urban areas with large minority communities than in suburban areas with largely white populations. In the urban areas, subprime loans tended to be pushed on borrowers by lenders anxious to lend at rates that are higher than market justified. In the suburban areas, in contrast, mortgage fraud was more likely to involve participation by borrowers themselves, who inflated their incomes and accepted unjustified appraisals. This sort of a differentiated understanding of the different categories of culpability is easier to achieve at the local level. Similarly, judgments about the point at which legislative curbs on greed start to compromise the vitality of credit markets could vary in different states. The way in which greed and fraud affects its victims is also subject to regional variation, perhaps explaining why local enforcement officials have proven to be more adept at recognizing predatory lending earlier than federal officials.

What state governments offer their citizens that is not so readily available at the federal level is the more intimate contact that fosters solidarity, something that the Church insists must moderate the delicate application of subsidiarity to economic activity.