In sharp contrast to the rhetorical emphasis placed on federalism and states’ rights by Reagan/Gingrich era conservatives, George W. Bush has engineered a dramatic reversal of long-standing, bipartisan positions against federal preemption in many critical areas. Whereas his conservative predecessors endorsed a vision of federalism in which the federal government had little authority to overrule states, Bush’s administration has embraced a system in which federal action, or even federal inaction, trumps states’ efforts to protect their citizens’ health, welfare and environment from corporate misconduct.

Nowhere are the dangerous consequences of this approach more glaringly evident than in the current financial crisis.

This week’s proposed historic bailout of the US financial institutions is only the latest development in a broader, ongoing financial crisis, which largely started with the collapse of sub-prime mortgage lenders earlier this year.

What many do not realize, however, is the extent to which state lawmakers across the Nation attempted to protect consumers from predatory lending practices in recent years, only to be blocked by the Bush administration. Facing a rapidly-escalating foreclosure crisis states sought to restrict predatory lending practices both through their own laws and by calling on Federal Reserve to tighten regulations on the mortgage industry at the federal level. These state officials were stymied at every turn by the Bush Administration. Former NY Governor and Attorney General Elliot Spitzer (discredited for unrelated reasons) put it this way in a February 2008 op-ed in the Washington Post:

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

Despite the fight waged by state officials, the OCC got its way. In a deeply splintered 5-3 ruling in Watters v. Wachovia Bank (2007), the Supreme Court upheld 2004 OCC regulations that preempted any state effort to regulate national banks or their subsidiaries even in the absence of federal protections against predatory lending, a decision that left the Nation’s mortgage industry in a regulatory vacuum.

The ensuing collapse of the financial industry and the need for a $700 billion taxpayer buyout thus highlights the fundamental dangers of the Bush administration’s use of its power to displace states as an ideological weapon. Rather than envisioning a system in which the federal government says to states “we’re not regulating, so you can’t either,” the framers sought a complimentary system where the federal government would be empowered to address national problems while states would generally remain free to operate (as Justice Louis Brandeis eloquently argued in 1932) as “laboratories” of government innovation and democracy.

That’s the vision of federalism Constitutional Accountability Center advanced in our book Redefining Federalism: Listening to the States in Shaping Our Federalism, and our project of the same name. The financial crisis illustrates how desperately we need a president that values the critical role states play in our constitutional structure.