mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Sunday, March 22, 2009

I don't think the fourth way will work either...

Back in the 90's, certain politicians, notably Bill Clinton, advocated a "third way" that combined the wealth creation of capitalism and the wealth redistribution of socialism. Because Clinton was president during the dot-com boom - a huge creation of wealth- it appeared to work, just because enough wealth was being created to make it appear to work.

With the series of bailouts we've had in the last year, I can't help it's almost a fourth way - a complicated mishmash of goverment ownership and involvement in private companies. This is leading to the odd situation we are in now, where companies do what they have always done, then get criticized for doing it because they've taken government money.

The AIG bonus debacle is, of course, the biggest of these. AIG, while still a private company, agreed and signed contracts to give retention bonuses to employees who were winding down a failing business arm. Then the government stepped in and bought a big chunk of AIG, and recently decided that the bonuses were a bad idea. AIG pointed out that the bonuses were contractually obligated, so that if they didn't pay them, they would probably end up getting sued and have to pay them anyway, plus legal fees.

But it made a great political whipping boy, so the government stepped in and imposed a 90% tax on them. As WSJ points out, with local taxes, that means some people will end up paying more in taxes on the bonuses than they got as bonuses.

I'm with Charles Krauthammer on this one. In the grand scheme of things, this is pretty tiny. There are legit reasons for the bonuses - there probably are some competent employees, who "know where the bodies are buried", who it would be useful to keep on. But mostly, in a time of major economic issues, where we have no problem with a $75 billion bailout for homeowners who bought too much house and are giving billions to states to build infrastructure they may or may not actually need, why is the government spending this much time on something so small?

Of course, criticizing spending by bailed-out banks has become a whole category of journalism. AIG has been criticized for, among other things, holding a sales conference at a fancy hotel and suing for taxes it feels were improperly assessed. Citibank has been nailed for renovating executive offices. Northern Trust has been knocked for holding a big party.

Of course, like the AIG bonuses, many of these fall seem worse than they are. The AIG retreat wasn't for employees, but for independent salespeople of a profitable division not involved in credit-default swaps. You know, people who make money for the company, and people who - if they feel they are getting the shaft - could switch to selling a different company's product, causing AIG to lose more money.

And the Northern Trust party brings up another problem with the bailout. NT didn't ask for money, but the government gave it to them anyway. Why? Because the idea was if all of the major banks got bailout money, it wouldn't be obvious which banks actually needed it - the idea was that if the government was only bailing out a couple banks, it would be obvious that they were failing, there would be a run on the banks as panicked account holders withdraw all their deposits, and the bank would become insolvent and fold - which is pretty much happened to IndyMac.

The restrictions and scrutiny means that some banks are giving money back, and probably won't take it in the future. That means the government won't be able to do the "hide the failing bank" strategy in the future, and that's bad - since if more banks fail, it means that the FDIC has to step in and pay for it, which means they will at some point need to raise the insurance premiums for banks, which will get passed on to depositors - you know, you and me.

The Fourth Way is problematic because companies end up getting controlled not by the corporation or by the government, but by mob mentality and media memes. Normally, in capitalism, investors and customers determine how a company is run. If it is making a profit and satisfying customers, it survives and thrives, and the assumption is that the choices of management were good ones. If they make bad choices, customers and investors avoid it, and it folds. In socialism, the government makes all the choices, and customers go there because they don't have a choice.

Under our current system, we have the worst of both worlds. Since the government is shoring things up, bad companies aren't failing, and bad decisions aren't punished. But it's often hard to tell what bad decisions are until you have firm numbers to look at. What's happening now is that accountability for decisions has moved from the end result to which make the worst headlines. Since government money is involved, the public feels they should have a role in how the company is run - but they are making those decisions not on hard numbers or cost/benefit analysis, but on what makes the best headline.

When the original bailout plan was touted, I agreed with it reluctantly, because lots of smart people were saying the financial system would collapse without it. As things continue, I'm wondering what would have happened if it hadn't been passed - and if it was worth it. Granted, I also think the original plan - buy toxic assets to get them off the books, and hope the government could eventually turn them over for a profit - was a better idea than just handing out money and having the government buy stock in failing companies. The horrible conflict of interest of having the government own private companies adds to the problem.

The Third Way was supposed to combine the best of capitalism and socialism. The Fourth Way that we are in now seems to combine the worst of both.


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