At the corner of uncertainty and anger
It feels like we've reached an important crossroads in the economic recovery. Many people are fed up with the bailouts of companies like AIG. The markets are confused by the government's "plan." The question now is: Is there a road that leads us past this intersection of uncertainty and anger?
Populist democracy may be wild and capricious but there is hardly an abuse or distortion government can serve up that the market can't figure out how to live with once the rules of the game are set. That's because nothing is more important to the functioning of capitalism than the rule of law. Even crappy law will suffice, which may be the best we can hope for.
Give us a date-certain when the Congressional circus and its media handmaidens will turn off the uncertainty machine so we can get back to work under whatever set of rules, subsidies, taxes, bailouts, and regulations they choose to saddle us with. Then freeze the plan and shut up.
But Fed Chairman Ben Bernanke keeps talking. In a 60 Minutes interview last night, Bernanke fed the uncertainty machine by saying this:
"It depends a lot on the financial system. The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery."
Bernanke says there's a plan, but who's in charge of it? AIG is now 80% owned by the taxpayers, but the government seems to have little say about what AIG is doing with its $170 billion in federal aid. Over the weekend, we learned that AIG is giving $450 million in bonuses and retention pay to employees. Treasury Secretary Tim Geithner protested, and AIG agreed to restructure some of the payments. But AIG's CEO said he had "grave concerns" about the company's ability to retain talented staff "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
But the government owns you! This is what happens when the taxpayers give money to financial institutions without stipulations. Once the money is handed out, all Geithner can do is write a letter saying, hey, you aren't supposed to do that. Further illuminating the lack of control, AIG disclosed where much of the bailout money has gone: to banks and other financial institutions, including hedge funds.
"These are extraordinary times," AIG spokeswoman Christina Pretto said yesterday in explaining the company's decision (to release the information). "And we and our partners at the Fed thought this was right thing to do." Fed spokeswoman Michelle Smith agreed, saying, "We commend the company for finding a balance between its concerns with confidentiality and the concerns of the public interest."
Our "partners at the Fed?" It's an 80-20 partnership, and the minority has the power. Henry Blodget at Clusterstock vents over the bonus payments:
This, needless to say, is outrageous: If AIG had gone bankrupt (in an orderly fashion), these bonuses would not be paid. The executives holding the contracts would just get in line with AIG's other creditors. And U.S. taxpayers would not be out $170 billion and counting and enduring insult after injury every week from the national embarrassment known as AIG.
Which brings me to the anger part of this. The natural reaction for anyone feels a lack of control is to lash out. And I'm not just talking about bloggers and taxpayers. The head of the President's National Economic Council, Larry Summers, also called the AIG bonuses "outrageous." From Dealbook:
Even as Mr. Summers was denouncing A.I.G. for the bonuses, he suggested that there was little if anything the government could do to stop them, seconding the conclusion of Treasury Secretary Timothy F. Geithner.
Then what's the use of having a "plan" if you have no control over how it's being implemented? President Obama must put his foot down or he, too, will face the wrath of the angry, confused masses:
"The change now is you have a free-floating economic anxiety that has expressed itself in a kind of lashing out at those being bailed out and people who are bailing out," Michael Kazin, a professor at Georgetown University who has written extensively on populism. "There's not really a sense of what the solution is.
The solution is for somebody to take charge of the solution. Otherwise, we're stuck at the intersection of uncertainty and anger without a phone and without a drop of gas in the tank.