Entrapments of Our Own Making
The fuss and feigned fury over the bonus payouts to AIG traders is good political theater (I’m not sure whether it is comedy or tragedy) but it distracts us from more important work in resolving the current economic panic and recession.
On the one hand, that AIG’s Financial Services Division could expect bonus payouts at all after they ran the entire company in the ditch seems arrogant beyond measure to most Americans. That AIG executives hid behind ‘contractual obligation’ to make such payments in the current circumstances stretches credulity. That the Government let it happen is just plain dumb economics and even worse politics.
I suspect I was not alone in my reaction that AIG should ‘just say no’ and let the FSD folks sue them. The Government could have aided in this process by jawboning the FSD folks that unless they fore go any bonuses and help AIG unravel this mess they risk being investigated, indicted and tried in the search for scoundrels that would cost them much more than any bonus payments they might have received. Had this scenario played out all the parties would have looked like heroes instead of greedy or stupid villains.
I suppose we could just chalk this up to the inexperience of the Obama team that this spun out of control. That might be the kindest explanation and the most generous outcome from this experience. But I think the real lesson here is not found in the facts of what has happened about bonus payments, but rather the lesson of unintended consequences when the government gets in over its head and becomes entangled in entrapments of its own making.
As taxpayers, we have now spent more money on AIG than the company was actually worth before this crisis all began because AIG was perceived as being to big to fail. In truth, most of AIG involved in insurance is quite sound and could have been spun off sequestering the toxic assets in FSD with the Government absorbing them, holding them and working them out. I would be happy to pay bonuses to the FSD folks for each of these screwy deals they successfully unravel from any profits the Government makes over the long term process of cleaning up this mess.
Such a strategy would also do something else we need right now—build confidence that there is light at the end of this long tunnel. That is exactly what the Fed seems to be doing by its surprise announcement that it would buy back Treasuries and expand its purchase of “toxic assets” over the next several months. Some fear this will ignite inflation and weaken the dollar. But the real impact might be sufficient to reassure investors around the world that the US is taking assertive steps to right this ship. Maybe it is only coincidence that the Fed took these actions only a week after the Chinese worried aloud out the value of its US investments in Treasuries and other assets. I think not.
The Fed is imposing “ adult supervision” on the financial system and taking the steps that Secretary Paulson first recommended—get those toxic assets corralled where we can deal with them over time, and free the banks to get back to business.
Now THAT is really a change we can believe in!
The Chinese are Our Friends
Chinese Premier Wen sounded like the sleepless banker worrying out loud this week about whether or not the US will repay the $700 billion that China has invested in US treasury securities. Bloomberg reported that Wen asked for assurances US debt is safe.
“We have lent a huge amount of money to the United States,” Wen was reported saying. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”
What are the Chinese worried about? INFLATION!
The dilemma for the Chinese is that while there is uncertainty about the current policy of the US and little experience upon which to build confidence in Obama’s Administration, the alternatives to diversify away from Treasuries are more risky. Sure, China could invest in commodities, but as many who loaded up on silver, gold or oil can tell you what goes up fast can crash like a lead balloon.
The Chinese are our Friends! The Chinese are our Friends!
China is worried, in part, because Congress is spending money by the trillions and Team Obama, apparently not knowing what else to do, is going along. Meanwhile, left to its own devices, the market will likely heal itself. It certainly is searching for a reason to rally—just look at the stock market results from last week after CitiGroup said it was profitable for January and February. Even bad news—GE credit rating was cut a notch—is good news—it could have been worse!
In the early part of this financial panic, the world pointed fingers at the US saying “ you screwed up big time,” then one by one they discovered their own banks, insurance companies and other financial geniuses drank the same toxic Kool-Aid of flipping bad loans and rebundling them into something sold as “securitized” good loans over and over.
We are now engaged in the age old process of defining the “Biggest Loser” and each week a few more players are eliminated. So far the Government ( both Bush and Obama) have a real policy of throwing money at the problem to (a) buy time (the Bush policy) and (b) fund the Democrat agenda (“never waste a good crisis”) since most of this stuff we are throwing money at would never fly in normal times. Both policies, in truth, are the same—let the market heal itself. But both are buying “political insurance” by throwing money around we do not have to spend now or in the future.
The Chinese national interests are likely well served by diversifying into commodities and other real assets, the value of which is not contingent upon an overleveraged debtor nation. But as long as China reasonably evaluates the trade-offs, it likely will continue to buy US debt since a faster recovering US economy is the best Chinese medicine as well.
The Chinese are our friends, in no small measure, because they have the capacity through their warnings and call for fiscal discipline to constrain the inexperienced in our Government and the ravenously political in Congress from blatantly printing money.
