. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.
Punishing Thieves in Suits: Piano Wire or Stocks? (brought to you by FromDC2Iowa.blogspot.com*)
As I've repeatedly conceded, I don't claim expertise as an economist. On the other hand, I've also urged that our instincts and intuition are entitled to more weight than we're modestly inclined to accord them. Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008.
Clearly, Tim Geithner, Ben Bernanke and Larry Summers do know something about economics.
Equally clearly the New York Times staff of editorial writers and columnists are not necessarily among the nation's top economists -- although one did win the Nobel Prize in economics, which is not something those three can claim .
Nonetheless, it was reassuring in terms of my "trust your instincts" theory that so much of what appeared in the Times over the weekend echoed analyses and concerns I've expressed over the last six months in the blog entries linked below.
For example, while I'd prefer to let the market sort this out, rather than simply throw taxpayers' dollars at bankers, if we are going to bail out those who have brought us this disaster I'd rather it be used to purchase the banks ("nationalization") rather than their so-called "toxic assets."
On Saturday the Times editorialized:
This crisis is unlikely to turn around until President Obama and his aides come up with a plan for failing banks that does not arbitrarily reject the idea of nationalization.
Thursday morning [March 19] I wrote:
And if it makes no sense to try to revive the auto economy by giving billions to auto executives [when consumers would rather save their money than buy cars], it makes even less sense to try to revive an entire economy by transferring trillions of taxpayer dollars to bankers. Here again, the problem is not that businesses and consumers don't have the opportunity to run up even more debt. The problem is that they have the wisdom not to want to do so, especially at this time. ["What a Mess," March 19, 2009.]
Saturday's editorial continues:
On Wednesday [March 18], it [the Fed] announced that it would buy hundreds of billions of dollars more [of mortgage-backed securities] and as much as $300 billion of Treasury bonds. . . . Unfortunately, there is no guarantee that this will work. With unemployment rising, debt loads high and household wealth falling, consumers may be reluctant to resume spending anytime soon, no matter how low rates and prices go. And even if consumers and businesses want to borrow, banks — stung by their own losses — may not be willing to lend.
I have repeatedly noted that the multi-trillion-dollar transfer of taxpayers' money to the banking and financial community has emphasized only the benefits of a rational benefit-cost analysis. There are potential downsides of this approach as well -- most notably, inflation -- and that the Administration and Congress have, at a minimum, an obligation to evaluate, and then share with the American people, those costs and risks.
The Times editorial went on:
To buy up securities, the Fed creates money. To provide fiscal stimulus, Congress borrows money. The more money that is created and borrowed, the greater the risk of future inflation and higher interest rates. . . . [A] forthright acknowledgment of the risks is necessary to keep policy makers from venturing too far into dangerous territory.rates.
By this morning [Monday, March 23] at least four, count 'em four, Times columnists, card-carrying members of the "liberal media," were expressing something far shy of enthusiasm for President Obama.
Paul Krugman (that Nobel Prize winner) writes of his "Financial Policy Despair":
If the reports [of the Administration's bank rescue plan] are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.
I have expressed concern about the Administration and Fed secrecy regarding what the banks and AIG have done with the money we gave them. Krugman notes that,
the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.
From the outset I've expressed concern about the President's close ties to the financial community, that community's financial contributions to him and members of Congress, the role of Goldman Sachs and Geithner's selection of the firm's lobbyist, no less, as his chief of staff, and the seeming obliviousness of the lot of them to the public feelings about corporate excesses.
Krugman comments:
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.
In "What A Mess" I wrote:
[E]ven the world's best and most honorable bankers couldn't solve this problem with that much money. Trickle down doesn't work. In addition to common sense, intuition, and long history, we now have the lack of results from the most recent six months of trying.
Paul Krugman shares this conclusion:
But the real problem with this plan is that it won’t work. . . . And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
On Sunday [March 22] Tom Friedman bemoaned the consequences of what he called "politics worse than usual":
There don’t seem to be any adults at the top — nobody acting larger than the moment, nobody being impelled by anything deeper than the last news cycle. . . . Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail — no matter how reckless. From bankers we hear about contracts too sacred to break — no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” . . . [Meanwhile,] our country, alas, is not too big to fail.
Maureen Dowd shares my concern about the consequences of the close ties between the Administration, AIG and Wall Street. She thinks "we need less smooth jazz and more martial brass" and, inspired by Michelle Obama's declaration that the President (and their daughters) are going to be pulling weeds in her new White House garden "whether they like it or not," believes "the wrong Obama is in the Oval."
[T]he fury directed at the robber barons by the robbed blind in America has been getting hotter, not cooler. And that’s because the president and his Treasury secretary have been coddling the Wall Street elite, fretting that if they curtail executives’ pay and perks too much, if they make the negotiations with those who siphoned our 401(k)’s too tough, the spoiled Sherman McCoys will run away, the rescue plan will fail and the markets will wither. . . .
The shafters of the universe have been treated with such kid gloves that they remain obnoxiously oblivious. Vikram “Pandit the Bandit” at Citigroup, which received $50 billion in bailout money, is . . . spending $10 million to renovate his Park Avenue offices . . .
Fannie Mae . . . brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco. Freddie Mac . . . has yet to disclose its planned bonuses. . . .
Treasury Secretary Tim Geithner, who grew up as a Republican . . . sees things from the point of view of that wellspring of masters of the universe, Goldman Sachs. (His Treasury chief of staff was a Goldman lobbyist, who fought then-Senator Obama’s attempt to curb executive compensation — just as Geithner has done within the administration.) . . .
Virtually unnoticed amid the bonus imbroglio was A.I.G.’s grudging disclosure that it had funneled $93 billion — more than half its federal money to date — to its high-flying insurees, including Goldman Sachs . . .. Yet as Goldman sneers at the federal money at the front door, it’s taking delivery of billions in no-strings federal money through the back door. . . .
The issue is how much we must pay to preserve financial stability over all, not how much one company promised to pay. At this point, A.I.G. seems to be the only party paying face value on toxic derivatives.
Frank Rich used some very tough language to hit on a number of the issues that I have written about, many of which are identified above. He also mentions an issue (the legality of much of what was done) that I've often described in these words: "the problem is not just that corporations violate the law, the much more serious problem is that they are writing the law."
A charming visit with Jay Leno won’t fix it. A 90 percent tax on bankers’ bonuses won’t fix it. Firing Timothy Geithner won’t fix it. Unless and until Barack Obama addresses the full depth of Americans’ anger . . . his presidency and, worse, our economy will be paralyzed. . . .
The White House seemed utterly blindsided by the public’s revulsion at the moneyed insiders’ culture illuminated by [former Senator Tom] Daschle’s post-Senate career. Yet last week’s events suggest that the administration learned nothing from that brush with disaster.
Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy. . . .
[AIG] has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.
Summers was even more highhanded in addressing the “retention bonuses” . . ..
[M]ost Americans don’t know how A.I.G. brought the world’s financial system to near-ruin or what credit-default swaps are. They may not even know what A.I.G. stands for. But Americans do make the connection between their fears about their own jobs and their broad understanding of the A.I.G. debacle.
They know that the corporate bosses who may yet lay them off have sometimes been as obscenely overcompensated for failure as Wall Street’s bonus babies. . . .
Since Americans get the big picture of this inequitable system, that grotesque reality dwarfs any fine print. That’s why it doesn’t matter that the disputed bonuses at A.I.G. amount to less than one-tenth of one percent of its bailout. . . .
What made Jon Stewart’s takedown of Jim Cramer resonate was less his specific brief against CNBC’s cheerleading for bad stocks than his larger indictment of the gaping economic inequality that defined the bubble . . . [the] “two markets”. . ..
No one is more commanding on this subject than our president. . . . But rhetoric won’t tamp down the anger out there, and neither will calculated displays of presidential “outrage.” . . .
Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable . . . actually answering the questions that officials like Geithner and Summers routinely duck.
Inquiring Americans have the right to know why it took six months for us to learn (some of) what A.I.G. did with our money. . . . [W]hy Goldman, which declared that its potential losses with A.I.G. were “immaterial,” nonetheless got the largest-known A.I.G. handout of taxpayers’ cash ($12.9 billion) while also receiving a TARP bailout. We need to be told why retention bonuses went to some 50 bankers who not only were in the toxic A.I.G. unit but who left despite the “retention” jackpots. . . . And where are the M.R.I.’s from those “stress tests” the Treasury Department is giving those banks?
[I]t's hard to imagine taxpayers shelling out billions for a second bank bailout unless there’s a full accounting of every dime of the first, and true transparency for the new plan whose rollout is becoming the most attenuated striptease since the heyday of Gypsy Rose Lee. . . .
[W]hy . . . has there been . . . so much evasiveness so far? The answer, I fear, is that too many of the administration’s officials are too marinated in the insiders’ culture to police it, reform it or own up to their own past complicity with it. . . .
The “dirty little secret,” Obama told Leno on Thursday, is that “most of the stuff that got us into trouble was perfectly legal.” An even dirtier secret is that a prime mover in keeping that stuff legal was Summers [of whom his mentor, Robert Rubin] wrote in his 2003 memoir . . . underestimated how the risk of derivatives might multiply “under extraordinary circumstances.”
Given that Summers worked for a secretive hedge fund, D. E. Shaw, . . . you have to wonder how he can now sell the administration’s plan for buying up toxic assets with the help of hedge funds. It will look like another giveaway to his own insiders’ club. As for Geithner, people might take him more seriously if he gave a credible account of why, while at the New York Fed, he and the Goldman alumnus Hank Paulson let Lehman Brothers fail but saved the Goldman-trading ally A.I.G.
To remove any possible question I want to repeat that with which I began. I suffer no illusion that anyone -- members of Congress, the Obama Administration, or New York Times' columnists -- are even reading this blog, let alone influenced by it. Nor do I believe that I've come up with insights over the past six months or so that had not occurred to others. Indeed, that's exactly my point.
If I, and thousands of other bloggers, can come up with these insights and analysis drawing on nothing much beyond intuition, why oh why cannot our elected and appointed officials do as well?
So what should we do with these folks who've brought the world to this economic disaster?
At dinner last evening talk turned to appropriate punishments for those who are coming to taxpayers for multi-trillion-dollar bailouts necessitated by a 40% (give or take) decline in home values and stock prices brought on by their own incompetence and greed.
Nicholas Night, who hails from Bisbee, Arizona ("the town too high to care" -- a response to Tombstone's claim to be "the town too tough to die"), made reference to AIG Ed Liddy's concern regarding threats he's received from those who believe piano wire should be put around the necks of the most guilty of AIG executives. Bisbee is something of a music town, and Nick observed that there are now so many electronic keyboards in use that there may well be a shortage of piano wire -- at least in Bisbee.
So what he next proposed is that they be put in stocks. No, not the kind they're already in, the stocks of profiteers; the stocks the Puritans put folks in, with criminals' heads, arms and legs sticking through and locked down. Guards would be provided to protect them, so that nothing more damaging than tomatoes and rotten eggs would be thrown.
After being freed from the stocks they, and indeed all white collar criminals in Nick's proposal, would then be required to pay back in full whatever losses they'd caused or thefts they'd pulled off. They would have to earn that money selling ice cream bars by driving a truck through neighborhoods primarily occupied by persons of a different color from themselves. And these customers could pick a 38-second excerpt from a song that the perps would have to listen to over-and-over, constantly, until the debt was paid.
It's possible you had to be there, but I think Night is on to something. If Obama is going to continue to refuse to prosecute and imprison them the least we can do is identify who they are and do some form or another of public shaming.
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Related Blog Entries on Global Economy and Bailouts
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
Since last September I have repeatedly been arguing against transfers of massive amounts of taxpayer money to those who created this problem, for reliance upon "the market" (with examples of where and how it has been working even during this crisis), against "trickle down," and for trickle up. (E.g., "There are three groups of people I care about in this mess -- none of which is made up of Wall Street or Main Street bankers. I am concerned about (a) depositors, (b) workers, and (c) homeowners." Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008.)
And speaking of "the marketplace," note the comment in this morning's New York Times about the 90% tax on bonuses that "Several banks are considering refusing to participate in government financial rescue programs if the bill passes, according to a person briefed on the banks’ plans." Carl Hulse and David M. Herszenhorn, "House Approves 90% Tax on Bonuses After Bailouts,"New York Times, March 20, 2009.
Secretary Paulson had passed along an earlier, comparable threat last fall.
There is no positive spin one can put upon those sentiments. (a) If the banks, if the market, will function with or without these bailouts, why are we giving them trillions of dollars of our money? (b) If their executives are so selfish, greedy and unpatriotic that, even though their incomes put them somewhere between the top 2% and top 1/100th of 1% of the nation's wage earners, they would rather see their bank go bankrupt than lose their precious bonus, why would we want to protect them from failure (so long as the depositors are protected by FDIC)?
Much as I continue to hope that Washington knows what it is doing and will eventually succeed and prove me wrong, I must confess to a little sense of vindication this morning [March 20].
Presumably the goal here is to reverse a downward spiral of reduced sales, leading to reduced manufacturing, leading to increased unemployment, leading to a repetition of this further deepening cycle, that has thrown business and consumers alike into a personally rational (even if group irrational) reassessment of their borrow and spend behavior. They want to reduce expenses and debt, use cash rather than credit, save rather than spend. Businesses cut costs by laying off workers; consumers by no longer running up debt, spending money they don't have to buy things they don't need.
As we've discovered with the auto industry, you can't revive an economy through a program of increased automobile sales by putting billions of dollars into the hands of auto executives -- especially those with a proven track record of inability to make cars people want to buy or otherwise run a corporation at a profit. The problem never was a shortage of GM cars coming off the assembly lines, or sitting in dealers' show rooms.
The problem was that there weren't all that many people who wanted to buy them in the best of times. And now, in what is fast becoming the worst of times, the problem is not a lack of opportunity for consumers to take on a hefty increase in their debt load to buy a new car. The problem is that laid off workers are not the only ones who are hunkering down, reapplying the Depression-era wisdom ("Use it up, wear it out, make it do, or do without"), and wisely deciding this is not the time to be taking on more debt.
And if it makes no sense to try to revive the auto economy by giving billions to auto executives, it makes even less sense to try to revive an entire economy by transferring trillions of taxpayer dollars to bankers. Here again, the problem is not that businesses and consumers don't have the opportunity to run up even more debt. The problem is that they have the wisdom not to want to do so, especially at this time.
"Trickle down" didn't work in the best of times, and certainly won't work now.
And I'm not even talking about fairness and equity, "government by campaign contribution," outlandish bonuses, or the near criminality and stupidity of putting these trillions of dollars into the hands of those who, like auto executives, have a demonstrated inability to run a corporation with ethics, common decency and common sense (not to mention long term survival and profit), executives who created the problem through their own greed.
No. Of course those are reasons enough not to be giving them our grandchildren's trillions of dollars. But my point for now is that even the world's best and most honorable bankers couldn't solve this problem with that much money. Trickle down doesn't work. In addition to common sense, intuition, and long history, we now have the lack of results from the most recent six months of trying.
The solution? I won't repeat everything laid out on this blog over the last six months (most of which are linked at the bottom of this entry), except to say that it involves trickle up not trickle down, a focus on the consumer, on 300 million Americans, not 300 thieves in suits, a massive and yet precisely targeted jobs program, mortgage relief for deserving homeowners, immediate health care for all during the downturn (while long term solutions are being crafted), and continued protection for bank depositors (not investors).
If that had been how we'd invested all those trillions given to bankers over the past few months I think we'd be well out of this mess by now.
Meanwhile, on top of everything discussed in this blog entry yesterday, below, there are now a couple of other, equally disgusting revelations.
(1) Apparently taxpayer protection language -- that AIG couldn't be paying millions in bonuses to the guys who created this problem while receiving billions of taxpayer dollars -- was once in Senate and House versions of a bill and then deleted under cover of darkness in conference as a result of Secretary Geithner's pressure on Senator Chris Dodd. Raymond Hernandez and Thomas Kaplan, "Connecticut Senator Draws Voters’ Ire for His Bonus Role,"New York Times, March 20, 2009 ("[AIG's] employees, political action committees and subsidiaries have made campaign contributions of nearly $300,000 to [Senator Chris] Dodd since 1989. . . . [Senator Dodd] finds himself a symbol of the political establishment’s coziness with tainted corporations and a target of populist wrath over their excesses. . . . That change [in the bill] exempted bonuses protected by contracts, like those at American International Group . . . that received billions in federal bailout money. Mr. Dodd said that his staff revised the bill at the urging of Treasury officials . . ..").
Edmund L. Andrews and Jackie Calmes, "Many in Government Knew Weeks Ago About A.I.G. Bonuses,"New York Times, March 20, 2009 ("Interviews with senior Federal Reserve and Treasury officials, as well as members of Congress, leave little doubt that the bonus program was a disaster hiding in plain sight. Mr. Geithner is not the only one who appears not to have understood the populist fury the bonuses would set off. Career staff officials at the Treasury, Fed and Federal Reserve Bank of New York exchanged e-mail messages about the A.I.G. bonus program as early as late February, according to a person familiar with the matter. A.I.G. itself revealed the bonus plan in regulatory filings last September.").
The rationale? The sanctity of contracts. You can't retroactively change an employment contract. Oh, really? Apparently that's a legal principle only applicable to thieves in suits. Auto workers' contracts, and those of millions of other workers across America, have already been changed, with more to come -- contracts regarding wages, health care benefits, and pension funds. It's just one more example of the stench that's accompanied this con game from the beginning.
(2) Apparently Treasury secretaries and other appointees are not the only folks who don't feel they need to pay taxes. A hefty proportion of the corporations receiving billions of taxpayer dollars aren't paying their taxes either.
"[T]he AP reported Thursday [March 19] that 13 firms receiving billions of dollars in federal bailout money owe a total of more than $220 million in unpaid federal taxes. Rep. John Lewis, D-Ga., chairman of a House subcommittee overseeing the federal bailout, said two firms owe more than $100 million apiece. . . . Banks and other firms receiving federal money were required to sign contracts stating they had no unpaid taxes, Lewis said. But the Treasury Department did not ask them to turn over their tax records . . .." "House OKs Hefty Tax on AIG Bonuses," PBS Online News Hour, March 19, 2009.
It turns out this is actually only a small part of a much larger problem: "Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released . . . by the Government Accountability Office, the investigative arm of Congress." Linley Browning, "Study Tallies Corporations Not Paying Income Tax,"New York Times, August 12, 2008.
There are some feigned expressions of outrage from Washington, that those who created the problems through personal enrichment are now enriching themselves further with taxpayer-funded multi-million-dollar bonuses, but little in the way of prosecutions, or efforts to get our money back. There are expressions that "we must re-examine and improve our regulatory model so that this never happens again." But we have had this conversation before; this is the happening that is "again;" and the problem is not entirely the model, it is also the people running it -- and few to none of them seem to be being prosecuted either.
Congress has a lot of explaining to do -- after we clean out the lot of them. I've documented before how those who make campaign contributions in the $100,000 to $1,000,000 range generally get something like a 1000-to-2000-to-one return on their "investment" -- for an investment it is, and one that pays much better returns than any on Wall Street. Nicholas Johnson, "Campaigns: You Pay $4 or $4000,"Des Moines Register, July 21, 1996, p. C2.
So it comes as no surprise to me to find out that the financial community has contributed some $5 billion to Congress over the past 10 years in campaign contributions and lobbying expenses. After all, members of Congress and senators are honorable people; they don't take $5 billion from someone and then give them a poke in the eye with a sharp stick -- not if they want another $5 billion over the next 10 years. They behave as they've been behaving; they give Wall Street its $5-to-10 trillion return on its $5 billion investment. See the report, Robert Weissman and James Donahue, "Sold Out: How Wall Street and Washington Betrayed America," Essential Information/Consumer Education Foundation, March 2009, linked from "$5 Billion in Political Contributions Bought Wall Street Freedom from Regulation, Restraint, Report Finds," March 4, 2009, Wall Street Watch.
Nicholas Johnson, "The Story of Stuff," March 16, 2009. And for more detail about what AIG and the bankers did and how they did it see the "Prologue" and "No More for AIG" in Nicholas Johnson, "Bankers as Arsonists," March 3, 2009 ("[Arsonists'] fires are not 'acts of God.' Nor is this economic calamity. Both are the clearly predictable result of reckless and irresponsible behavior by humans. The only difference is that those who deliberately set the woods on fire don't personally profit financially from their acts. These men and women did.").
But it didn't. If anything, yesterday just made it worse.
Of course the $160 million in extra pay for those who brought down AIG and the world's economy with it is outrageous -- as is the role of the past and present administrations in going along with it. So are the expensive corporate gatherings at spas and expensive resorts, the $50 million private jets for executives, and Bernie Madoff's jewelry and yachts.
But all of that day-long ranting and raving by members of congress yesterday is one big shell-and-pea game of diversion. Those AIG bonus payments are less than 1/10th of 1% of the $170 billion taxpayers are in hock to for AIG. That doesn't make the bonus payments any more justified, but it does kind of put them in perspective.
Meanwhile the President, understandably, wanting to get as far from Washington as possible went to California to get some positive vibes and re-creation from "the people," doing what he does best: campaigning at a town meeting. Helene Cooper, "President Takes Campaign for Budget to California,"New York Times, March 19, 2009.
He answered that part. Geithner may have frightened Obama enough to make him leave town, but not enough to reduce the President's professions of "confidence" in him.
The part of the question left unanswered; actually the first part?
What do you have to say about that $100,000 campaign contribution you got from AIG?
Yes, even the President is not free of the questions raised by the $5 billion the financial community contributed to public officials over the past 10 years. (See the "Government by Campaign Contribution" excerpt, above.)
And at another appearance yesterday he almost literally echoed the line quoted in that excerpt, that we should see to it that "this never happens again": "My goal is to make sure that we never put ourselves in this kind of position again." Mary Williams Walsh and David M. Herszenhorn, "AIG Seeking Return of Half of Its Bonuses,"New York Times, March 19, 2009.
Yeah, right; who can argue with that? But isn't it just another diversion? When we focus on future reforms, as when we focus on 1/10th of 1% of the problem, we aren't focusing on what's going on right now!
And what's going on right now is what AIG is doing with that $170 billion. To the extent AIG executives are not entertaining themselves at resorts, and enriching themselves with bonuses, they are essentially flowing through that $170 billion of ours to other members of that vast army of "thieves in suits."
And who might they be? Try Goldman Sachs -- yes, the same Goldman Sachs we've already financed with taxpayer money directly -- now getting our taxpayer money from us indirectly, by way of payments of our money we gave to AIG, to the tune of $8 billion.
And then the Fed, in another burst of great generosity, decided "Oh, what the hell, another day another trillion dollars" -- and I'm no more confident we'll ever find out where this trillion will go than the last, now uncounted, trillions of our money they've already given away. The resulting increases in the prices of gold and oil, and decline in the value of the dollar, gives you a clue as to how the world views this additional step toward inflation. Edmund L. Andrews, "Fed Plans to Inject Another $1 Trillion to Aid the Economy," New York Times, March 19, 2009.
No, I'm afraid yesterday didn't make me feel any better.
Nor will today, as Congress endeavors to redeem itself in our eyes for falling sway to to the $5 billion in campaign contributions and lobbying of the financial industry by passing a special extra tax of 90% on those bonuses. Even if it passes, and even if it's legal, it really is far, far too little too late. Carl Hulse and David M. Herszenhorn, "House Approves 90% Tax on Bonuses After Bailouts,"New York Times, March 20, 2009.
P.S. Congressman Barney Frank said yesterday he wanted to have the names of those who received bonuses, and how much each has returned to the government. AIG CEO Liddy expressed concern of mass assassinations by outraged members of the public were that to be done. Mary Williams Walsh and David M. Herszenhorn, "AIG Seeking Return of Half of Its Bonuses,"New York Times, March 19, 2009. If that proves to be a reasonable concern, rather than fail to reveal anything about this outrage, here's a modest suggestion.
Let's at least start with a list, released to the public and media, with the names redacted and replaced with numbers, along with the title/job description of the individual (or department -- enough to give some idea of what they were paid to do, as narrowly identified as possible without revealing their identity), along with what they did to earn the bonus or "retention" payment, their total salary, benefits, and other perks, the amount of the bonus, and how much has been returned.
__________
Related Blog Entries on Global Economy and Bailouts
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
The Sure-Fire Solution to Economic Pain (brought to you by FromDC2Iowa.blogspot.com* -- and Saturday Night Live, see below)
My Dad told the story of a Kansas farmer who was asked whether he believed in baptism. "Why of course I do," he said, "I've seen it done."
That's kind of how I am about credit. I've seen it done. And all about me I'm now watching the consequences of its having been done. And that's why I really don't believe in credit.
Mason Williams (the composer of "Classical Gas" and one-time head writer for the "Smothers Brothers Comedy Hour") once wrote the story of the automobiles in his life, which he called his "Auto-biography."
In a similar spirit here is how I would describe my own "Auto-biography" of Nicholas Johnson.
My first car was a 20-year-old Model A Ford I bought from a local farmer for $25.
I paid cash.
My second car required saving money for a year as a college student. It was a much fancier Model A, with four doors and a roof, and therefore cost $75.
I paid cash.
Over the years the cars got grander and more expensive. A two-door Chevy ($700), a Volvo ($600), and a couple others along the way.
I paid cash.
My current vehicle is a 1978 VW camper van, one of my most expensive ever at $2000.
But I still paid cash.
Is this because I'm wealthy? No; quite the opposite. When offered job choices I've never simply picked the one that paid the most. I've chosen the ones that would offer the most interesting new experience, the most fun, or the greatest opportunity for public service -- one of which was serving on the local school board, a job I once described as providing "no money, but at least you get a lot of grief."
(Don't get me wrong, this is not a "pitty poor me" blog entry. I've been blessed at every turn in a life that could not have been better: my parents, growing up in Iowa City, the University's schools, from the two-year-old group at the Iowa Child Welfare Station on through University High School, a top flight public university undergraduate and law school education when tuition was $50 and a couple part-time jobs plus managing an apartment house were enough to get you by (compared with today's near-$50 thousand at private colleges, with the accompanying student loan debt), the lucky accidents of the U.S. Court of Appeals and Supreme Court clerkships, and three presidential appointments, and being able to return in my later years to my home town, live in the house where I grew up (on which the mortgage has long since been paid -- if indeed it was not purchased for cash), and welcomed into the UI College of Law, a three-block walk from home, where I live with a former high school classmate who is, for me, the perfect wife -- in addition to our wonderful children, grandchildren and now great-grandchildren. No; all I am saying is that I have, by choice, purchased cars for which I could afford to pay cash, rather than paying interest to a bank on a newer, more expensive one.)
No; I've paid cash because, in attempting to control living costs, the elimination of interest payments always seemed to me to involve the greatest returns for the least effort -- with the least pain.
I don't confess this as a badge of honor. I'm fully aware most Americans will ridicule my choices and think me a fool.
I merely mention it to give you some insight as to why I might be questioning the behavior and choices of those who propelled us into this global economic collapse -- and who now propose that the way out of the pit we're in is to go back to making more credit available, to recreate the economic structure and behavior that got us into this mess.
Why should every small business, home and automobile be owned in largest measure by a bank's shareholders? And for what? So we can have our stuff a few months before we'd have it if we saved first and then paid cash? Rented a few more years before buying a home? Drove a little older car?
Why should one of our largest expenses -- as taxpayers as well as consumers -- be the transfer of our hard-earned dollars (in the form of interest payments) to bankers and investors who have contributed neither goods nor services to our economy? Banks were getting "bailouts" from the federal government -- that is, you and me as taxpayers -- long before they brought down our economy. Do you know what one of (if not the) largest expenses of the federal government is? That's right, interest payments from you and me to those wealthy enough to loan their money to our government -- some $412 billion in the FY2008 budget! Federal Budget Spending and the National Debt. I'd say that's a pretty nice income for what Senator Bob Dole once described as "indoor work with no heavy lifting."
And our payments to those folks are only going to increase as our government continues its present "solution," this glide path to economic hell: getting us out of a economic mess created by credit and debt by taking on more credit and debt.
[Credit: "Don't Buy Stuff: The sure-fire way to get out of debt," NBC Saturday Night Live, Season 31, Episode 12, aired February 4, 2006, available from hulu.com.]
I don't expect anyone to agree with me. But I think Saturday Night Live had it right: "The sure-fire way to get out of debt"? "Don't buy stuff you can't afford."
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Don't Buy Stuff," March 6, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
No More For AIG and the View from the "Frontline" (brought to you by FromDC2Iowa.blogspot.com*)
Prologue
I dreamed I was having a beer with Tim Geithner and Ben Bernanke. (I had to explain to them that we were fresh out of champagne.)
"So what do you think is the answer for AIG?" I asked.
"We think handing over billions of taxpayers' dollars to the company is the way to go," Geithner said. Bernanke nodded, while looking suspiciously at his glass of beer.
"Have you tried that?" I asked.
"Oh, yes." Bernanke smiled. "Three times. I think we're up to about $150 billion now, aren't we Tim?"
"Yeah, about that." Geithner took a sip and scowled.
"So how's that been working for you?" I asked.
They both looked down and said nothing.
"How's that been working for you?" I repeated.
"Not really all that well," Geithner finally replied in a near whisper. "They lost another $60 billion this last quarter, and the Dow just dropped below 7000."
"Oh, my." I paused. "So what are you going to do now?"
They both smiled and said, as if in chorus, "We thought we'd give them another $30 billion."
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What the hell is the Obama Administration and Fed thinking to give AIG another $30 billion of our (taxpayers') money?! When you find something that doesn't work, repeating it over and over in the hopes that it will is one definition of insanity. This means we've now underwritten a single company to the tune of what will soon be a quarter of a trillion dollars -- two and a half times the entire federal budget when I was in government!
AIG, this so-called "insurance company," just reported a $61 billion dollar loss during the last three months! That's nearly $1 billion every business day. Andrew Ross Sorkin and Mary Williams, Walsh, "A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid,"New York Times, March 3, 2009 ("the deal . . . presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises").
Stories like that always kind of make me wonder. If you were paying even a modicum of attention wouldn't you kind of notice after a day or two that there was $2 billion missing from the petty cash drawer?
These are the guys, you'll recall, who celebrated one of our early infusions of billions by heading off to a luxury resort to spend some of it.
And let's get straight why these losses are occurring.
Bankers, through greed or ignorance, were issuing mortgages they knew, or should have suspected, would not be paid ("sub-prime mortgages"). So long as they could mix them up, package them, call them a security, and sell them, the profit (and resulting bonus) was theirs and the risk of loss was someone else's.
Those holding these worthless ("toxic") securities wanted protection. So AIG issued insurance -- an agreement to make good on the mortgage/security if it turned out to be worthless because the debtor defaulted on this "credit" -- a "credit-default swap."
For more details on what AIG and the banks did to our economy see Joe Nocera, "Is AIG the Worst of Them All?"New York Times, February 27, 2009 ("the practices that led to its troubles . . . were shocking"); and "Propping Up a House of Cards,"New York Times, February 28, 2009 ("Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more . . . Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. . . . either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up. That would be us, the taxpayers").
Normally insurance, whether home, auto, or life, is designed to spread the rare or occasional loss among a great many premium payers. Every homeowner has fire insurance, but very few have fires -- there's no "bubble" that suddenly bursts and causes all homes to burn, thereby bankrupting an insurance company suddenly called upon to pay full value for 40% or more of the homes it insured.
Moreover, regulated insurance companies are required to maintain "reserves" sufficient to pay off an unexpectedly large number of claims. (AIG's conventional insurance operations are still profitable.)
By contrast, when the real estate bubble bursts during an economic downturn it tends to burst nation wide. Providing "insurance" for mortgage defaults means the insurance company has assumed the risk that when the bubble bursts it will be responsible for the losses sweeping an entire industry, not just those of a handful of individual investors.
Not only is this not a normal -- or sensible -- risk for anything called an "insurance company," credit-default swaps are not regulated, and therefore do not require reserves -- creating the risk of a kind of double whammy of losses.
In short, the taxpayers are bailing out, assuming executives' and investors' losses, brought on from fraud, greed (or, at best, stupidity and ignorance). This includes the folks who sold the mortgages originally, who bundled them into securities, who bought and traded those securities, and who insured those investors -- all a pretty scummy lot who should have known better and were engaged in fraud-like behavior bordering on, and sometimes crossing over into, criminality.
They must be thought of, in moral terms, as the equivalent of the arsonists who cause major forest fires, with injury and death of the individuals caught in the fire and those brought out to fight it, property damage in the millions or billions of dollars, seriously disrupted lives, and a drain on taxpayers' resources.
Those fires are not "acts of God." Nor is this economic calamity. Both are the clearly predictable result of reckless and irresponsible behavior by humans. The only difference is that those who deliberately set the woods on fire don't personally profit financially from their acts. These men and women did. It's like crashing the power grid, causing Americans to freeze in the dark, or setting loose a computer virus that ultimately brings down the Internet and causes billions of dollars of losses
In short, the harm these corporate executives have done goes far beyond their own investors, employees and retirees. It goes beyond their customers. It has resulted in what may prove to have been the most serious body blow ever suffered by the American economy and the people whose welfare depends upon it. And we now know not only does the suffering go far beyond our shores and fall most heavily on those least able to withstand it, but it has become a threat to our national security far more serious than anything threatened by "terrorists" -- as the CIA must now brief the president each morning on the potential threats to our country, foreign and domestic, brought on by this sorry lot of bankers. See, Nicholas Johnson, "Terrorist Bankers," February 13, 2009.
So why has our government given them a single dime, let alone the trillions of dollars it has -- including what will soon reach $250 billion for one company alone, AIG?
It's the old "they're too big to fail" ruse. My response? Any company too big to fail is simply too big; the sooner it can be broken up into manageable-sized pieces the better.
These "toxic assets" have some value -- or would if the government would get out of the market, remove any possibility of a bailout, thereby forcing the holders, and potential buyers, to do the sorting through of what's in those securities, and put a price on them. Of course no one's going to buy them for their true value so long as the government can't make up its mind but may, in the end, buy them for much more than they're worth. These securities actual market value may be a lot less than what the holders paid for them. That's too bad. But that's the way their beloved "marketplace" is supposed to work.
No one ever promised them this system of privatized profits and socialized losses that these johnny-come-lately socialists now believe is their birthright.
One of the best television explanations of how we got into this mess, and how little the relevant government officials really knew about how to get us out, was prepared by PBS' "Frontline" in its show titled "Inside the Meltdown," February 17, 2009 (the link goes to a complete online video, transcript, timeline of the economic collapse, and other features).
If you think global economic collapse is of sufficient significance to warrant an hour of your time coming to understand the tension between the competing concerns over "moral hazard" and "systemic risk," and the meanings of "toxic assets," "bundled, securitized mortgages," and "credit-default swaps," I highly recommend the show. Not only is it a balanced effort to inform, it's also entertaining -- not in a "Daily Show" way, but because it is so well written, shot and edited into a classic "Frontline" presentation.
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Bankers as Arsonists," March 3, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
