Geopolitical Alpha

Chapter 7Constitutional and Legal Constraints: The Constraint–Preference Hybrids

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

— Mario Draghi, ECB president, July 26, 2012

hesitate to write this chapter. This book is about material constraints and how they force policymakers down the path of least resistance, not the path that they have chosen themselves. And yet, this chapter is about a constraint that, more often than not, behaves like an optional preference.

Constitutional and legal constraints ought to be meaningful because in law-abiding societies, the law is a strong constraint to the individual citizen. No one wants a parking ticket, to end up in jail, or to be arrested for tax evasion. As a result, most individuals take the path of least resistance and operate within the constraints of the law.

But in policymakers' hands, these constraints are malleable. They get around laws more often than investors realize. When it comes to this particular subset of constraints, they are meant to be broken, especially in a crisis. In both Europe and the US, recessionary economic constraints forced policymakers to manipulate the legal constraints – and sometimes even the constitutional ones.

During the 2008–2009 Great Recession, the US banking system faced a liquidity Armageddon. Because their balance sheet collateral was worthless, banks abruptly stopped lending to each other and the real economy. Because ...