Economics, Politics, Outrage, and the Media

Warning: This is a post about economics and politics; it is a reader response post; but (here’s the warning), it’s also one of those annoying self-referential posts you only see on the Internet discussing a debate among the commentariat.

Last week went something like this:

  1. We learned about the $165 million in retention bonuses at AIG Financial Products.
  2. A lot of people, up to and including President Obama, got mad.
  3. Various commentators, including Ian Bremmer (on Planet Money, around the 14-minute mark) and Joe Nocera, said, in Nocera’s words, “Can we all just calm down a little?”

Their argument is basically that $165 million is small change, the government should be working on bigger issues, and the demonization of AIG is making it harder to solve the real problems.

Andrzej Kuhl, a former colleague of mine, put it well in an email to me after reading our New York Times op-ed:

I feel that the timing of the piece is harmful and its final conclusion is too limited.

Don’t take me wrong, I am a strong believer in compensation plans being tied to performance.  And not just a short term – one year – window, but a performance measured over a multi-year period.  Ideally, compensation enhancements should have multiple parts, ranging from evaluation of the performance of an individual, to that of a larger unit within which the individual performs.  I also believe that all individuals are replaceable and should be moved aside if their performance has been sub-par (and bringing a company to the brink of bankruptcy is definitely below par).

Having said that, I strongly believe that the current brouhaha over bonuses at AIG, and other TARP recipients, has reached the level of a national hysteria.  What should be an effort for some lower level functionaries, has been occupying front pages of newspapers, tying up valuable time of top government officials (including the president), as well as encouraging members of the congress to pontificate in circus-like hearings and propose retroactive tax legislation of dubious legality.  In effect, our leaders are following, or being forced to follow, the angry crowds.  But history also teaches us that such crowd-pleasing games, just like feeding a few Christians to lions, only obscure current problems and defer their resolution.

Ironically, those same historical facts described in your article could have been used to present a much broader set of recommendations.  Rather than adding fuel to the fire (focusing on the lack of justification for retention bonuses), you could have called for a radical restructuring of the financial services industry and its compensation practices.

After all, even if we claw back the $165M (or even the $218M reported by Reuters today), the economy will still be in shambles and the mind set among the leaders of financial services establishments will not be much changed.  On the other hand, if we can muster as much bi-partisanship into congressional work on budget, economy rescue plans, financial services regulations, etc. as we witnessed on the “bonus tax” proposal, we could be a step closer to the real solution.

I think there are two separate issues. On the first issue, I agree completely with Andrzej, and in large part with Bremmer and Nocera. I began my first post on this topic with these words: “$165 million, of course, is less than one-tenth of one percent of the total amount of bailout money given to AIG in one form or another.” I agree that the bonuses have an insignificant direct economic impact. I also agree that the furor that erupted over the bonuses has made it harder to solve our big problems. Not only have the president, his economic team, and Congress been distracted by Bonusgate, but the public backlash will make it much harder for the administration to get money from Congress when they do need it – not only as the economy deteriorates, but even when it comes time for things like health care and education.

At the same time, let’s not forget that Bonusgate has also had some positive effects. First, though small in itself, it strikingly illustrates a broader issue of tolerating business at usual in a failing financial sector. Scond, it has finally made the administration realize that there is a political cost to repeated generous bailouts of the financial sector.

The second issue is more complex. Bremmer and Nocera basically say, “calm down.” (Andrzej says something more subtle, which I will get to in a bit.) In Bremmer’s words, “if you are a subsistence worker, outrage is a luxury you cannot afford.” I’m not sure what this is supposed to mean. Outrage is an emotion, not a rational choice. Blaming outrage is like blaming greed: it’s an unavoidable part of the human condition. The question is whether we can do anything about it.

Bremmer, Nocera, and (to some extent) Andrzej blame our political leaders in Washington for indulging in populist bonus outrage instead of acting like responsible adults. But this raises an interesting question about the relationship between economic policy and democratic politics. I’m no expert on democracy, but I can make a couple of basic observations. We live under a democratic system. We want our elected officials to be sensitive to the concerns of their constituents. We don’t necessarily want them to do everything that a majority of people want – they are supposed, to some extent, to resist popular pressures and instead do what is in the public interest – but at the same time we get very upset when they seem to ignore popular opinion, or seem out of touch with popular opinion. When that happens, an administration can lose popular legitimacy, and without popular legitimacy, it will find it very difficult to get Congress to cooperate.

This is the risk the Obama administration now faces, as eloquently described by Frank Rich. Even if the administration officials believe that Bonusgate is a distracting sideshow – as they probably do – they cannot simply ignore, or belittle, the concerns of Main Street; if they do that, they lose whatever ability they have to solve our “real problems.” I think that the last administration was at fault for not dealing with the bonus issue back in September, and the new administration is at fault for not dealing it when it learned about it. But that’s water under the bridge, and Washington has to meet the public partway. And I think that is what Obama was trying to do.

This is not a country where technocrat-economists can design perfect policy solutions and implement them without regard for public opinion, nor would we want it to be. As I said in a recent post, I have made the mistake of thinking that an ideal solution could be imposed without taking proper consideration of the political difficulties involved. In the country we have, the ability of the government to implement the “right” policy solutions depends instead on its popular legitimacy, which means at a minimum feeling the public’s pain.

Now, Andrzej raised a slightly different issue: whether I (and, by extension, the many commentators who piled onto this issue) am at fault for helping to stoke bonus outrage. President Obama has to be sensitive to popular opinion; I don’t. In my case, Simon and I wrote an article trying to debunk one of the arguments for the AIG bonuses. We wrote it first because we believed what it said, and second because we thought its relevance went beyond AIG, since it dealt with the broader question of whether failed institutions can hold up reform by insisting that only they can fix the problems they created. So the question is whether we should have published it or not. (I agree with Andrzej that a better outcome of Bonusgate would be a systemic fix for flawed incentives in the financial industry. But publishing the article you most want to write, for reasons I won’t get into here, usually isn’t an option, unless you have your own column.)

Perhaps from a narrow utilitarian perspective one could argue that the article did more harm than good, because it contributed to the outrage that is making it harder for the administration to get real work done. From a broader perspective, however, one could argue that the value of the free exchange of ideas outweighs the short-term costs generated by the article. Of course, there is no way of quantifying and weighing these costs and benefits. And in any case they are probably relatively small either way; I don’t want to make the mistake of exaggerating my own importance.

In summary, I agree that Bonusgate has had some negative consequences (along with its positive ones), but I’m still comfortable with my small contribution to it. If we were much, much bigger, then perhaps I would pay closer attention to the potential consequences of what I write. But for now I’m willing to write pretty much anything I believe to be true.

63 thoughts on “Economics, Politics, Outrage, and the Media

  1. As taxpayer, one of those in the “angry mob” I dont’ want my money to go to retaining people. I don’t want it to go to rewarding those who made bad decisions. And I am not going to allow my elected representative to forget that they work for me, not Wall Street.

  2. Dr. Kwak —

    You have treated the bonus scandal exactly as it should be treated: As a small, easily-understood example of the mindset at work in these bail-outs, both in the firms themselves and among government officials.

    Major historical shifts sometimes hinge on small events (e.g., the assassination of an Austrian prince in 1914). The bonuses may be small, but they are easily understood by everyone, and they are outrageous. Indeed, the very fact that $165 million is “small” in this context is part of what makes the whole situation so absurd…

    Populist rage is more than warranted, in my opinion. If merely reporting some facts about the “small” bonuses stirs it up, what is wrong with that?

  3. The bonuses sure look like another symptom of important underlying problems with our system.

    How many symptoms do we have to see before we realize that things have to be done differently?

    Bob Spencer

  4. Just step back and broaden the perspective. The odd thing is that so many economists still think of the economic system as apart from democracy and therefore politics. It is not — and not even in a purely theoretical sense (since, on the micro level, interpersonal utilities cannot be measured other than by willingness to pay a price, so there is no outside verification of the theory; and on the macro level, the distribution of income is independent of Pareto optimality and therefore “economic efficiency” and further, inequality is not categorized as a market failure.)

    Morals and philosophy are primary to how we trade and exchange, and so politics is important in a fundamental sense. Outrage is good because the market economy exists in a web of extra-market institutions — and those institutions now include the internet. When people get angry so widely and so quickly, it’s a signal that the whole thing is not working and needs to be fixed. You are correct to point out that this could become a political problem for the Administration if its politics are not handled effectively.

    All of that said, it will be handled. There are several reasons why. Strong emotions last about three months, a fatigue starts to set in, and then the public starts thinking about something else. Many individuals will come to consider that it’s been a bit of hysteria, like Mr Kuhl. The Administration meanwhile will demonstrate due diligence on executive compensation in the bailouts, and it is unlikely to repeat the mistake. And nobody is going to let go of the big lesson, which is that the financial industry needs to be watched more closely, and a resolution mechanism for cashiering corporations that are presumed “too big to fail” must be put into place. Here again the enormous new transparency in ideas, and the attention to details, that is afforded to us all by the internet may well serve to help us formulate a better system of embedded institutions than before.

  5. Yes, and while so many dilettante economic “conservative” enthusiasts never fail to rhapsodically cite Adam Smith’s wonderful “invisible hand,” they neglect the fact that he was first and foremost a moral philosopher, e.g.,

    Adam Smith, “The Theory of Moral Sentiments” “Conclusion of the Sixth Part”

    “Concern for our own happiness recommends to us the virtue of prudence: concern for that of other people, the virtues of justice and beneficence; of which, the one restrains us from hurting, the other prompts us to promote that happiness. Independent of any regard either to what are, or to what ought to be, or what upon a certain condition would be the sentiments of other people, the first of those three virtues is originally recommended to us by our selfish, the other two by our benevolent affections regard to the sentiments of other people however, comes afterwards both to enforce and to direct the practice of all those virtues; and no man during, either the whole of his life, or that of any considerable part of it, ever tried, steadily and uniformly in the path of prudence, of justice, or of proper beneficence, whose conduct was not principally directed by a regard to the sentiments of the supposedly impartial spectator, of the great intimate of the breast, the great judge and arbiter of conduct…

    But though the virtues of prudence, justice, and beneficence, may, upon different occasions, be recommended to us almost equally by two different principles; those of self command are, upon most occasions principally and almost entirely recommended to us by one; by the sense of propriety, by regard to the sentiments of the supposedly impartial spectator. Without the restraint which this principle in poses, every passion wouldn’t, upon most occasions, rush headlong, if I must say so, to its own gratification…”

  6. Seems to me that there’s some sort of middle ground (I know, I know).

    The outrage led nowhere good, at least in terms of immediate practical consequences – the House bill is dumb and will probably fail.

    I’m hoping, though, that it has a couple effects: that it puts the fear of God into the administration, that it encourages Congress to look for more creative ways to channel public outrage, and that it does shine a light on bonuses as a flaw in the system.

    Tangentially, That’s why I’m not convinced by the “drop in the bucket” argument. Saying “meh, it’s not much money” is sort of like saying “one drink won’t kill me” if you’re an alcoholic. One drink won’t, it’s the cumulative effect and the chain of consequences it could touch off that’s the problem (I’m happy to be corrected if you think the current bonus structure doesn’t encourage bad behavior, but if you do think it does, its role can’t be ignored). Plenty of alcoholics have slipped off the wagon with little to no consequence, but broadly speaking it’s not a reason that everyone should drink.

    Love the blog – I think you’re doing a fine job of responsibly and analytically stoking outrage, which is what’s needed.

  7. Dude,

    No need to be defensive. The country’s Total Outrage Index (TOI) did not move any measureable distance after your column. Adding insight is good. Thinking you should edit because you might be part of the problem is good while meditating, but it’s bad (and bordering on arrogance) while writing.

    You did just fine.

  8. Perhaps if the Obama Administration were actually being as transparent as they promised, the public would have the ability to put these bonuses into the “proper” context. Right now, the only thing the public is being told is to shut up and let their rich, social betters fix this problem.

    Without transparency, everything they say smacks of condescension and smugness, and outrage is the only proper public response.

  9. That the “commentariat” have difficulty seeing the need for outrage in the face of this madness is a message in itself. The injustice of taking money from people who are struggling to feed their families and keep a roof over their head to reward those created so much grief for so many is obvious and well deserving of outrage.

  10. “…outrage is a luxury you cannot afford.”

    This rationalization has been used to subjugate people to injustice through time immemorial.

  11. !!!!!!!BRAVO JAMES!!!

    The “BE NICE and LET”S ALL GET ALONG” mantra is precisely how people (especially women) are conditions to cease all critical thinking and in the current situation, these methods glue together the GROUPTHINKTHINKTANK ideas that run a machine that may bankrupt our country, take away our good name in the world and all that implies.

    Additionally, when we are INSTRUCTED by our elected officials or anyone in a position of public power to move forward, the trust of all US citizens and possibly the world is being ushered away because without looking back and making corrections and eventually calling for proper process, we cannot have trust.

    As another post stated, if our government participates in a crime, this makes the government an accomplice–this is indeed a fundamental, urgent and overwhelmingly important issue to address! We all depend on the good name of our country, and the way that the crimes of the financial service industry are being shoved under the rug and sent out into outerspace with the constant groupthingthinktank mantras is why the issue that the public does understand made such heat–EVERYONE KNOWS THAT WHAT WE CAN’T UNDERSTAND INTELLECTUALLY, WE OFTEN UNDERSTAND IN OUR GUT, AND THE PUBLIC IS THE GUT OF AMERICA, AND THE AIG ISSUE STARTED TO WAKE UP THE COUNTRY TO THE OUTRAGEOUS OFFENSES THAT ARE BEING IGNORED AND WITH THE “IGNORING” OUR GOVERNMENT APPEARS TO BE AN ACCOMPLICE IN THE CRIMES THAT ARE BEING IGNORED!!!!!!!

  12. I’m delighted to see so many replies here that agree with my basic viewpoint on the AIG bonuses and other outrages, and I won’t bother to repeat their arguments. I just wanted to make a historical point:

    There was another time in our nation’s history when the general public got thoroughly upset and angry about a few minor matters of taxation, most notably on certain documents, and tea. People understood clearly that the issue was not the amount of money involved, but the principle: that the Imperial Parliament in Westminster had the right to impose taxes on the Colonies without any right of the Colonies to representation in Parliament. Most people are aware of the eventual outcome of this controversy….

    The amounts of money involved in the AIG affair and others like it are just as trivial. The principle, however, is just as important: the wealthy are not entitled to remain wealthy forever as if by Divine Right, the concept of Moral Hazard cannot simply be discarded, and that every human being, be they rich or poor, is responsible for his/her actions and the consequences thereof, physical as well as moral.

    Or, as Bob Dylan put it (in another context):

    “Oh but you who philosophize disgrace and criticize all fears,
    Bury the rag deep in your face
    For now’s the time for your tears.”

    (The Lonesome Death of Hattie Carroll)

  13. Bobby G gives us Adam Smiths essay on the fact that…
    “…Without the restraint which this principle in poses, every passion wouldn’t, upon most occasions, rush headlong, if I must say so, to its own gratification…”

    The current administration’s fed/treas may seem to be slow and methodical and as such, cannot be viewed as rushing headlong…but the principles are absent since the actions are the continuation of a machine that stated last year that was clearly posed as “to save the world” but starting with AIG NOT being nationalized, this act is clearly being viewed as selfdealing as is the TARP 1 weekend secret pass out money meeting.

    So, as long as the administration is not REQUIRING a full review (not a mock court) of those decisions starting with the excuses about why Lehman was denied a 6billion dollar bridge loan, our country appears to be acting without regard to the essential virtues of an uncorrupt society prudence, justice, and beneficence.

  14. I got laid off in October and my reward is cashing in my 401(k) so I can pay my debts and keep my house. Do I think there are bigger issues than the AIG comp? Sure. Am I upset by it? You bet. Would I like to see the peasants grab pitchforks and torches and march to the castle to shake up our “leaders?” Now you’re talking. Do I think it’s possible to vent some justifiable rage and expect the Goldman/Sachs crowd, err, I mean, Treasury, to come to their senses and stop rewarding the bastards who blew up my world? Yep.

  15. The real issue has little to do with what’s an appropriate bonus and who gets to decide that or at what point does greed cross the imaginary line separating good deeds from bad – the fact is it’s quite beyond the humble conscience of the average American to understand in any legitimate way what Wall Street does and why some people make so much god damn money. No, the real issue is that big money is being demonized – America will no longer be America if big money and all its trappings, good and bad, are washed away in a flood of populist class angst. Obama peed his share of piss into this flood, but wisely seems to be changing tone, no doubt taken aback by the rising tide.

    Does compensation need a rethink? Sure, why the hell not – but to move forward as if some how now the world is to be made anew and there will no longer be dirty little secrets percolating through the mysterious higher echelons of power that poor average Joe has no notion or understanding of – well, that’s delusional and dangerous.

  16. If your op-ed piece had said, “Now is the time for us to all get along and play nice with the AIG folks who got us into this mess” and we need to use this bonus fiasco to re-energize Congress to work in a bipartisan way to fix our economy….well, I’d have thought, “What’s happened to James and Simon??”

    Power recognizes power; it doesn’t capitulate for the sake of “getting along”, but rather only when its good for its own self-interest.

    It takes the voices of people like you, who frankly have the courage to stand up to the power of the moneyed elite, and constantly point out how the rest of us are getting a raw deal. Because of what you do, there will always be critics (sometimes even some you don’t expect).

  17. One more point: this reminds me of the debates on the left in the 60’s about Lenin’s bribing of the technocrats and professionals to go along with the revolution. It also brings to mind the legal strategy of granting immunity to murderers to get their cooperation to go after bigger fish. Or so they say.

    IMHO, both are examples of unbridled and lazy pragmatism, and the result is a system prone to corruption is hurried along that path.

    People, when something is so hopelessly mysterious and unfathomable, do we really want to rely on those who haphazardly created it, without any thought given to much besides making money (no one goes to Wall Street to save the world) to unravel it?

    I’d rather push them aside.

  18. Hey James,

    What about the constitution. There are those who believe that the Federal Reserve Act is somehow in violation of our Constitution… take that with the compliance of a treasury that was “friendly” to the fed and ??????????????

    (Just like the Church Lady on Saturday Live…I don’t know, could this situation be…SATAN!)

    But seriously could you think about all of this? Anyone else have a way of looking into this? More tea parties?

  19. Thanks, BobbyG. Like many other real thinkers and moralists, Smith would be appalled to see who goes around invoking and slandering his name and ideas today.

  20. James, I don’t see any need for soul-searching here. AIG and the sdministration are completely to blame for anything which has happened throughout this bailout, including any level of public outrage they provoke.

    And while it’s true that the numbers involved here are small and the incident in itself is trivial, what’s important is how exemplary, how typical it is.

    AIG did not act out of character; this was not a lapse or a mistake. On the contrary it goes to the core of their arrogance and their recklessless, both of which are congenital, and both of which are undiminished.

    (It seems the public didn’t even notice that AIG is also suing us, using our own money to do so, demanding a huge tax refund.)

    As for the outrage, I imagine public feeling is often a non-linear system which can eventually reach a tipping point. Does it look like the public lashed out ad hoc and without a sense of proportion, after all the vastly worse, vastly more “systemic” outrages we see on a daily basis, which are by now as boring as they are terrible? Perhaps.

    But maybe this was the tipping point. Maybe it’s like a window that has sustained many furious blows, but then an added tap shatters it.

  21. Um – we do not live in a democratic system. We live in s system with the trappings of democracy. The most obvious trapping – the one everyone points to and says “See! We are a democracy.” – is the quadrennial public relations event we call a presidential election. Nothing illustrates the narrow range of opinion represented by the political parties and their captive nature more clearly than the current economic mess. Two years and a billion dollars were spent campaigning, we get a president from the other party (as if true democracty could be represented by only two parties) and he offers what is essentially the Paulson plan with more bells and whistles attached (in an effort to make it less obvious that it is the Paulson plan).

    Why is this so? Follow the money. It takes 500 million dollars to run a presidential campaign now. Those people don’t give money out of conviction, otherwise they wouldn’t give to both parties, would they? But they do give to both parties, and they expect things in return. And you don’t get to be president by failing to deliver on campaign contributions (campaign promises are another matter entirely).

    The Democrats have accepted so much money from Wall Street it was crazy to hope for anything better (but I did it anyway)…

  22. It is said that Thomas Jefferson “If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

    But isn’t it interesting that the same people who claimed that the world was coming to an end, and the only way to save the world was to “bailout the banks” is the same group of appointed and elected officials who shun nationalizm of the banks–the perfect trap–pass every penny the already communist bank of America can pass with the help of all of the friends ot the Bank of the US (oops, i mean the fed), and at the same time lobby that nationalization would end capitalism as we know it—the owners of the Bank of the United States (private parties who control our government, and all of us with their power) will keep this game going unless we examine history, see the forces in action and realize that a government owned currency (which is what we have since this private fed reserve is powerful enough to run the show) is communism…but unlike communism out in the open, our leaders are BANKERS who we can’t exactly name, we just know their friends.

  23. Who really believes the New Deal would have come about without the great popular outrage against the financial world of it’s era.

  24. I think its insane that Treasury bailed out AIG without first requiring that each and every executive in the division that created the problem be fired immediately. Its beyond insane that these people are getting bonuses. The dollars at stake may be relatively small, but the principle is huge. As long as executives in financial firms can make outrageously poor decisions with no personal negative consequences we will continue to have problems with our financial companies.

  25. Outrage is to be welcomed, but there is a very legitimate concern about excessive pay in general. First it is quite arguable that excessively poor income distribution leads to backwards societies. The main point is that how can one expect to have job loyalty careful and conscientious employees from the top to the bottom in jobs if the captains of industry i.e. senior traders and managers engage for want of a better term looting. Excessive pay for arguably poor work demoralizes the entire organization. It turns ordinary workers into thieves. Secondly, it shows disrespect for the future of the organization that the senior manager is running. It promotes the destructive ideology that if you work to get to the top you can rob the organization blind. If pay is not linked to performance in any sense it fosters lawlessness and undermines the rationale for a market economy. If the leaders of industry loot their firms even if the looting is a pittance, they encourage disrespect for the entire economic system beyond the amounts of money invovled.

  26. Comments are closed to your Baseline, etc., and I can understand why. You guys are great! That’s why your site kind of crashed today–at least I couldn’t “get there” for a long time. That’s how important you have become to thinking people (as opposed to the other kind). Please consider adding a new service: Ask Baseline. Put your grad students on the case. (See Ask Factcheck at for guidance.) My first request: Define V-shaped, U-shaped, and L-shaped recessions. What is “deep”? What is “long”? Ranges will do, of course. The blogosphere is all over the bleeping map on this and no help at all! I am a trained economist. I recommend your website to my clients, CEOs of mid-sized companies of some importance. But your site is still over their well-educated heads. In addition to “Ask Baseline,” consider a simple glossary of economic terms. Meanwhile, you are doing God’s work. Good job. Do not stop. Tom Jackson

  27. Retention bonuses are a critical tool for protecting enterprise value. A company is made up of tangible assets and intangible assets. In the financial services industry, the most critical intangible asset is its people. Whether you “like” those people or not is irrelevant. A disorderly departure of the companies employees destroys enterprise value, period. Since you, as a taxpayer, have an interest in the enterprise you should focus more on what has an impact on the value of your investment, not what makes you feel better. If this plays out the way I suspect it will (after years of experience as a turn-around executive) you will have won the battle (the money will be returned) but lose the war (the long term value of AIG will be greatly diminished in the process).

  28. Forget the whys and wherefores, the ethics and the morality. If the Administration–in avoiding nationalization or bankruptcies or receivership or even boardroom activisim–has been merely afraid of the political power of the moneyed elite, the current outrage would be providing the political cover necessary to implement any and all of those approaches.

    This outrage forever robs the Administration of any excuse that “X was simply not politically possible.” Whatever this Administration does from now on, they own it. Outrage makes everything possible.

  29. This is a lecture to the shareholder that he should just shut up and pony up. Management knows better, and the rest of should sit back and let management do it’s thing.

    I’m wondering what level of disaster will change your mind?

  30. The outrage was justified, even if the $165 million is considered by some to be chump change. The bonuses illustrate in a clear and simple manner what’s wrong with the system, which is rewarding massive failure.

    AIG took its name off it’s flagship building in NYC this weekend!

  31. AIG is bankrupt, totally dependent on taxpayer money–continued injections of taxpayer capital–to avoid death. It isn’t a going concern. And there are plenty of other recently laid off bankers to replace them. We’re not in the “boom” days of ’05 and ’06.

    So AIG’s management and workers don’t get a bonus. Period. The minute they pay back the government’s money, they can pay the little idiots as much money as their idiot Board is willing to approve. Good luck.
    Remember GM autoworkers’ salaries were just “clawed back” by Congressional Republicans–so much for the “sacredness of contracts” tingod of the right wing oligarchy.

    I can’t believe the banker/FIRE groupies can still sustain an argument for taxpayer-funded bonuses. Keep it up and you’re likely to see a political revolution because it really pisses off the lower 95% in income. We’re in the top 10% and it absolutely enrages me.

    If you gave me a choice between a dope pusher and an AIG investment banker and your criteria was who represents the lesser social damage, the pusher probably wins. Americans are realizing we’re in a smoking hole created by our own willingness to incur debt and the dynamite was AIG and the banksters. And they’re realizing its going to be a long pull. So pontificating about “preserving intellectual assets” at a failed concern like AIG is pissing into a hurricane. Sorry for the metaphor but the defenders of taxpayer financed bonuses just don’t get it and their tone-deafness might pull down the whole political structure along with it, if the banks haven’t already finished pulling it down.

  32. Please, these guys placed a $400 Bn bet with money they did not have and lost. In the process destroyed their company and maimed the global economy. It what rational world would I want to retain such incompetence? In any other job, trade, or profession, such poor decision making, planning, and performance would lead to immediate dismissal. It is a conceit of the financial trade — any profession would have a professional body that would disbar or suspend licenses for this performance — that somehow they are above the rules the rest of the world lives by. Yes the amount of money involved here is a tiny fraction of the total money given to AIG, but it did a perfect job placing the cancer at the soul of Wall Street in the lime light. If Wall Steet was one of my patients, I would recommend hospice.

  33. No matter how reasonable the rage about the bonuses can be the leaders must lead in a responsible way. Any leader of a country that needs to access the markets to the tune of a couple of trillions in public debt must know it is highly irresponsible to be tinkering with such dangerous-to-the-confidence issues like retroactive taxes.

    The 165 million in cost of the bonuses could already pale in comparison to the additional margins the markets could now charge the US in risk premiums in order to compensate for such unsettling behaviour as the possibility of starting to legislate retroactively.

    If you think you can blithely ignore the consequences of what you say just to vent anger or earn support then let´s pray that the small man or “subsistence worker” on main-street, he who normally ends paying for the mistakes of his governments, don´t get you as leaders.

    Changes going forward?… No problem! Changes backdated… Big problem!

  34. Don’t you peeps “get it”, we have to throw money at the problem. See what it’s done for education!

  35. While in business school (U of Chicago), I remember a labor class in which the professor described the rationale for massive rewards at the top of an organization being that the mere chance of the big score motivates work from the lower ranks, the vast majority of whom will never see such a payday, far more effectively than paying them directly would. I’m sure he used a proper technical term that I can’t recall, but I’ve always thought of this as the “lottery” system of compensation.

    I love the symmetry of this AIG situation. As long as the fat bonuses were rationalized in the past with regard only for profit-maximizing efficiency and without regard for justice, let’s not change the game now. This may not be fair, but I’ll bet it’s damned efficient. How many dollars would we need to put into new regulations and enforcement to get the same kind of effect? This may be the most — perhaps the only — fiscally responsible move from this regime yet.

  36. Today’s rally reminded me of a person taking their last breath and gasp of life…i am afraid our country is corrupt and run by the fedcartel, and we are seeing the most sterling example of the way the cartel works: key word–bailout….glorify capitalizm, and demonize nationalization at a time when nationalization/reprivitization would have been a tiny fracton of the price of the scam/bailout…the nationalization will come, but only after the robbery of a millenium is complete.

    It isn’t a conspiracy theory, we are living it.

  37. On economics- many of the so-called experts have performed as well if not better than the AIG Execs. On Politics – with Dodd and Barney Frank at the helm no wonder there is bewilderment and loss of confidence. Recently, outrage has been tempered by low gas prices- just wait till gas goes back up. The media has been clueless- I cancelled my WSJ subscribtion and just read the blogs. Thank you for this one. Regards, bigchubasco

  38. A very good question from Spencer Ackerman :

    “What would we think, for example, if we discovered that the Bush Administration had been secretly lending hundreds of billions of taxpayer dollars to their friends to participate in a highly speculative investment scheme? And some of the friends turned out to be former colleagues and mentors at private equity and sovereign wealth funds, and most of the money came from subsidized interest rates on non-recourse loans from the FDIC, so that if the investments went bad, the private investors could walk away with only minor losses while leaving the Treasury stuck with the bad investments? But if the investments became profitable, the private investors would have leveraged massive US dollars and become obscenely rich.”

  39. See Felix on this subject:

    No I don’t think the revolution is in the air but he’s got a good point. People
    a) are not buying that the world will end if these greedy institutions are not saved and
    b) do not care about “constructive solutions or in leveraging private capital or in the sanctity of contracts” as Felix says.

    Obama told Jay Leno most of this stuff was perfectly legal. Call me stupid but I’m sorry, don’t expect me to believe that no laws were broken when billions were transferred from the general public to a few employees’ pockets costing the whole economy up to 4 Trillion dollars. Anyone who believes that is either lying or stupid.

  40. has there ever been a proper and systematic audit of the UNITED STATES OF AMERICA’S BALANCE SHEET? Could it even be done? one little 0.00000001 is a big deal, but imagine 0.07?

  41. First, I think the issue here is not so much about the elected officials being sensitive to the concerns of their constituents (I believe they are more often than not being overly sensitive) as it is what they produce from their sensitivity to the relevant issues. A stark example is the bill that the Congess passed. While I do agree that it is about giving in to populist outrage, I don’t believe it is the best that the Congress can do. Taxation might be the easiest way to get the bonuses back, but it’s not necessarily the right way. If I remember it right, that was passed even on the same day that Ed Liddy testified and said that he already asked those who received bonuses to give at least 50% of what they received. It wasn’t even a day or two after that testimony that Congress decided they’ll be unwise and hasty and pass that bill. It might not be an issue for many, but that being a 5-page bill with nothing else in it but pure motivation to tax – no clauses that allow for some flexibility whatsoever, i.e. even attempting to exempt those who MIGHT be deserving of getting something – tells me how poorly conceived that move was.

    You’re right, we don’t want the officials to do everything that the majority want – because as supposedly the wiser group of people to handle constituent/public issues, they are expected to act more rationally and solve matters in a more acceptable and sensible way. They might run the risk of losing legitimacy if their way of solving things run contrary to what exactly the public wants but at times, what the public wants is not really the best way to go about with things. And that’s partly why they are politicians – they are expected to be capable of explaining to their people why they did what they did. And it doesn’t necessarily mean the concerns of Main Street are being put aside.

    With all that said, I believe it’s not an issue of being sensitive or of losing legitimacy or whatnot, rather is is an issue of how they act towards resolving matters. Are they sensible or not? Are their actions sensible or not? Are they really acting on behalf of the populace or are they simply taking advantage of public outrage (or they themselves may have lost their cool, which often happens) that they’ll do whatever they want without consideration for their implications/consequences?

    Now second, about your colleagues commentary. In your defense, I personally did not find your op-ed piece in NYT to be provoking further intense anger. When controversial issues are at the center of debate everywhere, I don’t believe it is right to be silent about it. Just as Andrew Ross Sorkin wrote a piece about why he thinks the bonuses should be given, it is just right to have people to refute what has been said and lay out those still not said. That is the main purpose of the blog, of op-ed spaces, of the media. Public discourse. So whatever was written in the op-ed was perhaps just right. While it may have helped stoke outrage, it is beside the point. First because the main reason that the media exists is for people to have access to both sides of the argument and readers, at the very least, are expected to look at things with more objectivity, instead of simply shutting their minds from opposing arguments.

    True, the crisis points to the many loopholes in both the US’s legal/regulatory system as well as the very same people in charge (e.g. point 1 above) but the complexity of the issue calls for action, discussion which is not limited to the general/broader view. Because there are various sub-topics that need to be resolved in order to help the recovery of the system as a whole, there is probably more risk in trying to be Tim Geithner back in February than being Tim Geithner today. Sometimes having more details may hurt, but more often than not, it is the details that help us craft the best solutions to problems.

  42. James, as always, another good post.

    He may not be an economist, but Michael Lewis recently published a good piece on the AIG bonus debacle on Bloomberg…whether you agree with his view or not, the article is still an interesting read.

    Link to “Mass Hysteria Over AIG Obscures Simple Truths” can be found at:-

  43. What exactly is th “radical restructuring of the financial services industry and its compensation practices” that Andrzej seems to be calling for?

  44. So the powers that be think that Bonusgate is a harmful distraction because it threatens their right to develop a technocratic solution to the “problem” without noisy interference from the smelly plebes who ultimately will have to foot the bill.

    That alone tells us how corrupt and rotten the system really is.

  45. The hysteria is misdirected. Are the people receiving the bonuses the same people who caused the mess in the first place? Would you want to work for the most vilified company in the world? Cut them some slack or they will walk and the taxpayer will be in more trouble. The phrase for this is “cutting off one’s nose to spite one’s face”.

  46. Uh, vimothy, where have you been and what have you been reading (smoking?)? Yes, they are the people from the AIGFP group. And my understanding is many who took the money already left. Many are betting against AIG’s book. And you want to persuade them not to walk?

    This is akin to offering immunity to a murderer to “catch the bigger fish.” It’s the sign of a corrupt methodology and players who just can’t see beyond the current set up. A set up, which, BTW, they brought into being in the 90s.

    Please do some reading.

  47. Yet more cool headed analysis, eh?

    “The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president…”

    But who cares about them, and I agree. Let’s give ’em plenty of abuse just because it makes us feel better! But bare in mind that AIG has just had billions. You don’t want all the staff to be walking out of the door, as any sane person would, if it was made abudantly clear to them that the public thinks they’re evil money grabbing tools.

    “Nobody is going to give it back and then stay,” said one of the firm’s employees. “If they give back the money, then they will walk. And they will walk into the arms of AIG’s counterparties.”

    Punishing bankers should come behind raising employment in your list of priorities. If it doesn’t, why bail-out the financial system in the first place?

  48. The enterprise value of AIG Financial Products is negative $180 billion. So, the key people who made that happen are worth…? The bonuses make clear that, while lives everywhere are ruined, the lives of those who caused this disaster have not changed. By threatening to leave in a national emergency, they show little interest in maximizing the value of our investment.

    I believe this is really extortion. If the bonuses aren’t paid, AIGFP people will take their inside knowledge elsewhere to trade against AIG’s book. Which ought to be criminal.

  49. Why not fine the financial regulators who empowered the credit rating agencies and then fine the credit rating agencies that provided AIG with the AAA rating that exploited and which lies at the root of all the problems?

    With those fines we might be able to compensate the taxpayer for the bonuses that should not have been promised by AIG but were.

    I mean while we’re at it why do we not also invent some retroactive fine mechanisms?

  50. >and tea

    My understanding is that the outrage was over madeira wine and import duties. We colonists liked our booze more than our tea. :-)

    On a more serious note – about all the outrage, moral hazard, pay for performance, competitive advantage, and all the associated “Fill in the blank” philosophies I can only say that all this flurry of activity over the current crisis doesn’t mean a lot because we, as a species, aren’t ready to learn any lessons from this current global three ring circus of financial craziness. Not yet, anyway.

    What do I mean by the above?

    In a nutshell…

    1.From numerous studies performed in the pursuit of understanding human cognition – status is a zero sum game – in human behavior, humans can never get enough status, power and wealth and no number of Sunday school sermons is going to change that.

    2.In study after study, the conclusion is that homo sapiens spend money like drunken sailors – many, and I mean most of us don’t behave responsibly, with an eye to the future, or with long term planning. No amount of personal responsibility lectures, 12 step programs or Suzy Orrman books are gonna change that.

    Human behavior, based on millions of years of evolution, developed a short term benefit weighted, Hard Wired brain algorithm – in other words, we tend to take the short term solution rather than the long term. It made perfect sense when in a completely natural environment, a human was old and decrepit at age 30 and tomorrow was not at all a given.

    But, this short term weighted brain does not fit in the world of today at all, and this is becoming more painfully obvious, first during the last few centuries, and now, decade by decade.

    We act surprised that so many folks took mortgage loans they could not afford, charged out credit cards they can’t pay, have not saved a dime in 60 years on this earth, (and the list of behavior is a lot longer than this!) and then we act more surprised that the banks, prodded by profit mad investors, handed over the money in a greed induced frenzy to all these giddy recipients. Eh heh, eh heh.

    My two cents – modern humanity will continue to go from boom to bust until we address fundamental human behavioral issues and destroy the myth of a completely unflawed rational human mind that can control our daily behavior – it does not exist.

    We, as a species, need to be regulated but only after we understand what the heck needs regulating, and we are getting there through critical research in evolutionary psychology and cognitive science.

    We are a product of evolution, and we have to deal with this issue some day to reign in our stone age minds.

    Simon, Paul Krugman, et al, may know a process to fix our broken banks based on the many previous times they’ve seen broken banks and economies all over the world and during the last century,(yes, we should ask why does this keeps happening).

    Maybe Geithner will get lucky, who knows, and we might even get our economy moving again on some level of consumerism in the next 5 years, (very sustainable model, eh?), though along the way, this is going to hurt many, many people who have not a clue what got them in such straits.

    IMO, the real fix won’t come until we try to understand evolved human nature and integrate it into our human existence. If we don’t, we’ll be doing this all over again in the not to distant future.

    If we can afford it.

  51. “Bonusgate” is old news. We’ve been hearing and reading about it for days now. When does “news” keep going this long? When it is an ongoing catastrophe or when someone (government perhaps) keeps feeding the fire.

    What is really going on? I believe this is a huge smoke screen.

    Keep the public focused on something that creates a lot of emotion and lets see what we can slide under the radar.

    The next 6 months are going to prove very interesting.

  52. Thomas Jefferson also said, “I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Kudos to you for the powerful message you leave us with in that you did, and I hope will continue to, pursue truth. And that the dawning realization that not only are we affected by the decisions of the current administration but that our children’s, and potentially our children’s children, lives may be impacted by the decisions being made today.

    As stated, whether your Op-Ed piece did more harm than good is not as relevant to me personally as that you seek to pursue and present a position that touches on issues that are near and dear to my (and a multitude of American’s) heart. While I agree that there may be a certain danger, or certainly, lack of focus, in not seeing the forest for the trees, I also believe that you don’t know what you don’t know. And I’m glad for people like you who bring me into the know….to offer intrigue so that I am motivated to search for facts so I can feel like I’m forming an educated opinion.

  53. “Outrage is an emotion, not a rational choice. Blaming outrage is like blaming greed: it’s an unavoidable part of the human condition.”
    No, the point should be even stronger. Outrage, even when it is over the top, is at least a moral response. Greed is a vice, period. There is such a thing as justified outrage. There is no such thing as justified greed.

  54. If I were an American, I certainly would be outraged, first at the cynical corruption of the AIG executives, then at the people who criticise J.Kwak for writing about it. Apparently, to such critics, it is inadmissible for commentators (who in a previous generation would have been called “intellectuals”) to criticise the party line. So is 21st Century USA coming to resemble the 1950s Soviet Union? Or 1930s Nazi Germany? Is J.Kwak to be sent to a re-education camp, maybe working on an Alaskan pipeline?

    And as for the outrage at the AIG executives, I remember J.Kwak’s colleague S.Johnson criticising banks for putting a gun to the head of the US Govt., effectively blackmailing it with the threat of provoking a financial collapse unless their demands were met. This situation seems still to be real, and the AIG behaviour is just another part of it. So “bonusgate” isn’t irrelevent, it is totally relevant to exposing and attacking the power of an entrenched special interest intent on holding the US to ransom.

  55. priscianus jr says “Outrage, even when it is over the top, is at least a moral response.”

    Yes feeling outrage is a moral response but clamoring or outright pushing outrage, if it is not done in a just way and sincere way, is an immoral response.

    Also, some of you, perhaps even all of you, have little moral right to throw the first stone.
    Does this for a second mean that I condone the bonuses? Of course not! You know it! But I am sure some will say I do… just because it is convenient.




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