Book Review: To the Edge

To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis was a book unlike any other historical analysis I have read so far. This was probably inevitable given the nature of the of the 2008 financial crisis, but Philip Wallach, a Brookings Institute fellow, managed to take his book to the next level of scholarly work.

Source: Amazon

Source: Amazon

Why I chose it

Tyler Cowen mentioned it some time ago on his blog and I by chance added it to my wishlist. One day I got an amazon gift card, and because of my desire to understand the financial crisis better, I made the leap of faith and bought this book. I do not regret that decision at all.


In 218 pages, Wallach lays the foundation for what I call his ‘theory-lite.’ Not quite concrete, not quite abstract, Wallach provides the basis for his theory of legitimacy, legality, their importance in the political process, and their divergence during episodes of crisis in government. Wallach calls this crisis in divergence between legitimacy and legality as “Carl Schmitt’s Challenge.”

Carl Schmitt was a German (and Nazi) political theorist who’s work investigated the role of government power and its source of legitimacy. Schmitt accurately captured the dilemmas democracies face in crisis, and believed democratic governments would inevitably fail to maintain their status in the face of continued crisis. This failure stems, as Schmitt argues, from the shift in legitimacy from democratic decision making to centralized authorities who take power during crisis.

While Schmitt enthusiastically embraced his philosophy by rising as one of Nazi Germany’s greatest political legitimators, his theory still provides a serious challenge to the concept and sustainability of the Rule of Law. In absence of flexible response and power, Schmitt’s political theory contends that things like due process, procedural justice, and other aspects of liberal democratic government cannot hold. This creates a paradox for democratic governments, squeezed between Rule of Law and the expediency needed by crisis fighters, as they must create a contradictory balance of executive discretion and procedural methodology.

Wallach takes Schmitt’s challenge and analyzes the financial crisis through the focal points of legitimacy and legality, ergo the title of this book. After setting the state for his theory-lite, Wallach then analyzes the entirety of the 2008 Financial Crisis, the response from government ‘crisis fighters,’ and the response of elites and the general American population.


A major theme Wallach emphasizes is the ad-hoc nature of the actions taken by crisis fighters Timothy Geithner (President of the New York Fed under Bush, Treasury Secretary under Obama), Ben Bernanke (Head of the Federal Reserve system under both Bush and Obama), Henry Paulson (Treasury Secretary under Bush), and Sheila Blair (Head of the FDIC under both Bush and Obama). Labeling their approach ‘adhocracy,’ Wallach explains at length just how last minute, impromptu, and unprocedural the government handled the financial crisis. Bernanke and Geithner especially made decisions in the eleventh hour of multiple episodes in the financial crisis (such as Bear Stearns, Lehman Brothers, and AIG), cajoled banks and other entities to accept their agreements, and consistently pushed the written law to its very limit and beyond.

While Wallach defends their actions on consequentialist grounds, he is critical of their after-effects, especially on government legitimacy and power. Wallach argues that repeatedly stretching the law, an outcome completely inevitable in Wallach’s view, must be minimized for multiple reasons. Principally, Wallach believes abusing the law and ad-hoc behavior severely reduce the legitimacy of the law and government, and this loss of legitimacy by government will substantially hinder its ability to handle future crises. For Wallach and Schmitt alike, it does not matter how powerful the government is if people, both elites and the masses, lose faith in the legitimacy of government action.


After an extremely in depth, objective, and well discussed retrace of the financial crisis, Wallach closes his book by looking at the accountability mechanisms used by government and possible alternatives for the future. Wallach emphasizes the place of media as a strong check against government overreach, but also shows how it falls short of capturing actions that are more ‘intrusive’ by government due the perceived legitimacy of government action. Moving beyond media, Wallach also recounts the inability of the courts to stop executive powers during crisis. Put simply, the judicial branch of the United States has consistently stood aside during crisis because it believes that the executive, given enough emergency, will simply ignore its orders, a la Jackson, Lincoln, and FDR.

The greatest accountability mechanism, according to Wallach, of the previous financial crisis was the ex-post accountability mechanisms implemented in bills. Accountability boards, GAO audits, and similar mechanisms made sure that government officials were not acting in scrupulous and corrupt ways after actions were taken. Additionally, such mechanisms often gave government more power to act by granting greater legitimacy of restriction. By putting into effect certain accountability mechanisms, the elites and average citizens of a nation will believe justice will be guaranteed by retroactive actions of accountability. However, Wallach emphasizes the need for pre-existing trust between government and citizens for accountability mechanisms to be allowed.

“Looking Forward”

While Wallach provides to no sure fire guarantee of accountability, his solutions do provide food for thought. Foremost, and idealistically, Wallach believes the legislature must engage the executive branch more during crises. This ensures accountability, provides grounds for legitimacy (perceived through the democratic process), and ensures the executive does not get out of control. The next big solution is for legislators and the executive to create laws that provide clear enough guidelines for government behavior, but that do not unnecessarily constrain government action. His reasoning for this is that anything too restrictive will simply be ignored, as was seen in prior crises. Finally, Wallach proposes a generic ‘slush fund’ for the executive branch. During the financial crisis, the executive branch used the Exchange Stabilization Fund, an archaic fund meant for currency exchange emergencies, for the bailout of the Money Fund market. This was a result of Geithner and Bernanke being afraid to approach Congress for help (and risk denial), but later came across as a severe abuse of government power. Rather than pander to the idea executives will not abuse the law during crisis, Wallach concludes that by providing a sizeable, but not too large, fund for emergency executive action, crisis fighters can buy time to negotiate with Congress over appropriate actions instead of worrying about partisan fighting and abusing the existing law.


When it comes to style, narrative, and facts, I have no qualms with Philip Wallach. His ability to objectively recount events is fantastic, and I only wish more scholars embraced his approach. However, when it comes to his own opinion, I do have to disagree. While I sympathize with Wallach’s view that, given the enormity of the crisis, the government had to intervene, he gives too much credence to the motives of political actors. Wallach almost believes that beyond some political motivation (record, image), individuals such as Paulson, a former CEO of Goldman Sachs, were driven by pure civic duty for their nation. Being such a well read scholar, Wallach is well aware of Public Choice and I wonder why he was so quick to ignore the very real incentives behind regulators to collaborate, on some level, with those they regulate.


This was a hell of a book. It challenges your world view on how the financial system and government operates, and it’s recommended reading for anyone who wants to better understand the political process, its weaknesses, and how the financial crisis came about. The book was fantastic and I can say that I learned immensely from it. 5/5

About Elias Garcia

18 y.o. Male Missouri, USA I like reading history, philosophy, literature, and other things that often make people snore.
This entry was posted in Federal Reserve, Finance, Reading and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s