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| Home Front Economy |
| Congress in a lynching Mood: Steve Chapman |
| 2009-03-19 |
| The financial crisis has been widely interpreted as proof of the need for extensive government regulation of banks, insurance companies and other capitalist institutions. The antics of politicians now that they have a greater role, however, are a vivid reminder of why they can't be trusted with such power. These days, every politician assumes that because he has a driver's license and an ATM card, he must have all the necessary skills to run an automaker and operate a bank. House Speaker Nancy Pelosi and Senate Democratic Leader Harry Reid, for example, said Detroit should use its bailout money to become "a global, competitive leader in fuel efficiency." Never mind that if we know anything from recent automotive history, it's that the Big Three's competitive advantage is in trucks and sport-utility vehicles. If they had spurned that segment during the decades of cheap gas, things would have been very different: They would have reached the brink of bankruptcy long before now. But Congress' idea of a sound business plan is to build cars that suit its grand ambitions rather than, say, the tastes of consumers. But Northern Trust didn't ask for federal help--it was conscripted into the bailout. It happens to be managing its money well enough to be making a profit and repaying the taxpayers. And did anyone notice that after Earth, Wind and Fire did the Northern Trust gig, it performed at a White House dinner? Why is it OK for President Barack Obama to host "lavish events" that are financed by taxpayers but outrageous for a bank to use mostly private funds to entertain valued customers? Then there is the insurance giant American International Group, which unleashed bubbling torrents of outrage when it paid large bonuses to hundreds of employees. Angry lawmakers have no idea what these workers should be paid, except that it should be a lot less. Of course, some taxpayers feel that members of Congress should forfeit their salaries in years when they fail to balance the budget. But our leaders' contempt for failure applies only to the private sector. They demand that the bonuses be rescinded and, failing that, threaten to tax them away, at proposed rates as high as 100 percent. "Let the recipients of these large and unseemly bonuses be warned--if you don't return it on your own, we'll do it for you," thundered Sen. Charles Schumer (D-N.Y.). No one in the lynch mob wants to admit that the amount is piddling from the point of view of taxpayers. It adds up to less than 1 percent of the $170 billion the government has poured into AIG. The prevailing reaction amounts to swallowing a camel and straining at a gnat. AIG could have refused to make the payments, but only by violating contracts it had made with employees. Officials at the Federal Reserve Bank of New York entertained this option, reports The Washington Post, only to realize that the spurned staffers would have sued and gotten not only the payments but "punitive damages that would make the ultimate cost perhaps two or three times as high as the bonuses themselves." Refusing to pay would also have driven away any top employees with alternatives--which would tend to be the better people, who might just be useful in restoring the company to health. Congress' approach brings to mind the sardonic workplace sign: "The floggings will continue until morale improves." Expropriating property from people who did nothing more than accept money they were legally due sounds uncannily like a bill of attainder--a legislative measure declaring someone guilty of a crime, and imposing punishment, without trial. This weapon was expressly forbidden by the framers of the Constitution because it is fundamentally unfair, at odds with the rule of law and driven by mass hysteria rather than dispassionate fact-finding. Once upon a time, those were considered bad things. |
| Posted by:mom |
| #8 It may not matter, anyway. |
| Posted by: SR-71 2009-03-19 16:42 |
| #7 CDS have two sides... one who sells them without having the funds to honor them and the other side who buys them knowing all that. And yes government (both parties) failed to regulate them. Just like legalizing a Ponzi scheme. |
| Posted by: European Conservative 2009-03-19 16:04 |
| #6 Thanks, lotp, for providing a healthy daily ration of perspective. |
| Posted by: mom 2009-03-19 15:39 |
| #5 That's a terroristic threat, IMO. Sic the DHS on 'em. No, unfortunately it's simply a statement of fact. Deutsche Bank and others used AIG and credit default swaps to whitewash their balance sheets and circumvent regulatory capital requirements. If AIG had failed formally, it would have required DB, Royal Bank of Scotland and the others to restate their balance sheets officially all at the same time. At which point they would all have been required not only to stop lending but also to dump their own equities and all assets they held onto the market to raise capital. In such a scenario those assets would be worth very little with the result that the whole international banking system would have come crashing down, within days not weeks. With the result that the 30s depression would be remembered fondly as good times. For instance, credit cards would be cancelled for the vast majority of consumers. We've become used to instant credit, so most consumers don't read the agreements that allow banks to jerk that credit very very quickly. Ditto for home equity loans etc. Meanwhile there would be a run on the banks as consumers attempted to withdraw savings and electronically deposited paychecks only to meet with withdrawl limits or outright refusal. It wouldn't take long until shops closed doors, followed immediately by the supply chain companies that stock their shelves. etc. etc. |
| Posted by: lotp 2009-03-19 15:16 |
| #4 I'm from the government and I'm here to help you. I guess that is called an oxymoron or at least some kind of moron. |
| Posted by: JohnQC 2009-03-19 13:26 |
| #3 If anyone is really interested in the nitty-gritty details of how the whole kittin-kaboodle financial crisis originated then I suggest you get this book and start reading. You may have to take notes along the way since it is very technical in structured finance and derivative theory but also spot on. AIG comes off as the Enron of the 21st century. |
| Posted by: Jack is Back! 2009-03-19 13:08 |
| #2 "Nothing more" than "legally due" is BS. AIG is a criminal enterprise, as far as I'm concerned. From the 26 February 2009 AIG paper titled "AIG: Is the Risk Systemic," p. 3 "The failure of AIG would cause turmoil in the U.S. economy and global markets, and have multiple and potentially catastrophic unforeseen consequences." That's a terroristic threat, IMO. Sic the DHS on 'em. |
| Posted by: Anguper Hupomosing9418 2009-03-19 12:51 |
| #1 The real sin is getting into a $170 Billion hole and expecting us to bail them out. Throughout this discussion never forget that AIG was responsible for conceiving the Credit Default Swap and the regulations surrounding them. They were warned from the beginning that these contracts were very volitile and needed reserves held against them. But that would have lessened profits. So after showing criminal disregard for the risks they took, they now demand to be bailed out by the taxpayer. Actually the bonuses are important since awarding them would mean these white collar criminals have done nothing wrong. It is not the S165 million. It is the symbolism. |
| Posted by: Frozen Al 2009-03-19 11:40 |