Economic Policy


There is a wealth of good commentary (commentary that I generally agree with) in the Washington Post this morning.  I’ll write about it in three posts today, divided by subject matter.  The first subject I’ll address is the newly announced plan by the Obama administration to stabilize banks and relieve them of their “toxic” assets. 

Before I begin with the two “good” pieces, lets get the bad out of the way.  Yesterday in the New York Times, Dr. No, otherwise known as Paul Krugman, despaired that the rescue plan to be announced later in the day was disappointing, filling him with a “sense of despair.”   Poor boy.  He was also on the Lehrer Newshour last night as the posterboy for the nay sayers.  I don’t think Krugman is right here.  Let us all hope he isn’t.  His column yesterday is entitled Financial Policy Despair.

Let me make clear that like the Treasury plan.  I do not want to see the country’s biggest banks “liquidated” and thereby nationalized, something that Paul Krugman seems to crave.  If we can avoid it, the country will be healthier for it, assuming we put into place new regulatory mechanisms that protect against future extreme folly.  It is no wonder, therefore, that I liked the Washington Post editorial today (Mr. Geithner’s Plan ) and especially Steven Pearlstein’s Washington Post Business section column (Optimism Over Despair).  In his piece, Pearlstein directly addresses the Krugman critique.     

I’m not an expert here.  I am trusting in our leadership.  But, what they are proposing seems prudent and smart and balanced.  It appears to me that the plan can work in a positive way with its fundamental reliance on the market.  More market and less bureacrats is always a good thing in my book.  As long as you have regulators who can temper market excess and force consideration of externalities as needed, it will remain the best allocator of resources that humankind has discovered.  It simply can’t be replaced by federal bureaucrats.   Mr. Krugman may have more faith in bureaucrats than markets, but I don’t.  This plan is deserving of our support and it has mine.  Let’s hope it works.

This continues my series about the AIG bonus fiasco, which encompasses both the decision by AIG management to pay retention bonuses (bonuses paid to employees to keep them from jumping ship during a time of uncertainty for the company), and the public and political reaction to them.  The former, while flawed and regrettable in timing and scope, seems to have served a legitimate business purpose.  The latter, being less rational and more emotional, is of much greater concern to me.  As I’ve expressed in my last two postings (here and here), the risk we’re running is reacting to the emotion with a solution that makes things worse.  Goal number one is getting out of the economic quagmire we’re in.  Retribution should be far down the list of priorities and retribution is just what the House tax bill passed last week is. 

Supporting my viewpoint are two pieces today.  One is a story in the Washington Post entitled Advisers to Obama Wary of Bonus Tax.  Obama’s advisers are right to be wary of this tax.  As I’ve indicated before, let’s hope the Senate addresses this more rationally.  The second piece is from the New York Times’ Breakingviews.com feature in today’s Times by Rob Cox entitled Tax on Bonuses Will Hurt Sector.

Both are valuable-reads in understanding the risks of overreacting.

Let me also take this opportunity to say that I think that Secretary Geithner is doing a fine job.  He is showing that he is a rational player trying hard to do the right thing in the face of enormous pressure to do the politically expedient.  He has my total support and confidence.  That President Obama is also standing with him speaks well for the president.  This is the right thing to do, which is very hard for a president to do.

This post continues what I began in my posting to this blog yesterday and concerns the public and political overreation to the AIG bonuses and the risk that this overreaction poses to our broader and much more important goal of getting the American economy out of the severe economic crisis that it’s clearly in.  Today, there are a number of editorials and columns that reinforce my view that we need to just calm down a little and not loose sight of our broader and more important goals.  The basic story of what I’m calling an overreaction can be found in these stories:  Congress Moves to Slap Heavy Tax on Bonuses (Washington Post); House Approves 90% Tax on Bonuses After Bailouts: Connecticut Senator Draws Voters’ Ire for Payout Role and A.I.G. and Wall St. Confront Upsurge of Populist Fury (New York Times).  In particular see In New Dilemma, Banks Cite Two Paths to Disaster.

I’m not going to say any more on this.  Today I’m turning the floor over to others, most of whom I’m in total agreement. 

Let’s begin with the Washington Post editorial this morning entitled Washington Gone Wild: Congress’s destructive reaction to the AIG bonuses.  It makes the basic case perfectly.

As for the columnists today, I recommend and agree with Charles Krauthammer’s Bonfire of the Trivialities(Washington Post),  Michael Gerson’s Commanding The Heights of Hypocrisy (Washington Post) Steven Pearlstein’s Let’s Put Down the Pitchforks (Washington Post) and David Brooks’ Perverse Cosmic Myopia.  If you can only read two, read the latter two.  The Post story (In New Dilemma, Banks Cite Two Paths to Disaster), the four columns and the Post editorial should be required reading for every American this morning, and particularly our political leadership.

Offering different perspectives are the columns Off With the Bankers (Simon Johnson and James Kwak in the New York Times) and Does Geithner Get It? (Eugene Robinson in the Washington Post).     

As I’ve thought about what’s going on here I have been tempted to resort to aphorism or adage.  The Merriam-Webster online dictionary defines aphorism as “a terse formulation of a truth or sentiment: adage.  There are a few that seem relevant to the present situation:

Throwing the baby out with the bathwater.

Cutting off your nose to spite your face.

Doing more harm that good.

Making a mountain out of a molehill.

I am certain that there are many more.  It is clear that in this fiasco we are treading very well worn ground.  I would suggest that we would be wise to take the counsel of this common wisdom, accepting it as a gift from the ages.  

I remain hopeful as well that in the United States Senate that saner heads will prevail.  As it was designed to do, let us hope that the United States Senate deals with this issue in a less rash, more prudent, and more deliberative way than did the U.S. House of Representatives yesterday.  It will be for the country’s good.       

My credentials as one who abhors the astronomical amounts paid to corporate executives is impeccable.  I have been decrying the unfathomable salaries and bonuses for years.  I consider it corrupt and abusive of shareholder value.  They have done it because they can and because corporate America has created a club in which members of the club reward themselves handsomely and declare it economically necessary in order to keep themselves employed by their companies.  Hogwash.

Having said this, I find myself very uncomfortable with what’s going on with AIG and the populist outrage that is being parroted by almost all of our political leadership, from the President on down.  There is good reason for outrage, but logic and responsible action can’t be crowded out of the equation.  Right now we are at risk of hurting the country more than we hurt the employees who’ve earned bonuses at AIG.  Why?  Apparently because we feel some primal urge for revenge and politicians can’t help but responding.

While at the gym the other night I watched Lou Dobbs of CNN and his carefully orchestrated outrage.  He had three guests with him who all agreed with him.  If you think this was just coincidence, I have some land I have available to sell.  In fact, at one point one of his guests went off-script a bit and Dobbs didn’t like it one bit.  “Hey, that’s not what you’re supposed to be saying,” I could read from his reaction. 

Dobbs is part of the game today.  Nicholas Kristoff in an excellent column in today’s New York Times calls it The Daily Me.  It has replaced the American newspaper as a source for news, and facts.  It is not longer about learning the facts and coming up with an opinion based on facts or a process of sorting through various perspectives on an issue, it is about forming an opinion and then listening to those with whom you agree and who think like you do.

The Washington Post in an editorial this morning (Condom Sense – with which I also agreed wholeheartedly) began the piece with a quotation from former New York senator Daniel Patrick Moynihan.  “Everyone is entitled to his own opinion but not his own facts.”  This simple sentence really hit home for me.  It captures so succinctly an issue I’ve been struggling with for several years now and that is the propensity of people to hold firm opinion and yet be completely ignorant of the facts.  It is about your average northeastern liberal environmentalist who knows what he knows about offshore drilling or the Arctic National Wildlife Refuge but knows next to nothing about oil and gas development or our country’s economic or national security vulnerability from imported oil.  Who needs facts when you already have an opinion.

We have that happening here with AIG and the bonuses being paid.  Of course it seems outrageous and in some cases it undoubtedly is.  But there is more to the story, of course.  Do we really want to possibly jeopardize the ability of the country to “solve” the AIG debacle as we recapture the bonuses but in the process drive out every employee who got a retention bonuses?  (A retention bonus is a bonus paid to employees to keep them from quiting and finding work elsewhere when the organization critically needs them.  It is employed mostly when a company is facing a difficult situation and risks employee desertion because of uncertainty about the company’s future.)

There’s an eye-opening piece in the Washington Post Style section this morning entitled Inside AIG-FP, Feeling the Public’s Wrath.  It offers an interesting perspective on the issue.  It is a MUST-READ!  One of the things it points out is that most of the bad apples have left and the remainder are just people doing their difficult–and getting more difficult–jobs.  It also points out that most that give back their bonuses will do so along with their letters of resignation.  Congratulations Barney Frank and Barack Obama, your reflective outrage at what’s transpired will but dig the country into a bigger mess.

The guy who’s left looking bad in all this is Treasury Secretary Tim Geithner.  (See the New York Times story today entitled Treasury Secretary Facing a Defining Moment.)  Why?  Because he didn’t react forcefully enough to the “outrage” over the bonuses.  Why?  I offer that it is because he is a rational man who’s been tasked with a mighty responsibility.  As such he concluded that the simple thing was not the best thing for the country.  His responsibility for solving the country’s economic crisis outweighed the positives of reacting, as did his boss, the president, with pronouncements of outrage. 

Our country was designed to insulate much of its political leadership from populist sentiments.  The staggered six-year term is a prime example, designed to ensure that it would take 6 years of a populist “uprising” to fully replace the Senate.  Our founding fathers knew that such populist uprisings are usually short-lived.  The problem today is in our 24/7 news world everyone “knows” everything immediately and demands instant results. 

I can only hope that sane heads will eventually prevail.  What’s important above all is getting this country’s banking system working again.  Solving the credit default swap problem that resides in the bowels of AIG is critical to doing that.  Taking actions that end up driving away every employee at AIG that can help solve the problem will only sink the country deeper into its economic quagmire.  We can’t let that happen.

Think America, think.  Let’s get facts back into the equation.  Let’s temper our emotions long enough to do that.  Otherwise I fear for this country.  I really do.

In stories today in both the Washington Post (AIG Discloses $75 Billion in Bailout Payments) and the New York Times (A.I.G. Lists Firms To Which It Paid Taxpayer Money) we learn about where some of the U.S. bailout money to AIG went.  Is it really a surprise that much of it went to bailing out banks, notably a great many European banks?  Probably not. 

One issue, among many, is the political fallout from this revelation.  How will America react?

Everyone pretty much knew that the bad debt out there was a tangled web that involved most of the world’s major banking institutions–though not all, and AIG.  What the public did not have, however, were details.  In Jim Hoagland’s column in the Washington Post on Sunday (Follow the Money) he writes that Larry Summers in a Brookings Institution event on Friday refused to answer a question about where all of the AID bailout money was going.  That sent up red flags for Hoagland as he speculated that there was real fear in the administration over political fallout from the truth about the AIG bailout.  It is an interesting piece that speculates that part of the administration’s current push to expand the social safety net is in recognition of the social and political time bomb that could explode as the recession worsens.  He contends the administration’s efforts in these regards is is making the U.S. a “functional social democracy”, ala Europe.  The piece also talks about the game that was played by European banks in conveniently using AIG’s triple AAA rating to insulate their risky investments from domestic credit reserve requirements, thereby allowing more risky investments.  It’s a good read.

For more discussion of European social democracies, social safety nets, and the responsibility of other industrialized nations to step up to the plate to solve this world crisis, there are two additional recent columns that are worth reading.  One is David Ignatius’ Back to the Bubble in the Washington Post on Sunday and the other is Paul Krugman’s A Continent Adrift in today’s New York Times.   

I won’t discuss either in detail but I do recommend the pieces for providing important context and perspective.  It is clear from all three of today’s columns that the causes of this crisis are complex.  It wasn’t just a matter of U.S. greed and stupidity, for many other countries participated, enabled and profited from the U.S. economic bubble.  The solutions will be equally complex and the entire industrialized world must step up to the plate in a meaninful way and not simply leave responsibility to the U.S.  

On a personal level I also know, should I have the good fortune to experience such a bubble again,  that I will again participate but with much greater cognizance that the good times will be but a bubble with a finite life span.  What’s sustainable is slow and steady.  Anything else is artificial and will most certainly end.          

In my post on this blog yesterday I noted the growing chorus of political commentators who believe that this country and its leadership is not taking our country’s present economic crisis seriously enough.  Add one more commentator to the list.  Today in the Washington Post, David Ignatius joins the chorus with his piece A ‘Phony War’ On the Crisis

In his column, Ignatius likens our response to the present “crisis” to the time in history when Neville Chamberlain was still Prime Minister of Great Britain and acting as if the problem with Germany could be dealt with short of war.  It couldn’t then and it probably can’t now.  

This is no ordinary recession.  I have lived through a few and am startled when I read that current unemployment is about the same as it was during the early 1980s.  I was just out of graduate school in the early 1980s and the times had a completely different feel to the times today.  Today, it is as if much of our economy has ground to a standstill.  I talk to friends looking for employment and they are reporting that jobs have almost completely dried up.  And it is going to get worse, a lot worse, before it gets better. 

Ignatius’ perspective on our lack of real action in dealing with this crisis is most valuable.  He faults the President for, in a time of economic crisis, putting together a cabinet with almost no real-world business experience.  Here’s what he has to say about our Republican and Democratic Congressional leadership:

Republicans and Democrats are sticking to party-line votes on many key issues. The Democrats were egregious in packing the stimulus bill with pet projects that won’t stimulate much except campaign contributions and in sticking with earmarks — a symbolic outrage that Obama promised during the campaign he would eliminate. But the Republicans have been even worse in their strategy of opposing recovery plans, which has given a legislative face to Rush Limbaugh’s “I hope he fails.”     

Unlike the country’s reaction to the September 11 terrorist-inspired crisis, there is no sense that the country’s leadership perceives the degree of the risk that the country faces, or that we are indeed even in “crisis”.  And, while as a country we perhaps overreacted to the crisis of September 11, it is clear we are not treating our present economic crisis with the respect it deserves.  What it deserves is the putting aside partisan politics and ideological agendas in favor of unified action in the national interest.

One thing the country may need to do is spend additional money, both in supplementing the funds already committed to the banking industry and perhaps in additional stimulus funding.  If it comes to the latter, this time around we need to do it right with clear criteria, developed with leadership from both parties, aimed at maximizing short-term economic impact.

Having said this, however, I fear our political leadership will not act until things get a lot worse.  Let’s just hope that by then it is not too late.     

There is a theme developing among Op-ed writers this week.  It is that Washington, led by our President, is not taking our economic crisis seriously enough.  I alluded to it in a posting yesterday in which I cited and quoted from a David Brook’s column entitled Taking A Depression Seriously.  Today appear three more columns devoted to the subject.  There is Thomas L. Friedman’s This Is Not A Test.  This Is Not A Test in the New York Times.  It is joined by Andrew S. Grove’s Mr. President, Time to Rein In The Chaos and Steven Pearlstein’s It’ll Take More Than Money to Fix This Crisis, both in the Washington Post.

All three of the pieces today are well worth reading.  The Friedman piece takes the administration to task for failing to act as if this is the crisis it is.  In particular he notes the administration’s failure to fill appointments faster and to tackle some difficult political issues.  Republicans aren’t left out of his criticism, and rightfully not. 

The Pearlstein piece argues that “[t]here is still way too much business as usual going on in Washington, on Wall Street and in the media.”  He is especially critical of Congress for its three-day workweeks and earmark-filled spending bills.  Republicans, with “their stubborn opposition to any increase in government spending in the face of a severe downturn”, are not spared.  He calls the irresponsible Republican stance “the economic equivalent of bloodletting”.

The final piece, however, is the most interesting of all.  The author, Andrew S. Grove, is the former chief executive of Intel Corporation and currently both continues to advise the corporation and teach strategy at the Stanford University Graduate School of Business.  He confesses to having found himself “wringing my hands, not over the goals President Obama has set but over the ineffectual ways the administration has pursued them.”  Here’s an excerpt wherein he explains a lesson he’s learned from the business world:

I have found that to succeed, an organization must travel through two phases: first, a period of chaotic experimentation in which intense discussion is allowed, even encouraged, by those in charge. In time, when the chaos becomes unbearable, the leadership reins in chaos with a firm hand. The first phase serves to expose the needs and options, the potential and pitfalls. The organization and its leaders learn a lot going through this phase. But frustration also builds, and eventually the cry is heard: Make a decision — any decision — but make it now. The time comes for the leadership to end the chaos and commit to a path.    

Grove goes on to argue that this time has come for the administration in dealing with the economy.  “Until the administration does this, we should not embark on attempting to fix another major part of the economy.”  I could not agree more.  I’ve been arguing for weeks that President Obama is doing too much, too soon, too fast.  There is no issue facing the country more serious than the present economic crisis.  It must be solved.  Nothing matters more.  Yet we are launching into a set of initiatives on almost everything.  I am in agreement with Mr. Grove and the other commentators: fix the economy and then move on to other things.

There’s another great piece by David Brooks in the New York Times today.  It’s entitled Taking a Depression Seriously.  He makes a number of dynamite points.  I will note two.  The first is that the Republican approach to the economy has been completely wrong and as a result has amounted to a mere “no” when so much more is needed.  The other is that Democrats, facing the biggest economic crisis in decades, appear to be doing too much else.  Here’s how Brooks puts this latter point:

Democrats apparently think that dealing with the crisis is a part-time job, which leaves the afternoons free to work on long-range plans to reform education, health care, energy and a dozen smaller things.

I agree as I most often do with Brooks.  It is further evidence to me of a broken political system.  On one hand we have Republicans that are so tied into an ideology where’s there is but one solution to everything economic–lowering taxes–that they can’t mount an effective and rational opposition to the Democratic plan.  On the other hand, we have a Democratic Party that has bungled the stimulus by reducing its effectiveness with an liberal Democratic wish list and doesn’t seem to understand that our country has one very major problem–the economy–that needs solving before anything else is tackled.   

We need something in this country to move us off of our present deadlocked course.  I believe what we need is a viable third party or at least a third force, of independents, who could advocate for the rational without concern for party identification or special interests.  I have concluded that it’s the only path forward.  For now, we will muddle along.  Muddling along, however, might just fail us this time.

From what I’ve read of it, I’m not a fan of the President’s budget.  In a time of crisis it attempts, at great cost, far too much social engineering under the guise of stimulus.  I have not, I must confess, waded through the document myself.  Thankfully, others have, such as the Washington Post’s Robert J. Samuelson.  In a piece today entitled Presidential Double Talk, Samuelson details the untruths and deceptions in the President’s “responsible” budget. 

It is worth reading.  While we can’t always trust an opposition party, whether it be Republican or Democrat, to give us straight information, given their desire to defeat the opposing party at all costs, there are certain independent, business-oriented journalists in which we can place a good deal of confidence.  I consider Mr. Samuelson to be one of these. 

It’s important that Americans begin to replace unthinking adulation of the President with respectful questioning of his programs and assertions.  This budget is a good place to start.  We need to encourage Congress to work to transform the budget into one that truly is the “responsible” budget the President promised us.     

We’re getting used to talking about money in the trillions of dollars.  How much is a trillion anyway?  Here’s an excerpt from Kathleen Parker’s column in today’s Washington Post (A Cool Look At Those Trillions) to give us some context:

Chris Martenson’s online “Crash Course” in economics explains a trillion this way: First, picture a million dollars as a four-inch stack of thousand-dollar bills. A comparable billion-dollar stack is 358 feet tall. A trillion-dollar stack of thousand-dollar bills stands 67.9 miles high.

It’s a bit mind-boggling and, indeed, a whole lot of money.  Yet Kathleen Parker’s column today and a superb column by Steven Pearlstein in Wednesday’s Post (Debt Doesn’t Have to Be A Burden) explain why, as large as trillions of dollars are, these sums aren’t as frightening as they might first seem.  Of course, we can’t go on doing this forever, but for now, they are probably necessary and manageable.  I recommend both articles.

Another worthwhile-read from last week if you have the time is Obama’s Ball and Chain by the New York Times’ Thomas L. Friedman.

Apologies for being ‘off the air’ late this last week, but the organization for which I work was meeting in Washington, DC and I was completely consumed by it.  Hopefully, this week will be back to normal. 

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