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.
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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