Washington is losing sight of the real crisis. Incompetence, loose money and impulsive decision making are what brought us to near collapse. Why are we repeating these same mistakes again?
Bonuses of the bailout
The $2B in Merril bonuses and the $187M in AIG bonuses when the government effectively saved these institutions from their own incompetence is far from acceptable. There is no reason that people who created the systemic risk should be rewarded by the bail out money which is ultimately funded by tax payers facing higher taxation and a reduction in government services.
Having said that, the anger that swept the US House of Representatives to pass an unconstitutional bill that singles out individuals and retroactively taxes them at a 90% rate is equally an unacceptable reaction. The bail out bill contained the provisions to allow these retention plans and bonuses. How was this overlooked? Because most lawmakers don’t read bills before signing them in to law.
Global righteous indignation grows
It’s an unbelievable situation we, as global citizens, find ourselves in. The international banking conglomerates have failed us. Our respective governments have failed us. Yet they now want to claim to be the heroes and the saviours that will restore prosperity to the world. Cutting interest rates, funding defunct institutions, floating trillions of dollars out to prop up bad debt all to relieve the liquidity vacuum the last bubble bursting left in its wake.
In the last two weeks there was a positive change of character, albeit short-lived, that boosted markets worldwide. It was the prospect that the rules of the game had been set in the United States to favor a partnership between private capital and government loans that would allow an eventual transition away from the US Treasury and Federal Reserve propping up the every marketplace they can.
In an attempt to quell popular angst over the AIG bonuses, which were 90% less than the Merrill bonuses and 99.9% less than the total bail out AIG dished out to other banks, including non-US banks, the House of Representatives set out to destroy all the good faith that had been built. Completely ignoring the bigger picture that AIG was simply a proxy for money that was siphoned all over the world, in the billions, not millions.
Who’s really in charge?
Let’s not forget the US Government is a majority stakeholder in AIG. They own 80% of the shares and easily control any issue put to vote. They can also demand the board and even CEO are replaced. These types of extreme actions wouldn’t be positive, but they certainly seem more logical than passing a retroactive 90% tax.
The problem is the government keeps changing the rules in the middle of the game. It’s very difficult to restore confidence when no one knows what the law will be tomorrow, let alone next week. Every time there’s some level of complacency that the rules have been set, the rug gets pulled out again from under everyone.
Laws and lawmakers
The rule of law is a fundamental element of successful capitalism. There is no confidence if laws can be arbitrarily and retroactively changed or contracts can be freely broken without consequence. I fear that more of this knee jerk legislation will completely reverse progress we’ve made toward restoring some level of confidence.
It’s unfortunate that we’ve propped up any of these institutions and in my prior entries I’ve always spoken out against bail outs and the corporate welfare environment it engenders. No business that is unable to continue to sell products or services should be allowed to be given second, third or forth chances funded from the public trust. Innovate entrepreneurs will create better, more profitable and functional replacements in time.
The problem is, Washington only realized this after the fact. Only in retrospect do lawmakers seem to understand that most if not all of the effort was a waste of money. Now, in order to not look foolish before the 2010 elections, lawmakers are putting on a big media circus to scapegoat everyone but themselves, who share in the blame just as much as the banks. Let’s not forget as citizens that any lawmaker who voted for the TARP or the stimulus was complicit with bonuses and retention plans.
Even back when Fannie and Freddie were taken in to conservatorship, part of the contract with the US government was to guarantee the bonuses and retention plans remained. The US Congress would have us believe that they were swindled and the bonuses flew under the radar. Seriously? Did you guys even bother to read the bill you signed?