Chronicle of the Conspiracy
Friday, March 20, 2009THE AIG LYNCH MOB My column today for SmartMoney.com:
While the Federal Reserve is busily trying to save the world, Congress is just as busily trying to destroy it.
This week the Fed announced it would inject much-needed money into the economy, and lower mortgage interest rates at the same time, by buying $750 billion in mortgage-backed securities, and another $300 billion in Treasury bonds. Bold move—making the Fed's enormous balance sheet bigger than ever. Bravo, Ben Bernanke.
At the same time, the Congress has turned into a seething lynch mob aimed at AIG, the failed insurance giant that has been the recipient of over $100 billion in federal bailout money, and is paying $165 million in bonuses to some employees. At the moment, the state of play is that the House of Representatives has passed a law taxing at 90% bonuses paid to employees of firms that received more than $5 billion in bailout money.
For the stock market, this is a rally-killer. Or worse.
No one seems to want to determine whether the people getting this money deserve it or not. Maybe some of them don't—maybe some of them are even the bad people who got AIG into trouble in the first place. But maybe some of them do deserve it. Maybe there's one guy or gal who has just done some brilliant trade that has made taxpayers billions, at least offsetting some of the billions in losses. Should that trader not get a bonus?
No one seems to care that these bonuses were all contractually promised, and a contract is a contract. Senator Christopher Dodd (D-CT), who wrote an obscure law hidden in the recent so-called stimulus bill to sharply limit bonuses to federally assisted banks, is outraged to discover that there is a provision in his own law that exempts employees with prior written employment contracts. First he claimed he didn't know the provision was there. Then he changed his story to claiming the Obama administration insisted on it.
No one seems to care that the 90% tax will apply to all banks that have accepted federal money, not just to AIG. That includes banks like Wells Fargo, who told Treasury secretary Henry Paulson that they didn't even want the money when the Troubled Asset Relief Program (TARP) was enacted last October. Reluctantly, Wells took the money at Paulson's urging, as did other healthy banks such as JPMorgan. Now virtually every employee of every one of them faces a 90% tax on their bonuses.
No one seems to care that the Internal Revenue Code is designed to collect federal revenue, not to punish particular classes of people. If Congress wants to outlaw bonuses, it should just outlaw bonuses. Not allow the bonuses to be awarded, and then tax them away.
No one seems to care that you have to pay people to run these banks, even AIG. If you don't pay them, or if you don't pay them enough, or if their pay isn't structured to create incentives for them to work hard and work effectively, then everybody loses. These employees will simply leave. Or they will turn their brains off. Either way, the taxpayers whose money is at stake in these companies will be hurt—because these companies will crash and burn without people to run them well.
I've been writing here over the last several weeks that the big problem the stock market now faces is the extreme instability of the political environment. I rest my case. Now, unless this foaming mad-dog of a Congress can be subdued, the wonderful stock market rally of the last couple weeks can be declared over and done, and it's back to the bear market—with a vengeance.
And then the Fed can print all the money it wants, and buy all the mortgage-backed securities it wants. And all we'll get for it is a lot of inflation. If it's going to turn into growth, then Congress is going to have to stop changing the rules of the game constantly. Without stable rules, it's not even a game. It's nothing but a street-fight.
A successful economy depends more than anything else on the rule of law. There has to be a stable set of rules governing the interactions between economic players, and between players and the government. Sometimes the rules need to be changed, but there need to be rules about how to change the rules.
Without rules, no one will take economic risk. No one will invest. No one will plan for the future. How can you plan for anything without knowing the rules of the game? And unless you can plan, how can you take the risk of investing?
It's even deeper than that. Without rules, how can you even know what you own? Without knowing that, you can't invest—because you can only invest what you own.
So the challenge facing the stock market is simply this: When everyone is learning the lesson that you shouldn't invest, stock prices simply will go lower and lower as, one by one, everyone in the market withdraws from investing.
We'll have a spectacular and sustainable stock market rally when someone in Washington DC imposes a little adult supervision. It would have been great if that could have come from our popular new president. He could have used his prestige and popularity to call a halt to the lynch mob. But he's done exactly the opposite. He's just joined the mob.
Until President Obama shows a little leadership—instead of just following every mob instinct set in motion by the Congress—the bear market will just keep on roaring. Even after the rally of the last two weeks, it's still worse, right here and right now, than the bear market of the Great Depression. If Washington doesn't stop taking stupid-pills, pretty soon there will be nothing left.
Posted by Donald L. Luskin at 11:34 AM | link
NOT EXACTLY A DEFENSE OF BOEHNER, BUT... Yesterday I told my DC-insider friend "Mick Danger" that his beloved John Boehner -- the GOP House Minority Leader -- had gone too far in fomenting the AIG lynch mob, and that the 90% tax on bonuses was the unintended consequences of his pandering. Mick writes this morning,
I've been thinking about our brief conversation yesterday about my great friend John Boehner. As with any other analysis, it helps to comparison shop for political leaders.Update... Mick has more:
Regarding the compare and contrast of Cantor and Boehner, note this other portion of the Politico story I linked to before. Boehner was one of the first "no" votes yesterday, but Cantor equivocated and then capitulated.As the vote began Thursday afternoon, Boehner was one of the first to register a red “nay” on the big board. “This is a bad bill with bad consequences,” he said.It might have been a huge 328-93 victory for insanity among all Members but it was close call with death for Republicans. Here's the vote breakdown:
Posted by Donald L. Luskin at 9:02 AM | link
Thursday, March 19, 2009BUT NO BONUSES FOR AIG EMPLOYEES From Jim Glass:
Out of all 50 states plus Washington DC, the lucky recipient getting the most economic stimulus spending per capita sent to it from our leaders in Washington DC is ... Washington DC!
Posted by Donald L. Luskin at 7:03 PM | link
CARD-CHECK? HOW ABOUT A BRAIN-CHECK? "Mick Danger" points to this rather hilarious story:
As it helps push for legislation that would make it easier for workers to organize, the country's fastest-growing union is engaged in its own labor dispute with employees it is seeking to lay off.
Posted by Donald L. Luskin at 7:00 PM | link
Monday, March 16, 2009THAT WAS THE WHOLE POINT! Even the Wall Street Journal doesn't get it:
Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks...After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.But that's what it means for a company to be "systemically important" -- that it has obligations to third parties, the failure of which would set off a domino effect of continuing collapse. When it is said that these "funds" are "funneled," that's just provocative language for saying that AIG was able to pay its debts, which was the whole purpose of the bail-out.
Posted by Donald L. Luskin at 11:22 AM | link
"REDEMPTIVE" LIBERALISM Shelby Steele just gets better and better at nailing the moral dynamic of politics. From today's Journal:
When redemption became a term of power, "redemptive liberalism" was born -- a new activist liberalism that gave itself a "redemptive" profile by focusing on social engineering rather than liberalism's classic focus on individual freedom. In the '60s there was no time to allow individual freedom to render up the social good. Redemptive liberalism would proactively engineer the good. Name a good like "integration," and then engineer it into being through a draconian regimen of school busing. If the busing did profound damage to public education in America, it gave liberals the right to say, "At least we did something!" In other words, we are activists against America's old sin of segregation. Activism is moral authority in redemptive liberalism...
Posted by Donald L. Luskin at 10:35 AM | link
KUDLOW REPLAY Here's the YouTube video of last week's hit.
Posted by Donald L. Luskin at 1:02 AM | link
Sunday, March 15, 2009I'M O.D.-ING ON OUTRAGE "A.I.G. Paying $165 Million in Bonuses After Federal Bailout" shrieks the headline of the lead story on page one of today's Sunday New York Times. But wait. That's millions with an "m," spread across thouasands of employees. Then we learn a couple of paragraphs down, that
Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.So let's see, that's an average bonus of $192 thousand each. Nothing by Wall Street standards. And that's for the top executives?
Somebody has to run this company for the taxpayers who own it. And they have to get paid, or they won't play. Unless we want it to end up like this.
Posted by Donald L. Luskin at 1:40 PM | link