In any case, what's the worst they could have done?

Tom Toles



hilzoy: Mark Haines Doesn't Get It

If anyone on Wall Street is wondering: what is this "it" that we are supposed to "get"? Is it just that people are angry? Could I be one of those people who don't "get it"? If so, how would I know?, s/he could do worse than consider this YouTube of CNBC's Mark Haines interviewing Rep. Brad Sherman (D-CA) (via TPM). It's a pretty good diagnostic tool.

This is what "not getting it" looks like. At about 50 seconds in, Haines says: "You and people who share your opinions seem to feel that, you know, let's hold salaries on Wall Street to $100,000. Do you have any idea what Wall Street would look like if you did that?" If your immediate reaction is: that's telling him, Mark Haines!, then you don't get it.

A couple of years ago, it would have been hyperbole to suggest that we would all be better off if the senior executives at all our major financial firms were people picked entirely at random out of the phone book. Now, it's arguably true. People picked at random would, admittedly, be likely not to have been to business school. They might not know a lot about futures or derivatives or put options. But so what? At least they might have been more likely to know that they were clueless, and a few of them might have had the common sense to ask questions like: will housing prices really go up indefinitely?

In any case, what's the worst they could have done? Bankrupted their companies with ludicrously risky gambles that fell apart once markets went south? Destroyed trillions of dollars in value? Brought the world financial system to the brink of collapse? Left taxpayers across the globe on the hook for trillions of dollars? Bankrupted entire countries?

Oh, right.

"Getting it" means understanding that the entire story that some people on Wall Street have told themselves about why they got such obscene levels of compensation is false. As a group, they were not uniquely talented. They did not make a lot more money for their company than they earned, at least not in the long run. Their salaries were not fair compensation for the value they produced. It would not have been worse if they had been replaced by people chosen at random.

Look at the YouTube clip again. Mark Haines seems astonished and baffled by Rep. Sherman's comments. He acts as though he's dealing with some ignorant Yahoo who just doesn't see that when people on Wall Street and people on Main Street disagree, Wall Street is obviously right. That's why he takes "What do people on Main Street know about running a financial system?" to be such a killer response to Sherman.

A few years ago, it would have been a killer response. Normally, it makes sense to think that people on Wall Street know more about running a financial system than people chosen at random, just as it makes sense to think that a successful director knows more about making movies than I do. When people reach positions of prominence in a given field, it makes sense to think that their opinions about the field they work in are entitled to some deference*. It takes a lot to completely forfeit any right to that deference. But the people in the financial services industries have managed to pull it off.

And that's what Mark Haines doesn't get.

* Preemptive footnote: their opinions are entitled to "some deference", not "complete deference". Imagine me talking to a successful director about what really goes on in the movie industry: I don't think that I should slavishly abdicate my judgment just because the director is successful, but I do think that before I go spouting off, I ought to take seriously the possibility that that director might know more than I do. That's all I mean.

TPM has a slide show of

The Men Who Wrecked The Economy

Here's Maddow putting all the pieces together in another fine segment. Cops and Robber barons March 20: President Obama is vowing to re-regulate Wall Street in the wake of the AIG bonus fiasco. With both sides pointing fingers, who is to blame? Rachel Maddow is joined by Pulitzer Prize winning reporter David Cay Johnston.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Halcro on Stimulus Politics

(3/20/09) It appears lawmakers in Juneau are feeling burned over Governor Palin's announcement yesterday that she was declining 30% of the federal stimulus money. The most controversial chunk of change left on the table was $170 million for education that has both lawmakers and education professionals stunned.

Lawmakers are apparently upset because they thought they had a deal with the governor on what funds the state would be keeping and now she has put them in a position where they'll look like the spenders while she polishes her appeal to conservatives who are courting her for 2012.

This was an email I received this morning from a legislative leader:

Here’s the scoop on the Big Stim funding. Until 24 hours before her press conference, the Governor was going to accept most everything, and reject a few items that we all pretty much agreed were not acceptable. Most of the Big Stim money is really pretty benign and does not require unsustainable new permanent programs. The issue became a big tug of war for control of the Gov between folks in state government and Sara PAC. Sara PAC won, literally hours before the announcement was made. Alaska was sacrificed again to the godless pagan illusions of her national ambitions.

hilzoy on HR 1586

Even though I am furious at the people who brought down AIG, along with all the other Masters of the Universe, I do not support the House bill that passed yesterday -- the one that would tax bonuses at 90%. For starters, it's badly targeted. On the one hand, it leaves out the incredibly troubling Merrill Lynch bonuses, along with any other bonuses paid before Jan. 1 of this year. On the other hand, it hits people who were just writing life insurance policies at AIG. Moreover, it also hits anyone AIG hires now. Suppose, for instance, that AIG were to hire Paul Krugman to supervise the liquidation of its Financial Products Division. And suppose AIG wanted to pay him a bonus if he did his job quickly and well. His bonus would be taxed under this bill, even though he had nothing to do with the financial crisis (which is why I picked him), and is being given a bonus for helping to solve it.

The bill would also allow firms receiving TARP funds to avoid the tax by simply paying their employees exorbitant salaries. Bonuses are bad, but exactly the same amount of money paid to exactly the same employee in the form of a salary is apparently fine. This seems exactly backwards to me. Part of the problem with the AIG bonuses was precisely that they were not tied to performance in any way: the people at AIG-FP, who had gotten enormous amounts of money when times were good, supposedly on the basis of their performance, locked down the same level of compensation when it looked as though their trades were about to go bad. Now, apparently, we want to give people an enormous incentive to decouple their compensation from performance in exactly the same way. Oh goody.

If that weren't enough, it seems likely to drive down the value of AIG generally, which will make it much harder for us to get the rest of our money back.

Besides all that, it's spooking the banks needlessly. I want to emphasize the word 'needlessly' here. There are a lot of things I think we ought to do that would spook the banks. Nationalizing several of the large banks, for starters. Putting in place regulations that ensure that no company is "too big to fail", that depository banks and investment banks are different companies, that liquidity requirements are bigger and (preferably) countercyclical, etc. Regulating all types of financial services firms, including hedge funds, and all financial instruments, including derivatives. Setting up procedures to liquidate any companies that manage to become systemically important despite these regulations, procedures that ensure that their investors take a very serious haircut. Unless someone can explain to me why off-balance entities serve some useful purpose, I think they should be banned. So I am fine with spooking banks.

That said, no business does well when the rules are constantly changing all around them. A lot of the reforms I favor are aimed not just at making the rules better, but establishing predictable rules where none exist. The fact that we have been improvising ever since this crisis hit is a tremendous indictment of every preceding administration that could have set up mechanisms to deal with these sorts of problems but did not.

If we want to spook the banks, then, I think we ought to do it in some way that actually solves a genuine and serious problem, and does it in an intelligent and targeted way. This bill is neither intelligent nor targeted. Moreover, while the bonuses are outrageous, they are not on my list of the top 100 things we need to worry about right now.

I'd rather save my fury and use it to force serious, lasting reform of the entire financial industry, and save spooking the banks for something really worthwhile, like nationalizing Citi.