One common assertion arising from the onset and resolution of the 2008 financial crisis is the belief that it proves the purported need and propriety of the government acting in a swift and discretionary manner and not have its hands tied by the constraints of the rule of law. Yet a close examination of the most recent crisis as well as those of the past reveals the exact opposite truth: adherence to the rule of law is actually more important during periods of economic crisis, both to restore short-term economic prosperity during the crisis as well as for the long-term systemic impact.
There are four reasons why this is so. First, adherence to the rule of law is necessary for economic prosperity in general, but even moreso during economic crisis. Second, adherence to the rule of law is necessary to restrain the opportunism of politicians and special interests that use the opportunity presented by the crisis to piggyback their own narrow interests, often with no relationship to the real problems. Third, once discretion is unleashed during the crisis history tells us that the dissipation of the crisis does not promote a return to the rule of law—in fact, there is a “ratchet effect” of government discretion as the post-crisis period brings about a consolidation of governmental discretion rather than new limits on it. And finally, the mere potential for discretionary action promotes moral hazard, thereby creating the conditions for still further rounds of intervention. Thus, while little is lost in the short run by tying the government’s hands from discretion, more importantly the only way to promote long-term economic growth and preserve freedom in the long run, and to avoid precisely the circumstances that then justify future arbitrary government intervention is to constrain government discretion in the short-run.