Deeper and Dumber

The theme of the week was down, down, down, down.

Industrial production in the Euro-zone feel over 17% on an annualized basis in the month of January. In the U.S., mass layoffs continued to accelerate, and in California the unemployment rate hit 10.5% (12.5% for African Americans), up from 10.1% last month and 6.2% a year ago. The LA Times had a photo series on a Tent City under the powerlines outside of Sacramento that looked like a warm-up for the return of Dorothea Lange to the Depression camps of 1936. The number of unemployed in the UK hit the symbolically important 2 million level (6.5%), with predictions that it would soon be 3 million.

Down down we go, no end in fact in sight.

Then there were A.I.G's zombie hungers. These appear to have no end. The "insurance company" has an insatiable appetite for public bailout funds - at least $160 billion to date.

How much is $160 billion? It's enough to educate 18.4 million US children for one year, or about 1/3 of all schoolchildren in the United States.

AIG's Financial Products personnel, who bankrupted their company and everything else in sight, want their full bonuses ($165 million in the March round). How much is $165 million? It's enough to reverse this year's budget cut and enrollment freeze for the California State University, which has 450,000 students.

Congress was shocked, shocked, to hear that the bonuses would be paid and voted to tax them at bailed-out companies at 90%, even as Sen. Christopher Dodd of Connecticut, the state that had more hedge fund managers than it had dogs, said he inserted the bonus-protection clause at the request of the Obama administration.

Rembrandt came back to life for the occasion and painted this picture, entitled "House Finance Committee Covering its Meaty Behinds."


The economist Dean Baker wrote the best short overview of the AIG Saga. Everyone got mad as hell this week about at least one part of it- 85% in one poll were either "outraged" or "bothered" by the bonuses. Even some business journalists are mad as hell. Joe Nocera should be madder at A.I.G. than at Congress, but he gets at the main issue anyway:

There is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?

But there's also a fair amount of mental paralysis. NYT "Dealbook" columnist Andrew Ross Sorkin offered the most pathetic defense of paying the AIG bonuses. He wrote:

If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

Gosh, I CAN imagine what it would be like. The business community would follow the rules established by the government as the duly-elected representatives of the public. The business "community" wouldn't be still trying to extort the public with money on the grounds that if we don't pay up everything will get worse.

The business community might, well, go back into BUSINESS. You know, go back to work, start making things again, designing and selling new goods and services, lending money, making old goods and services better. All the stuff that BUSINESS is supposed to do.

And the public wouldn't be standing around with its pants down watching Geithner et al. make payoffs with the Giant Government MasterCard.

Why isn't any of this happening? Why is Sorkin among others so dumb - by which I mean, unable to call for putting money to constructive uses rather than giving more away to the loons in finance?

A clue comes from what the pro-bonus people are actually defending. They are defending the entitlements of the financial community - the privileges of sheer position.

I say this because they are defending guaranteed bonuses - bonuses that used 2007 payouts to set a floor beneath 2008's (see Section 3.01(a) of the AIG contract). There wasn't actually a relation between the AIG bonus amount and actual financial results. Their was only the protection of a preestablished superior income position. This is feudalism, not "performance."

The same goes for the much bigger issue of the tens of billions for a 100% bailout of AIG's clients, as Nocera points out. Dean Baker's analysis (linked above) is particularly helpful and should be read by all. He asks:

1) Did the banks hold the underlying assets, or just the CDS?
2) Did the government have to buy back the underlying assets from the banks, or could it have waited to see what happened?
3) Could the support for the banks have been done directly, including some quid pro quo, without having AIG as an intermediary?

Baker's answers are no, no, and yes. These answers (you have to read the piece) lead Baker to observe this:

When the government lent hundreds of billions of dollars to the banks through TARP, it got preferred shares of stock in return, in addition to placing conditions on the banks’ conduct. By contrast, the government received absolutely nothing for the tens of billions of dollars that it passed on to the banks through AIG. It may have been desirable to ensure that AIG’s defaults did not lead to the collapse of the major banks that were its counterparties, but this could have been accomplished by directly giving these banks capital through TARP or some equivalent mechanism. . . .

Baker suggests that the government did not do this because it wanted "to preserve the international reputation of the U.S. financial industry."

This is probably right, but I would put it slightly differently: what Bernake, Geithner, et al. want to do is to preserve the international position of the U.S. financial industry. Their actions make sense (the 100% restoration prior to contract maturation dates, the propping up of AIG as the most expensive intermediary in world history, etc.) only as an attempt to keep the institutions in charge of the international finance system. That means in charge of their international relationships. It also means in charge of all economic decision-making in the U.S. This is a complete shut-out for the public - for public education about finance (see Nocera), and for a shift in the balance of decision rights from the financial industry to the public.

Obama-Geithner mean for the public to be shut out. Geithner himself told the NYT that "“It’s very important that we don’t look like there’s any intent of taking over or managing banks." Banks have to stay entirely in charge.

I'm afraid that the sovereignty of finance over the economy is more important to the Fed and Treasury than is the recovery of the economy itself.