Monday, March 23, 2009

Utilitarian criticism of AIG bonus mob

When I wrote about the obscene vilification and congressional overreach on the AIG bonuses last week, I criticized it on mainly constitutional and philosophic grounds. Other critiques are popping up now, many of them on utilitarian grounds.

Wall Street Journal:

Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930, but it led to retaliation and a collapse of world trade. The question amid Washington's AIG bonus panic is whether Congress's war on private contracts and the financial system is a similarly destructive moment. It is certainly one of the more amazing and senseless acts of political retribution in American history.

...

With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia. The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital, a counterpoint to our lottery tort system and costly regulation. Meanwhile, the 90% tax rate marks a return to the pre-Reagan era when Congress and the political class behaved as if taxes didn't matter to growth or incentives. It is a revival of the philosophy of redistributionist "justice" of the 1930s, when capital went on strike for an entire decade.

The financial system will suffer in particular, just when the Obama Administration is desperately seeking more private capital to ride out future losses.



Tom Friedman, NY Times:

I ran into an Indian businessman friend last week and he said something to me that really struck a chord: “This is the first time I’ve ever visited the United States when I feel like you’re acting like an immature democracy.”

...

If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once — like Treasury Secretary Timothy Geithner or A.I.G.’s $1-a-year fill-in C.E.O., Ed Liddy — and you’ll ensure that no capable person enlists in government. You will ensure that every bank that has taken public money will try to get rid of it as fast it can, so as not to come under scrutiny, even though that would weaken their balance sheets and make them less able to lend money. And you will ensure that we’ll never get out of this banking crisis, because the solution depends on getting private money funds to team up with the government to buy up toxic assets — and fund managers are growing terrified of any collaboration with government.


Financial Times:
Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the “anti-American” measures smacked of “a McCarthy witch-hunt” that would send the country “back to the stone age”.

There were fears that the backlash triggered by AIG’s payment of $165m in bonuses to executives responsible for losses that forced a $170bn taxpayer-funded rescue would have devastating consequences for the largest banks.

“Finance is one of America’s great industries, and they’re destroying it,” said one banker at a firm that has accepted public money. “This happened out of haste and anger over AIG, but we’re not like AIG.”

The banker added: “It’s like a McCarthy witch-hunt...This is the most profoundly anti- American thing I’ve ever seen.”

The question that needs to be asked right now is this - is this happening because the Obama administration is utterly incompetent or is it happening because the Obama administration wants it (the destruction of wealth and the financial system) to happen?

Neither answer is a good one, of course.

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