Systemic Rut In Thinking About The Financial Crisis

Last night I tried to make the point that folks who are trying to pooh pooh the AIG bonus issue are missing the mindset behind them that effects economic and financial policy on a wider scale. I wrote:

What's interesting about the new DC J-List insiders' (just kidding) take on the AIG bonus mess is how they do not make the obvious connection to the bigger problem of Treasury's timidity regarding the financial crisis. Of course in the scheme of things, the AIG bonuses are a drop in the bucket -- but the problem here is, to coin a phrase, "systemic." Too much energy and political capital has been wasted by the Obama Administration in propping up the old Wall Street order and not enough in trying to figure out what exactly would be best for the country.

Via Digby, Atrios puts it more succinctly (and less charitably):

The issue is that Timmeh and friends never distinguished between bailing out the system and bailing out the players. There was a way to do that, and they didn't do it.

A more cerebral discussion is offered by Brian Buetler:

[T]hough it's easy to place too much emphasis on this particular episode, and that doing so only makes it harder for the White House and Treasury to address the problem--there is an underlying issue here that matters quite a bit. It's not that the success of the bailout depends on what happens to these $160 million, but that these $160 million strongly suggest that some very rich, and, perhaps, very bad men have leveraged their way into control of the whole bailout process and the government's now following their lead. And their incentives are, to say the least, not in line with the best interests of the vast majority of taxpayers.

If that perception is correct, then it's hard to imagine the financial rescue succeeding. If that perception is incorrect, but still pervasive, it very much limits the tools Geithner et al. may need to complete the process, and in that sense, it's important for the administration to reverse the perception.

. . . I think [those arguing that the AIG bonuses are a trivial distraction] badly underestimate the extent to which this was the manifestation a genuinely systemic problem. It's simply not the case that Geithner and other high-level economic officials were so concerned with the bigger picture that they outsourced the question of compensation to Congress entirely. On the contrary, they were extremely involved in resolving that very question. They were opposed to strict compensation limits. And even though they may not have winked and nodded at AIG specifically, or at this or that bonus package, they made a calculation and arrived at the conclusion that caving to the extortion of the very people who triggered this collapse was worth a few hundred million tax payer dollars.

It's hard to say exactly why they decided that. I'm sure that in part they underestimated the potential for political backlash, and now they've learned their lessons the hard way. But clearly they also thought that letting executives take home big fat piles of government money was either a matter of expedience or a matter of necessity. And either way it has huge implications for the success or failure of one of the most expensive and urgent government programs in the country's history.

Well stated by Buetler. In response to the general critiques of the "it's just a distraction 'school'" (the JOList (kidding)), Yglesias writes:

A lot of people, myself included, spent a lot of time in 2007 and 2008 observing that a lot of the old gaps inside the progressive camp had narrowed or vanished since the 1990s. But I think the Panic of ‘08 is tending to reopen a new gap. On the one hand you have people basically inclined toward Hiltzik’s that a lot of the people making the big bucks for the past 10 years are basically scammers who lucked into the ability to siphon tons of money out of the economy without really doing anything useful or valuable, and between people who think that they’re genuinely smart hard-working people who just happen to deserve to pay somewhat more in income taxes than they currently do.

This is just plain wrong, and to put a real point on my criticism, it is just the way the DLC would respond to disagreement about its foreign policy views. I think the Iraq debate amongst "progressives" and Democrats is actually very instructive here. Like Yglesias, the Democratic and "progressive" supporters of the Iraq War treated those who disagreed with them as "Un Serious" and who did not understand the issues or who were knee jerk opposers of all wars. This was utter nonsense. I addressed that point in a 2006 post on Peter Beinart's book:

Beinart's central problem is that he has married his analysis to the story of the Henry Wallace movement in the Post-World War II period and has convinced himself that it describes and explains contemporary liberal views of the United States and its role in the world. What does Henry Wallace have to do with today`s liberalism? Nothing of course. But like his TNR colleague Jon Chait, Beinart wants those liberals and Democrats who disagree with them to be wild eyed useful idiots who "coddle terrorists," are crazy Leftists and haters of America. He is wrong and for obvious reasons.

Yglesias is adopting the same approach. disagreement with the view that concerns for the "Masters of the Universe" should not be in the forefront of government policy are casually tossed aside as the "old debate" between "pro-business" and "anti-business" Democrats. This is lazy thinking and wrong. As a staunch defender of Clintonomics, free trade and other "pro-business" policies (hell, I still defend the repeal of the Glass-Steagall Act and think its reimposition would be a mistake), I think it is pretty clear that I do not line up the way Yglesias wants me to (and I doubt other critics of the "AIG is a distraction" idea line up too far from me.) Just as I opposed the Iraq War AFTER supporting Desert Storm and even the Panama incursion, because it was a bad choice of policy, my opposition today to the Obama Administration's Wall Street-centric approach comes from the belief that the circumstances we face today do not permit for an approach that adopts this type of thinking.

Of course, the irony of the lazy thinking Yglesias employs here is that our current President was a staunch opponent of the Iraq Debacle (who would have been labelled as "UnSerious" if his views were even considered at all) and famously said "I don't oppose all wars. I'm opposed to dumb wars." Similarly, I would argue I am not opposed to all bailouts. I am opposed to dumb bailouts. The Obama Administration's approach has been to embrace dumb bailouts, due to the systemic rut in its thinking about the financial crisis and the "Masters of the Universe" who helped cause it.

Speaking for me only

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    These guys operate (5.00 / 1) (#4)
    by SOS on Fri Mar 20, 2009 at 08:58:23 AM EST
    according to the law of the jungle Big Tent. They put their own personal survival and "honor" ahead of everything else. Whether they wear an Armani suit and short stocks or wear prison stripes and carry a shank there's basically no difference in how it affects everyone else.

    You know what is sad to me? (none / 0) (#10)
    by Militarytracy on Fri Mar 20, 2009 at 09:41:13 AM EST
    It is the laws of their faux created jungle.  I consider what my husband does having to live, work, and deal with "the jungle" and when you also have to deal with the consequences of your actions.....well, on the battlegrounds of Iraq and Afghanistan I see the players having more of a conscience now than the Wallstreet Bonused.

    Well as an "anti-business" Democrat (5.00 / 3) (#7)
    by BobTinKY on Fri Mar 20, 2009 at 09:30:01 AM EST
    less enamored (less enamored does not mean openly hostile to, just prefer other policies options more) of Clintonomics and "free" trade, I see this whole series of taxpayer funded Wall Street/Bank/AIG/industrial bailouts, designed as they are to cover the losses of the investor class while retaining for that same group any of the increasingly slim chance of "upside," as reaffirming my economic views.

    It is absolutely amazing to me that the single constant between the Bush and Obama Administrations is this insistence that the public eat the speculative losses of the investor class without taking on any control over these bailed out entities or rights to a potential upside.  When a Democratic Amdinistration is this deep in the tank for Wall Street we must acknowledge, no matter how unsettling it may be, that we as a country are truly owned lock, stock and barrel by these people.    

    As I watch this unfold my understanding & appreciation for W J Bryan's tirades against Wall Street are growing enormously.  


    One minor point... (5.00 / 1) (#21)
    by santarita on Fri Mar 20, 2009 at 12:38:44 PM EST
    The USG has the legal basis for exercising such control over AIG, and the major banks that for all intents and purposes it could nationalize them when it chooses.  The control over AIG is through ownership of the majority of common stock.  In the case of Citi the USG has (or could have) such a significant percentage of common stock  that it can effectively control Citi.  And with the other major banks by virtue of the bail out funds that they have received and the existing supervisory authorities, the USG has significant control.

    The question is whether or not the USG should exercise its significant powers and in what ways.

    Cost of bonuses for AIG (none / 0) (#1)
    by Coral on Fri Mar 20, 2009 at 08:37:19 AM EST
    would pay to re-sod the Washington Mall, which, if memory serves me, was deleted from the stimulus package.

    I think the anger over the AIG bonuses has everything to do with the concept of fairness. It is appalling to me how GOP railed against that project, but are now defending the AIG bonuses or saying that it doesn't amount to all that much.

    To most people 165 million is a lot of money. If that amount were proposed for any number of programs to, say, help children get health care, or provide WPA-type jobs to out of work blue collar workers in Detroit, there would be huge outcry from the GOP about waste.

    It really has to do with who is getting the money and why. To me it is no small matter that our nation is paying $165 million in what I consider blackmail to one of the firms that is a leading culprit in this entire financial fiasco.

    Fairness may be your concern (none / 0) (#2)
    by Big Tent Democrat on Fri Mar 20, 2009 at 08:44:30 AM EST
    Efficacy is mine. My post is not about what you are commenting on.

    The sad fact is that the nerve these (none / 0) (#8)
    by inclusiveheart on Fri Mar 20, 2009 at 09:33:56 AM EST
    bonuses touched amongst the public could have been used to go for it and address the systemic issues.  Instead the House rushes through a ridiculous and essentailly unproductive tax bill that does nothing to address the transactions and business models that have brought us to this economic collapse.

    The thing that really bothers me is that it is obvious that the bailout cannot work until you plug the holes in the boat.  It is that simple.  Nothing has changed to prevent the bailout money from going right out of the boat the same way all the money these firms lost before it.

    I am stunned that so few people discussing the bonuses aren't asking why the people in AIG's Financial Products division are still employed at all; and further asking why that division continues to operate given the damage it has done to the company and our nation's economic system as a whole.

    In the old days, wooden ships sailed with shipwrights as a part of their crew.  They were tasked with plugging any holes in the boat while other people bailed.  We need some shipwrights on the Hill or in the Administration, but we haven't any I guess.


    Minor Correction... (5.00 / 1) (#13)
    by santarita on Fri Mar 20, 2009 at 10:22:57 AM EST
    If I remember Liddy's testimony ocrrectly, he said that about 20 people at AIGFP were the bad apples and they are gone.

    Of course, I'm not sure if he is correct but I believe that Congress is going to follow up on that issue.


    It isn't about the people imo. (5.00 / 1) (#14)
    by inclusiveheart on Fri Mar 20, 2009 at 10:34:02 AM EST
    It is about the hugely risky financial transactions that they were executing.

    Not a minor correction at all, IMHO (5.00 / 1) (#18)
    by gyrfalcon on Fri Mar 20, 2009 at 11:03:08 AM EST
    See this Wapo piece on who the people are who are left at the Financial Products Unit.

    The "populist rage" the pols and the media and the blogs have ginned up is heavily premised on the idea that it's the "bad guys who brought AIG down" who are the recipients of the bonuses.  It's apparently not the case.

    I'm shedding no tears of sympathy for people whose income is in the millions of dollars.  But I think we should be clear that these are people who have been apparently very efficiently and effectively doing just what we, the taxpayers, want them to do, which is dismantling the unit piece by piece, "unwinding" AIG's obligations, etc., so that the healthy pieces can be sold off.


    There are plenty of ... (none / 0) (#19)
    by santarita on Fri Mar 20, 2009 at 11:39:34 AM EST
    valid reasons to be upset about the size of the retention payments.  We don't need  to manufacture reasons.

    Running on not much sleep here (none / 0) (#3)
    by Militarytracy on Fri Mar 20, 2009 at 08:49:35 AM EST
    But I have decided that I simply cannot deal with reading anymore of Kandy Britches Klein's shiny happy peoples scenarios.  I have survived 8 years of mendacious solutions being applied to crisis and I'm done!  I haven't taken a senseless survey yet so I'm pulling this out of my backside, but  I think a HUGE majority of the country is done with it too.

    MT - did I miss a reference to Klein in the above (none / 0) (#5)
    by DFLer on Fri Mar 20, 2009 at 09:00:59 AM EST



    The JOList (none / 0) (#6)
    by Big Tent Democrat on Fri Mar 20, 2009 at 09:04:20 AM EST
    and the "AIG bonuses are a distraction" are Klein related.

    When I read Atrios (none / 0) (#9)
    by Militarytracy on Fri Mar 20, 2009 at 09:36:10 AM EST
    he connected to and responded to Klein's write up about wasting our time on bonus issues.

    thanks to both you & BTD (none / 0) (#11)
    by DFLer on Fri Mar 20, 2009 at 09:53:10 AM EST
    ....sleep and coffee deprived here.

    Hey, I'm with you (none / 0) (#12)
    by Militarytracy on Fri Mar 20, 2009 at 09:58:45 AM EST
    I must read slowly right now.

    AIG Bonus Issue is Important.. (none / 0) (#15)
    by santarita on Fri Mar 20, 2009 at 10:53:28 AM EST
    and I agree with much of what you have written, BTD. You've raised the importance of the AIGFP story.

     What the AIGFP bonus issue has exposed is a mindset by Geithner and Summers (and perhaps Bernanke and Obama).  They believe that fixing the financial system means returning it to the way institutions were run before, except with more government oversight.  Because they want to interfere as little as possible in the running of these businesses, they err on the side of too much deference to management.  So the bonuses to AIGFP didn't register with them (or their subordinates) because this was simply a continuation of existing compensation practices and they bought into the argument that only AIG employees could effectively resolve the CDS books and they should be as highly compensated as before.  In short, they don't want to require systemic changes as a result of systemic failure.  

    In fairness to them (and in disagreement with Buetler), I don't think there are evil people who have wormed their way into the Administration.  Rather, because this crisis has been moving incredibly fast, they are perhaps unaware that the business models that they are comfortable with have been rendered almost useless.  In essence, there is a paradigm shift happening and they are stuck in the old paradigm.  Tim's timidity (although I don't like that word) results from trying to keep the old paradigm afloat.

    I don't think it's a distraction... (none / 0) (#16)
    by lambert on Fri Mar 20, 2009 at 10:59:24 AM EST
    so much as an opening wedge.

    To change metaphors, we don't need to put down our pitchforks because the problems are systemic -- which, granted, is exactly what Versailles would like us to do -- but instead get bigger pitchforks.

    If you frame the issue as "accountability," then the bonuses and the two trillion Hank and Timmy threw to their golfing buddies become two aspects of the same thing. But nobody's doing that.

    NOTE On legislation, I wouldn't claw back the bonuses in taxes on individuals (though I would claw back bank profits). What I would do is pay any bailed out executive in stock options on the toxic waste.

    A symbol (none / 0) (#17)
    by Big Tent Democrat on Fri Mar 20, 2009 at 10:59:52 AM EST
    if you will, for something bigger.

    Here's a question, BTD (none / 0) (#20)
    by gyrfalcon on Fri Mar 20, 2009 at 11:41:59 AM EST
    Is immediately crushing and dismantling the (obviously malignant) compensation practices of only the struggling and bailed-out entities compatible with the overriding goal of keeping the financial system functioning sufficiently to support an economic recovery?

    Is there a glimmer of a possibility in anybody's mind that maybe that's why the administration opposed attempts to put restrictions on compensation in the bail-out legislation, rather than because they think bailing out fat cats' wallets is as important or more important than fixing the system?

    If you're an owner trying to rebuild a struggling baseball team, do you start by announcing a salary cap for your players that's a fraction of the prevailing standards in the rest of the league?

    Seems to me we have an economy-wide problem -- not just AIG and not just Wall Street and not even just the financial system -- of grossly excessive and out-of-whack executive (and trader) compensation.  That system has structurally been a big contributor to the growth of the madness that brought us to where we are today, and something has to be done about it, I assume through the tax code, to rein it in economy-wide.  Geithner has said Treasury is beavering away at just such a plan, and I hope we see it soon.

    But until then, in purely practical terms, I fail to see how putting punitive restrictions on compensation only on companies receiving bail-out money accomplishes anything positive.

    Perhaps you and so many others are right that the government should stop trying to fix this through other avenues and simply take over the weakest of these institutions (although I'm not clear how that would even be possible with AIG, since as an insurance company, it's not subject to FDIC takeover), and it very well may be that this compensation hysteria and its ripple effects may force them to do that.

    This whole bailout is nonsense (none / 0) (#22)
    by ding7777 on Fri Mar 20, 2009 at 12:41:06 PM EST
    Reneging on an insurance policy where there is no underlying default will not break anyone - the Wall Street financial firms included.