May I associate myself with the remarks of the esteemed Professor Bainbridge?
The Obama administration has shown a shocking disregard for the rule of law when contract rights interfere with the administration’s ability to reorder the American economy as it sees fit.
First it was the AIG bonuses. Then the Chrysler and GM bondholders. Now executive compensation.
From the New York Times:
Responding to the furor over executive pay at companies bailed out with taxpayer money, the Obama administration will order the firms that received the most aid to slash compensation to their highest-paid employees, an official involved in the decision said on Wednesday.
The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers.
Some executives, like the top traders at A.I.G., will face tight limits on their pay. In addition, the top-paid employees at all the affected companies will face new limits on their perks.
The plan will also change the form of the pay to align the personal interests of the executives with the longer-term financial health of the companies. For instance, the cash portion of the executives’ salaries will be slashed on average by 90 percent, and the rest will be replaced by stock that cannot be sold for years.
It’s unsurprising that a public that has had to pay billions to rescue firms from bad investment decisions would resent paying big checks to senior executives. It’s certainly conceivable that the form of compensation imposed by Ken Feinberg – more stock, less cash, with delays in the date the stock can be sold – might have encouraged more responsible behavior had it been in place beforehand.
But as Bainbridge puts it:
[M]any (most?) of the compensation deals the Obama administration is shredding were set in employment contracts. Granted, some of those employment contracts were signed after the law setting up pay “czar” Kenneth Feinberg’s position and empowering him to review pay packages at TARP firms.
But a lot of them are pre-existing contracts and it’s those contracts that are the main concern.
Feinberg in fact is trumpeting his success at forcing so-called renegotiation “even for contracts over which he did not have explicit authority.”
The bottom line thus is that Obama is having his minion coerce TARP executives and employees into ripping up contracts Obama doesn’t like so as to assuage the populist public.
Maybe an analogy helps. Suppose we discovered that during the tense days of September and October 2008, executives at the big banks were ordering lavished catered dinners for themselves at their offices. We’d all disapprove. Those executives should have been eating sandwiches at their desks! But would it be OK for the government to order the banks to refuse the invoices from the catering company?
The service was contracted by the people who had the legal authority to make the contract. The contract must be paid, unless the company goes into bankruptcy – at which point all creditors would have to be treated equally, without the government picking and choosing its favorites to be paid first.
What’s happening with these executive contracts is the equivalent of bouncing the bills from some disfavored suppliers. It’s lawless and it’s wrong.
And the consequences of this wrong action will reverberate through a whole economy. Suddenly all creditors, suppliers, and contractors have to factor into the other uncertainties of business a new risk of arbitrary government abrogation of their legal rights. Suddenly the awful Chrysler case looks less like an emergency exception to an otherwise reliable rule, and much more like a harbinger of danger to come.
41 responses so far
1 balconesfault // Oct 22, 2009 at 10:04 am
So if we understand this correctly – the position of the Republican Party should be that collectively bargained compensation packages for autoworkers making on average $28/hour should have been slashed as a precondition to any federal bailout of the auto industry … but that the guys who created the current mess by leveraging their companies into a position that required a bailout about 60x the size of the auto bailout (between Fed money poured into the banking industry last year, plus TARP, the bill is close to 3 trillion) shouldn’t have their $10 million bonus checks touched?
Yeah – that’s a long term winner.
Again, last year around this time there were Republican Congressmen calling for UAW contracts to be voided. What was your position then, Mr. Frum?
2 sinz54 // Oct 22, 2009 at 10:07 am
Sounds like those executives should go to court to have their contracts enforced. That’s what we have a judicial system for.
The fact that none has done so yet, however, suggests that there’s something in their contract that would weaken their case.
That’s all I can come up with about this.
3 ottovbvs // Oct 22, 2009 at 10:12 am
balconesfault // Oct 22, 2009 at 10:04 am
……..You said it better than I could…….but consistency is not exactly David’s strong point…….Personally I hope the Republicans jump aboard this one but somehow I don’t think even they are that dumb…….although with a bit of luck Beck, Limbaugh and co may go for it since kneejerk reaction against anything the Obama admin does is standard operating practice.
4 cpanza // Oct 22, 2009 at 10:14 am
I too would like to know what Frum’s reply to Balcone’s counterexample is. Was the changing of union worker contracts a violation of the rule of law or not?
Sinz’s reply seems also right to me: that’s what courts are for. If you think the administration has violated the rule of law, bring it to court.
5 balconesfault // Oct 22, 2009 at 10:23 am
FWIW – I think that when Government money has to come in and bail out an entity … that we the people have a right to expect contracts to be changed or voided just as they would be changed or voided were the company to have gone into bankruptcy.
The question then becomes one of policy – to what extend does it enhance our societal goals to alter a contract, or to leave it in place?
Personally, with my goal being the strengthing of the middle class, I’m much more concerned about tens of thousands of UAW workers who bought houses and had kids with the expectation of working 30 more years at the union scale not having to chew up their kids college funds and give their homes up to foreclosure (in the middle of a massive real estate collapse), than about some Wall Street exec whose annual bonus would pay for 100-200 of those workers annual salaries taking a cut.
But others concerns might lie elsewhere.
6 sinz54 // Oct 22, 2009 at 10:24 am
balconesfault:
Legally, there’s a BIG difference between a precondition and a postcondition.
If the Government tells GM “We will ONLY bail you out IF you slash those compensation packages,” then GM has the right to say no. Especially if the unions threaten strikes or legal action. In that case, no compensation slashes and no bailout either.
But suppose that the Government had told GM “We’ll give you this bailout money, no strings attached,” GM and the unions accept it. And then later on the Government says “On second thought, we want you to slash compensation packages,” then the Government is unilaterally rewriting the terms of the agreement they made. GM would have every right to seek redress in the courts.
7 sinz54 // Oct 22, 2009 at 10:28 am
balconesfault:
I don’t think that’s legal.
AFAIK, the only time when a corporations’s obligations to others can be voided is when it files for bankruptcy protection.
General Motors filed for bankruptcy, so it could declare union contracts null and void.
But not all the firms that received TARP money filed for bankruptcy.
8 sinz54 // Oct 22, 2009 at 10:29 am
cpanza:
It was fully legal, of course.
General Motors had filed for bankruptcy protection. That frees it from having to honor obligations to its creditors (like the workers’ health care and pension funds), while it undergoes restructuring.
9 balconesfault // Oct 22, 2009 at 10:42 am
But not all the firms that received TARP money filed for bankruptcy.
This isn’t about all firms that received TARP money – it is about 7 firms which received extraordinary support. Four of those entities – General Motors, Chrysler and the financing arms of the two automakers – did go into bankruptcy, no?
Meanwhile, it is without question that the other 3 – Citibank, AIG, and BOA – would have gone into bankruptcy without Federal intervention.
So it seems there is an argument here for more socialism (the Government having allowed bankruptcy and then buying the banks and AIG) … or for the Federal Government to have been willing simply to have allowed the entire system to collapse last fall. I suspect that there is a half-truth in your comment that we’d see lawsuits if this wasn’t legal … and that this right now is a large negotiation to get those parties to unilaterally cut their compensation packages.
It’s a big gamble. On one hand, execs might feel that they will win in court. On the other, if they take the case to court and lose, they will have established precedent, and pretty much become pariahs in the financial industry because the precedent could resonate far beyond these 7 firms.
Whatever, I am glad to have a government ready to play hardball with these greedy SOBs, rather than simply allowing them to use the Fed as their personal ATM card while recycling back a portion of the take to both political parties to ensure that they don’t really face any serious regulations in the future to prevent another 2008.
It’s actually kind of a welcome surprise, considering the financial backing that the Obama campaign had from the investment community.
10 LFC // Oct 22, 2009 at 10:56 am
It’s simple. If the execs at a company contest the cuts, simply force the companies involved into bankruptcy. They certainly haven’t had and still don’t have the legally required capital to back their obligations, so they could probably be forced to file in a heartbeat. Then, as a condition of the bankruptcy proceedings, fire the top execs and nullify their contracts. That would work out great for them, because there are soooooo many prime jobs available to them in the financial sector right now.
And while we’re at it, let’s start a full Justice Department investigation on what these top execs did and didn’t know over the past decade. Subpoena all their e-mails and correspondence, and question their subordinates. If any were involved in shady dealings, prosecute them to the fullest extent of the law.
I think that’s why the execs won’t yell too loudly. The government has more than one big stick and with the 2010 elections coming up, the Dems can’t politically afford to have these companies publicly give them a big F.U.
11 cpanza // Oct 22, 2009 at 11:20 am
I think Balcone makes a fair point. I’m not sure at all what the legal status of it is, but again — if they think they have a case, go to court and find out. If a company is surely going to succumb to bankruptcy if the govt does not intervene, then it seems to me that there’s at least a prima facie argument that the company is in a de facto state of bankruptcy, seeking bailout so as not to have to suffer from many of the negative consequences of actual de jure bankruptcy. The interesting question is how close that de facto state is to a de jure state, where contracts can be altered. The situation is extraordinary, given that the govt bailed them out, so I’d be interested to see how the distinction between technical bankruptcy (de jure) and govt bailout (de facto bankruptcy) is treated by the courts.
12 balconesfault // Oct 22, 2009 at 11:26 am
cpanza – I think your analysis is spot on.
And most importantly – this is a place where throwing the dice in the courts has the potential to establish precedent that will be far far worse for these execs than accepting the cuts in the compensation packages that are on the table. It may well be that the only execs willing to take that risk are ones who are already on their way out of the industry, and have nothing to lose. At that point it is the government which has to decide whether it’s worth it to throw the dice to chase them, or to keep their threat for another day.
13 rbottoms // Oct 22, 2009 at 12:41 pm
Boo Hoo.
Don’t like it? Pay back the frakking cash, all of it right now.
14 Reason60 // Oct 22, 2009 at 12:41 pm
Balconesfault beat me to it with the UAW analogy;
But here is another one. Most pundits and blog posters are unfamiliar with welfare. But the fact is that in recent years, the federal governemtn and states have made receipt of various forms of welfare increasingly stringent, to the point of being a draconian intervention in the lives of its recipients.
Examples would be the random sweeps through welfare apartments, looking for drugs or crime; the evictions of families, because one member commits a crime; evictions based on simply having a suspected gang member visit. And so on.
We seem to have no trouble making lives miserable for welfare families on the grounds that begging for government charity subjects you to stringetn rules.
Cuting John Galt’s welfare check from 19 Million down to a mere 1/2 Million, really doesn’t tug at my heartstrings. Shrouding this in the “rule of law” doesn’t cut it, not when these same firms are making themselves a virtual arm of the government.
The welfare mother who had her lease torn up because her son stole a beer at 7-11 doesn’t have Timothy Geithner on her speed dial. I would be more inclined to give her the “rule of law” treatment.
15 sinz54 // Oct 22, 2009 at 1:16 pm
lfc:
Not possible.
The reason those firms were bailed out in the first place, is that the collapse of the credit markets would have destroyed the U.S. economy.
Forcing them back into bankruptcy would spell doom for the credit markets and the stock market. The U.S. economy would slide right back into the depths of recession.
OTOH, the bankruptcy of General Motors had nothing to do with saving the U.S. financial system. It was done as a political payoff to the UAW for supporting Obama’s presidential campaign.
And so I would LOVE to see GM forced into bankruptcy. And it wouldn’t hurt the U.S. economy significantly.
16 balconesfault // Oct 22, 2009 at 1:24 pm
<b.Forcing them back into bankruptcy would spell doom for the credit markets and the stock market.
Nope. Because you force them into bankruptcy, and the Federal Government steps in and buys them, rather than just feeding money to the companies to keep themselves afloat with.
If the Government has made it clear that they will do this before bankruptcy is announced, then the markets will take it in stride.
OTOH, the bankruptcy of General Motors had nothing to do with saving the U.S. financial system. It was done as a political payoff to the UAW for supporting Obama’s presidential campaign.
That is your opinion. I believe it to be wrong. I think that the hit to all the companies that make up GMs supply chain, to dealerships across the country, to the communities which largely employ GM employees, would have unleashed another wave of financial turmoil against a US economy that was already listing thanks to the collapse of the derivatives market.
And I think that the Republican obsession with viewing every move by Obama as a form of political payback to various support factions is a perfect example of projection, from a party which accepted a long list of highly non-conservative decisions by the former President with barely a quibble, when the only justification for those decisions had to be seen not as ideological, but as political payback to various support factions.
17 ottovbvs // Oct 22, 2009 at 1:25 pm
sinz54 // Oct 22, 2009 at 1:16 pm
“And so I would LOVE to see GM forced into bankruptcy. And it wouldn’t hurt the U.S. economy significantly.:
………As I’ve pointed out several times Sinz what you know about economics and business could be written on the back of a postage stamp……..and still leave room for the lord’s prayer……..a very typical deranged but patriotic conservative LOVE to see the leading US automaker forced into bankruptcy…….Republican nihilism on full display
18 rbottoms // Oct 22, 2009 at 1:44 pm
For God knows what reason you are hoping for the destruction of thousands of jobs and the elimination of one more sector of manufacturing in the United States because why, you don’t like unions or something. There’s just something not quite right about Republicans.
19 MI-GOPer // Oct 22, 2009 at 1:48 pm
rbottoms opines: “There’s just something not quite right about Republicans”.
Let me fix it for you richard-the-banned… “There’s just something not quite right about trolls who revel in professional agitation”.
That’s better.
20 WillyP // Oct 22, 2009 at 2:00 pm
Rarely have I seen more shrill anti-market pronouncements from so many self-proclaimed conservatives. Mounds and mounds of pet plans for our nation’s workforce, and never a thought about the other end of the equation.
Why shouldn’t GM go bankrupt if they aren’t profitable? Profit/loss mean something, you know. If a business is losing money, it’s society telling it “you’re wasting scarce resources!” Following profit/loss, made possible through accounting, is what coordinates our production in a way that maximizes utility/happiness, whatever you wish to call it.
I have a better question: what the hell is the president doing setting salary caps? This entire foray into the private sector was never about improving our country. It was always about control. And when the business climate is unpredictability, investment sits on the sidelines; citizens lose their independent spirit; the incentive to work is diminished considerably; a big brother of plunder looms over the entire economy.
Furthermore, otto says:
“………As I’ve pointed out several times Sinz what you know about economics and business could be written on the back of a postage stamp……..and still leave room for the [L]ord’s prayer…….”
I’ve said as much to sinz myself. However, otto, you are no better. You’d lead us down a road to complete economic tyranny in short time, advocating as you do for these salary caps. What does it matter to anyone here that someone collected an additional $10 million? $10 mil is chump change compared to the damage done by arbitrary wage controls. Nationalizing industry after industry, and you’re worried about $10 mil, even $100 mil. How very imprudent; how very shortsighted.
21 rbottoms // Oct 22, 2009 at 2:37 pm
Yep. President Obama took office in January, looked around and decided for the hell of it to take over GM, bail out AIG, and end billions to banks and other financial institutions. Hmm, what could have been thinking??? Maybe how in Hades do I keep the financial structure of the entire planet from imploding. Or maybe he’s thinking it’s the end of the financial world if he doesn’t do something to stop the fall into the abyss presided over by his predecessor?
One year ago we were facing financial Armageddon and now we’re now, just barely not in any case.
If these free market wizards are so disgusted with Obama interference there’s one sure way to get rid of it: Pay back our money. You know, the taxpayer money that saved their collected behinds an from which these Masters of the Universe want to engorge themselves even more? The Hell with that.
How about because adding 50,000 more unemployed in one fell swoop would have catastrophic effects and the amounts that GM took out of the til barely scratches the surface compared to Citgroup, AIG, and all the other pigs lined up at the trough.
You want Obama gone. Pay back the money, otherwise stop whining.
22 LauraNo // Oct 22, 2009 at 3:40 pm
Balconesfault cited Frum:
Again, last year around this time there were Republican Congressmen calling for UAW contracts to be voided. What was your position then, Mr. Frum?
With the republicans, it’s always a matter of who, not what. It’s very irksome to listen to a conservative worrying about the rule of law, all of a sudden, or about the deficit, all of a sudden, or about the size and scale of government spending, all of a sudden. Their standard response is to say, “but now we won’t be like that”…Which is true, they won’t be because they were drummed out. Tax cuts for rich, good. Tax cuts for low-income earners, bad. Contracts for rich, good. Contracts for lower-income, bad. Contracts for Cheney friends, good. Contracts for minority-owned firms, bad. Contracts for rapists, good. Protection from rapists, bad. Etc., etc.
23 BoolaBoola // Oct 22, 2009 at 5:37 pm
I agree, we should not cut the bonuses of these executives.
We should kill them.
And their families.
24 Arch // Oct 22, 2009 at 8:29 pm
I’m not wild about the Whitehouse dictating pay terms, but in this case I think they were damned if they did, and damned if they didn’t. Demonizing the finance exectutives (some of whom had a share in creating the mess we’re in) who were about to be paid more than most of us will see in our lifetimes was just the best politics. And this administration is all about politics.
25 Koso // Oct 22, 2009 at 10:36 pm
Republicans continue to behave as if they reside in an alternative universe. Why are you suddenly worried about the rule of law. It never bothered any republican for 8 long years.
The whitehouse did the right thing. What these companies are doing is nothing but a ponzi scheme. They come to the tax payers when they’re in deep trouble and then pay themselves huge sums without regard to what we think. What boggles the mind is that these are the same poeple who acomplished what Communism could not, single handedly bring this country to its knees and here we are pretending that we believe in the powers to the market to self correct. I know of no VC who will allow this to happen. They will either get rid of mgmt of shut off funding.
It will be refreshing to see interlectually honest argument.
26 Instapundit » Blog Archive » DAVID FRUM: Will The Rule Of Law Survive Obama?… // Oct 22, 2009 at 11:47 pm
[...] DAVID FRUM: Will The Rule Of Law Survive Obama? [...]
27 Porkov // Oct 23, 2009 at 12:07 am
Greed and envy are opposite sides of the same coin.
What this administration is doing to a few bankers is nothing compared to what it proposes for all medical practitioners. Of course, doctors are supposed to be motivated by altruism and embrace their financial ruin for the greater good.
28 24AheadDotCom // Oct 23, 2009 at 12:24 am
GM is an American icon, and it would send the wrong message if it goes under. The psychological impact (helping global opponents + lack of confidence) has to be factored into any “market” prescription. (It’s odd how many ignore factors of the “market” that aren’t convenient to whatever argument they’re making).
As for the post title, wake me when the GOP establishment cares about the rule of law. Most of them seem to be more concerned with finding ever-more-creative ways to mask their support for illegal activity. While I could give many, many examples, here’s just one:
http://24ahead.com/bank-on-california-illegal
Don’t try the RINO excuse, I’ve got plenty more.
29 OregonJon // Oct 23, 2009 at 12:40 am
The 21st century equivalent of allowing the multitudes to cheer while feeding Christians to the lions. Our financial debacle was not caused by executives taking long term risks for short term rewards, the debacle was created by the perverse incentives created by the political elite.
Add to that not only the shredding to contracts but that for a number of firms top executives are new, installed either directly by our all knowing government or with its tacit approval. The multitudes may cheer, the political elite may celebrate the brief rise in their popularity, but the long term effects will only be to prolong an otherwise very solvable crisis.
If only there were a way to allow the political elites to endure the short term pain that comes when markets are cleared without government intervention rather than this Kabuki dance which may entertain, but where the outcome is known. Oh well, politicians are masters are pushing problems into the next election cycle, which is what this is all about.
And apologies for the mixed metaphor.
30 ButterflyDragon // Oct 23, 2009 at 2:20 am
balconesfault // Oct 22, 2009 at 10:04 am
So if we understand this correctly – the position of the Republican Party should be that collectively bargained compensation packages for autoworkers making on average $28/hour should have been slashed as a precondition to any federal bailout of the auto industry … but that the guys who created the current mess by leveraging their companies into a position that required a bailout about 60x the size of the auto bailout (between Fed money poured into the banking industry last year, plus TARP, the bill is close to 3 trillion) shouldn’t have their $10 million bonus checks touched?
———————————————
You bring up a valid point if it was a similar situation. The auto companies that were bailed out went through bankruptcy. During a bankruptcy the contracts can be renegotiated or just put down as a primary debt they need to be relieved of and the contracts are voided.
None of the banks you refer to went through bankruptcy.
You are comparing apples to elephants. At first blush they look like the same thing, but legally speaking, when you throw a bankruptcy into the mix, it changes EVERYTHING with contracts and their status.
31 President Thalidomide « Natural Fake // Oct 23, 2009 at 7:55 am
[...] nation with the rule of law twisted, it’s very Constitution [...]
32 Koblog // Oct 23, 2009 at 7:59 am
GM was losing $1 billion PER MONTH before the current “crisis.”
How many cars would they have to sell just to get to even, much less make a profit? And then there’s the little problem of paying back the bailout.
Ain’t gonna happen.
GM is bankrupt. Period. To pretend otherwise is silly.
Then again the government owes, what, $13 trillion?
$1.4 trillion deficit this year and for as far as Obama can see?
33 Koblog // Oct 23, 2009 at 8:19 am
“Rule of Law.” Ha.
Obama has already told us he’s not satisfied with the Constitution. Too “restrictive.”
Obama wants to be king. He wants his word to be law. FDR had the same problem. But in those days “But what you want to do is unconstitutional!” meant something.
Now the idea of the Constitution is rather quaint . Sort of like the Ten Commandments. Good idea in principle, but gets in the way of my will.
Rahm Emanuel told us also that the “crisis” allows him to do things he normally couldn’t do.
“Rule of law” is for suckers and Republicans. King Obama and his satraps know better.
But beware: when contracts large or small are no longer honored, we are done with.
Failure of contracts is why nothing can be done in Africa or South America. Who will invest in a place that will not honor contracts?
34 Kevin B // Oct 23, 2009 at 9:20 am
Rahm Emanuel told us also that the “crisis” allows him to do things he normally couldn’t do.
“Rule of law” is for suckers and Republicans. King Obama and his satraps know better.Why not? They learned from Mr. Cheney and The Decider, who learned it from Billary, who learned from Daddy Bush, who got it from The Gipper.
35 WillyP // Oct 23, 2009 at 9:59 am
robottoms, get a clue. Jobless claims go up and up and up and up more each time, always higher than expected. We’re in month 13 of the government’s intervention, and we’re sinking quickly. By the time we start seeing double digit inflation
As you clearly have no understanding whatsoever of finance or economics, it’s not worth a reply. Why don’t you begin by reading “Economics in One Lesson” by Henry Hazlitt?
I think that any party that sits around planning business activities is going to end up as tyrannical. We should have our federal government stick to its Constitutional limits, and avoid what we have here: a complete mockery of political discourse, descending as it has into several personal opinions on how multibillion dollar companies can and should run according to, at best, very peripheral knowledge. Don’t you central planners have any modesty?
36 balconesfault // Oct 23, 2009 at 10:10 am
oregonjon: Our financial debacle was not caused by executives taking long term risks for short term rewards, the debacle was created by the perverse incentives created by the political elite.
Really? It was perverse incentives created by the political elite that caused investment firms to deal in derivatives and credit-default swaps until firms like Bear Stearns had a debt-to-equity ratio of 33-1?
That didn’t have to do with risk taking and greed?
37 WillyP // Oct 23, 2009 at 10:21 am
balconesfault,
greed is a sin, a vice. it is stuck with humanity forever.
the best we can do to address these sins is provide incentives to behave. political masters that pervert the incentive basis destroy society just as much as greed itself.
38 balconesfault // Oct 23, 2009 at 10:26 am
the best we can do to address these sins is provide incentives to behave. political masters that pervert the incentive basis destroy society just as much as greed itself.
I’m sorry – I still don’t understand what “incentive” government provided for executives to take such extraorinary risks with their companies futures.
Even Alan Greenspan was stymied – “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,”
I guess that underregulation and lack of enforcement can be called “providing an incentive” – but that seems to me as perverse as blaming anyone who doesn’t have a home alarm for “providing an incentive” to house robbers.
39 WillyP // Oct 23, 2009 at 10:40 am
you’ve asked the germane question: what were the perverse incentives?
1) Easy money from the Fed
2) Community Reinvestment Act
3) Implied immunity from bankruptcy via the “discount window” by the Fed
In other words free access to money, legally enforced extortion from the forcing of bad loans, and a moral hazard created by being declared “too big to fail.”
If banks were responsible for making their own profits or going broke, we’d be in a lot better position right now.
40 balconesfault // Oct 23, 2009 at 1:21 pm
First, the CRA is a cipher in this context. Loans made per CRA were some of the best regulated, and had a much lower default rate than other loans up and down the system. Blaming poor people just won’t work here.
Meanwhile, the whole “too big to fail” thing came at the tail end of the crises. By the time that became policy, the economy was already in the crapper. In fact, it became policy because the economy was in the crapper, and the Fed was desperately trying to keep the tank from being flushed.
Easy money from the Fed? Yeah – without that easy money there probably would have been just a steady decline in the economy under Bush, but I’ll agree that it was a problem. I fully expected Greenspan to jack up interest rates when the money supply was expanding so rapidly thanks to the deficit and to all the paper transactions … but the Fed decided to play along. Then again, there was tremendous political pressure on the Fed – had they not played along, and the economy stagnated under Bushinomics, they would have gotten the blame.
Again, however, we’re talking enabling – not encouraging. The Fed wasn’t inceitivizing people to overleverage their companies. That was pure, unadulterated greed. Bad acting en masse.
A funny anecdote – other day I heard someone say that the reason stuff like this hadn’t happened in the past was because in the past the Financial Sector wasn’t run by the smartest of the smart … but by a middle tier of guys who just wanted to make a good living and enjoy their week each summer in the Hamptons and send their kids to an Ivy League College. However, in the last decades the smart guys moved in, and they wanted to be bazillionaires and own estates in the Hamptons and buy new dormatories for Ivy League Colleges. And so they started creating financial products that the regulatory community wasn’t able to even understand, much less regulate, and they were basically making bigger and bigger bets against one another to try to be master of the universe … and they all were playing with house money, until the housing bubble burst – an inevitibility because housing bubbles always burst – and nobody could pay the house back.
But it wasn’t because Wall Street wasn’t filled with enough smarts – it’s because Wall Street no longer had the stodgy gatekeepers who had guarded the institutions for so many decades.
41 Reason60 // Oct 23, 2009 at 1:27 pm
The housing crisis was created by a perfect storm of aligned interests:
CRA benefitted community activists and liberals since it appeared to help poor and minorities get loans; but in fact, only 255 of the banks fell under its purview; most subprime loans were made without CRA;
Easy credit was wildly popular with just about everybody; homeowners, banks, realtors, homebuilders, furniture and durable goods manufacturers….the list of trade associations and interest groups that pushed constnatly for lowered barriers to home loans is widespread and bipartisan.
Conservatives liked it because of the idea that homeowners would become part of the “ownership” society, more stable, taxpaying (and more likely GOP) voters; liberals liked it because it allowed poor and minorities access to the middle class.
Nearly everyone profited from the spectacular rise in home ownership and prices; Some more than others, but trying to pin this on this politician or that regulation is absurd.
In retrospect, TARP appears more an more to have been yet another con job by well connected insiders, evidence of Naomi Klein’s “Shock Doctrine” at work.
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