A real idiot outrages
Amit Varma quotes the following Allan Sloan piece in CNN:
If you want a real bonus outrage, consider this: The operation getting the biggest taxpayer subsidy of all - the federal government - pays bonuses to its employees too. This year it plans to hand out about $1.6 billion of bonuses, despite running more than $1 trillion in the red.
No, a lot of people actually do have problems and are outraged with waste of taxpayers money. People like Varma and Sloan often hammer a strawman rather than discussing the real issues. The actual problem with AIG bonuses, from what I have heard, was that executives at AIG got paid entire year’s salary as a bonus to keep them from switching jobs. A friend we met a month back was telling how one of his ex-colleagues got Rs. 1.3 crores just so he doesn’t leave AIG (until then, I didn’t even know AIG had India operations).
Getting back to what people like Varma and Sloan were arguing for the last four years or more: Markets work because they create appropriate incentive system. I don’t see how getting bonuses because your company failed (and got rescued) is an “appropriate incentive” to actually do good work.
So yes, in a way, the bailout works against the free-market principles. But people who will hurt and bleed if AIG or other companies fail are not the executives — they still get their multi-million-dollar severance package; they still have a few houses and a good amount of cash stashed for the rainy day — its the common folks who had no role to play in the crash, except that they trusted these big firms with their monies and trusted these firms to know what they are doing if they are insuring their assets.
Bush himself has wondered aloud if it would have been better for the general confidence had he not allowed Bear Stearns and Lehmann Brothers to fail.
And I still don’t know if bailouts is the right way to go; I just know that letting some of the large companies fail is the wrong way.
Bush did allow Lehman Brothers to fail. Letting companies fail may mean misery for a lot of common folks, but how does one purge the crap out of the system unless you do that?
Aditya
Only recently some of the largest banks: BoA and Citi were facing significant problems. Do you think its pragmatic of any government to allow such banks to fail?
Think about this: all your hard-earned money deposited in these banks just vanishes one night and FDIC is unable to pay you back your money even though deposits up to $250K are insured.
Two years back, you would have ridiculed me for writing the above paragraph; that is no longer the case today.
The second question is how would allowing these companies fail bring in responsibility. What happens to the high flying CEOs, CFOs and CTOs who are responsible for running the firms to the ground: nothing. They get a more than generous severance package and the people who pay for it are the folks like you and me who had no role in the firm’s decision to take unreasonably high risks. If you were a lower rung executive who refused to go for such high risk investments, what is more likely: you get rewarded for your foresight after the stocks crash, or you get eased out of your job a few months earlier for underperformance?
I believe in markets, but not to the extent I am willing to let the large banks fail and myself feel the pinch. Ten years later, the economy would bounce back, even if the big boys go under; but at what cost? Are we willing to pay that price?
I honestly do not know the answers. The rants against all governmental regulations are as counterproductive as rants against “material culture” or “culture of greed”.