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March 21st, 2009

The danger of vilifying Wall Street



It’s been a chaotic week of outrage and finger-pointing over the AIG bonuses. Depending upon your view, the bonuses — which were put in place last year and known to the Obama administration since at least early March, if not earlier — are either a necessary evil to keep the employees who know how to unravel the Gordian knot that other, long-gone employees put into place…

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. …

Pasciucco cringed at the notion, articulated by many lawmakers and even President Obama, that Financial Products is a firm of nearly 400 reckless and greedy derivatives traders.

…or just prove that basically all of Wall Street is simply evil:

The “Masters of the Universe” on Wall Street — through their greed, recklessness and illegal behavior — have plunged this country and much of the world into a deep recession, causing millions of Americans to lose their jobs, their homes, their savings and their hope for the future.

From outraged talking heads pointing quivering fingers of outrage, to a President joining the outrage parade, to Congress on the verge of passing the AIG Vengence Act of 2009, “everyone knows” that banks are evil, Wall Street is evil, etc.

But hold on. There’s plenty of blame to go around. The list includes some bankers, Wall Streeters, and — ahem — members of Congress, who are supposed to be making sure that the Federal regulators have the proper tools and motivation to watch over Wall Street. But that’s an article for another time.

The danger now is that Congress, eager to jump in front of the outrage parade, will poison the administration’s efforts to get America’s economy back on track. A 90% tax on “greedy bankers” may sound like a good idea, but not only is it probably unconstitutional, it will scare away the investors that Obama and Geithner are counting on to jumpstart the economy:

Further complicating the challenge, the uproar over AIG has scared potential private investors from any involvement in a government-run program. “AIG makes everything worse,” says the senior administration official. Private investors fear that an angry Congress might place restrictions on pay packages for anyone who participates, Treasury, Federal Reserve officials and industry officials say.

It has also directly damaged the very financial institutions that Congress purports to want to save:

“Citigroup lost one third of its market value in the half hour after it became apparent that Congress was going to pass the bill,” Connelly said. “That’s no way to attract private capital to the banks. … One of the clear unintended consequences of what Congress is considering right now is to make it much harder for the banks to raise private capital, which is exactly what the public purpose of both the Congress and the administration is to do right now, is to get the government out of the business of owning banks and get private capital in.”

Such a punitive tax will also encourage the very people needed to unravel this mess to go elsewhere for work — and most of them aren’t responsible for the mess:

Thanks to our bailouts, we now own major stakes in these firms–at mind-boggling expense. So it’s not clear why we want to destroy them. But that’s what we seem determined to do.

Believe it or not, hidden inside these companies are thousands of decent, competent people whose households bring in more than $250,000 a year. Many of these folks had NOTHING to do with the gambling addiction that bankrupted their firms. Many of them still have a choice where to work. And now that they’ve learned that their family’s pay will be capped at $250,000 indefinitely, many of them will quickly decide that now is a good time to pursue their careers elsewhere. …

The real lesson here, unfortunately, is that it’s a disaster for the government to run private companies. We used to understand that. But ever since we started telling ourselves that we had to save bankrupt institutions by taking them over and pretending not to “nationalize” them, we have apparently forgotten.

The other lesson that we have yet to learn is that Congress needs to slow down and think about the legislation they write before they pass it. It hasn’t worked so far, as witness the ’stimulus’ bill, which was neither “timely” nor “targeted,” and the alphabet soup of economic rescue plans (TARP, TALF, HASP, TSLF, etc.) which have come tumbling out one on top of the other before the last one was even implemented, much less given a chance to work.

Fortunately, the AIG Revenge Act was put on hold at least for a little while in the Senate:

Sen. Jon Kyl, the Republicans’ vote counter, blocked Democratic efforts Thursday evening to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009. The House had swiftly approved its version of the bill earlier in the day.

By rushing, Kyl said, Democrats were letting populist outrage trump informed decision-making in the Senate, which is supposed to be insulated from the pressures of public passion.

“I don’t believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences,” Kyl said on the Senate floor. “Frankly, I think that’s how we got into the current mess.”

The whole sordid affair isn’t helping America’s reputation, either:

As an aghast world — from China to Chicago and Chihuahua — watches, the circus-like U.S. political system seems to be declining into near chaos. Through it all, stock and financial markets are paralyzed. The more the policy regime does, the worse the outlook gets. The multi-ringed spectacle raises a disturbing question in many minds: Is this the end of America? …

One test of whether we are witnessing the end of America is how many more times Americans put up with congressional show trials of individual business people and their employees, slandering and vilifying them for their actions and motives. And for how long will they tolerate a President who berates business and corporations as dens of crime and malfeasance? If the majority of Americans come to accept the caricatures of business as true, then America is closer to the end of its life as a global leader, as a champion of markets and individualism.

Let’s hope it doesn’t come to that.

UPDATE: This article gets it just right: “Congress committed economic arson“:

Take, for instance, that new securitization program the government is trying to get off the ground, called the Term Asset-Backed Securities Loan Facility — or TALF. Although it is backed by large government loans, it requires people in the marketplace — Wall Street bankers! — to participate.

This program could help revive the consumer credit market. But at this point, most Wall Street bankers would rather be attacked by wild dogs than take part. They fear that they’ll do something — make money perhaps? — that will arouse Congressional ire. Or that the rules will change. “The constant flip-flopping is terrible,” said Simon Johnson, a banking expert who teaches at the M.I.T. Sloan School of Business.

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One Response to “The danger of vilifying Wall Street”

  1. Gerald Sims Says: March 21st, 2009 at 4:45 pm

    The outrage being blown up in congress is just another smoke screen to cover up how incompetent they are with the taxpayers money. There is empty suit Obama, open mouth insert foot Biden, comlete zero, oh I forgot to pay my taxes Geithner, and the monkey brigade, don’t raid the businesses that employ the illegals Pelosi, I am mad at the world Reid, oh yes, I did chande the language to exempt the paying of bonuses Dodd, another I am acomplete zero Frank and my wife is filthy rich Kerry, to name just a few.
    These people, if allowed to stay in congress, are going to bankrupt this country if they continue on the path the they are on now.
    They want to keep the welfare and illegal immigrant support groups happy and to h___ with the hard working responsible Americans.

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