Today, Michael McConnell explains the rise of the Supreme Court’s “shadow docket”; Amit Seru shares research illuminating the financial stability of private credit funds; and Bill Whalen and Lee Ohanian discuss the state of California’s gubernatorial primary as well as the Golden State’s sluggish post-COVID economic recovery.
Law & Policy
At The Washington Post, Senior Fellow Michael McConnell explains that the Supreme Court’s “so-called shadow docket” describes “a pejorative label for the court’s method of deciding whether a government policy may stay in effect while challenges work their way through the system.” McConnell notes that in the past, “the court tended to defer to the executive branch’s judgment of the public interest and to lower courts’ decisions about these matters.” But today, the former federal appellate judge writes, “the court makes its own judgment about a challenge’s probability of success on the merits and which side is most likely to suffer ‘irreparable harm’ if the underlying policy persists while litigation grinds on.” McConnell argues that the best the court can do under such circumstances “is to make an educated guess about the ultimate outcome on the legal merits and try to minimize serious, irreversible consequences.” He goes on to explain why the rise in “shadow docket” cases says much more about “aggressive” uses of executive orders under multiple recent presidents than it betrays arbitrariness on the highest court.
Unpack why McConnell doesn’t think the shadow docket is insidious. [Subscription required.]
Financial System Stability
“Every few years, a new corner of the financial ecosystem is dubbed the next ticking time bomb,” writes Senior Fellow Amit Seru at The Financial Times. “Now it’s private credit’s turn.” But are fears about private credit warranted? The Stanford finance professor explains recent research he’s coauthored exploring “about two-thirds” of the private credit market. Seru says that prior to 2008, “the largest financial institutions were levered as high as 30-to-1.” Private credit funds today “typically carry a leverage ratio of roughly 1.25-to-1,” meaning that “a private credit fund can absorb enormous losses before creditors are meaningfully affected.” Acknowledging some weaknesses and transparency concerns in the private credit sector, Seru says we’ll “probably see some private credit loans go bad in the months ahead.” But he cautions that “investors and regulators should be wary of overreacting to individual failures or conflating them with a systemic threat.”
Learn why Seru doesn’t see private credit funds creating another financial crisis. [Subscription required.]
California Policy & Politics
On the latest California-focused episode of Matters of Policy & Politics, Senior Fellow Lee Ohanian and Distinguished Policy Fellow Bill Whalen review several ongoing policy challenges in the Golden State: high gas prices, political upheaval, slow post-COVID recovery, and a faltering legal cannabis market. Evaluating the impact of the war in Iran on California’s already supply-constrained fuel market, Whalen and Ohanian ask, how much of the Golden State’s “pain at the pump” is driven by current geopolitics versus decades of arguably misguided state energy policies? The fellows then turn to the state of the gubernatorial open primary, recently shaken up by former Rep. Eric Swalwell’s abruptly quitting the race following accusations of sexual misconduct. Ohanian and Whalen conclude by discussing the policy missteps that have fueled an ongoing black market in cannabis a decade following the legalization of the controlled substance for recreational use.
Dive deeper into the policy challenges facing Californians and the state of the race for the next governor.
Monetary Policy
The Federal Reserve’s balance sheet may sound technical, but it lies at the center of major questions about monetary policy, market function, and central bank independence. How large should the Fed’s balance sheet be, and what happens when policymakers try to bring it down? In this conversation, Senior Fellows John Cochrane and Darrell Duffie examine what the Fed owns, why it matters, and why reducing it is more complicated than it looks. Cochrane and Duffie also explore why the Fed has found it so difficult to shrink that balance sheet after years of quantitative easing. They discuss how post-2008 liquidity rules, supervisory pressures, and changes in market structure have increased banks’ demand for reserves, making balance-sheet reduction more complex than a simple asset runoff. The conversation also considers why the composition of the balance sheet matters, especially when the Fed holds mortgage-backed securities, and how a narrower role may help preserve central bank independence.
Learn how the Fed’s holdings shape markets and monetary policy.
Hoover Opportunity
Around the world, development progress has stalled, trade barriers are rising, aid flows have plummeted, and private finance remains limited, volatile, and dominated by debt. With development funding unlikely to recover soon, the challenge for international development efforts is how to drive systemic change that delivers greater impact at scale with far fewer resources. To confront this challenge, Stanford’s King Center on Global Development and the Hoover Institution’s Emerging Markets Working Group are bringing together renowned development finance leaders from philanthropy, international financial institutions, government, and the private sector for the second of a two-part event series about the future of international aid. This event, to be held on Tuesday, May 5, will focus on sub-Saharan Africa and will feature Mark Suzman, CEO of the Gates Foundation; Ambassador Mark Green (ret), former administrator of USAID, US ambassador to Tanzania, and congressman; Gyude Moore, former Liberian minister of public works; and Vera Songwe, chair and founder of the Liquidity and Sustainability Facility.
Learn more here.
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