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bailout

Easy Money

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The alleged purpose of the various bailouts was to stabilize the economy and to set the groundwork for a recovery. However, the reality seems to be that the bailouts are enriching the financial companies at the expense of the taxpayers.

While the massive gifts of cash to these companies are a thing of the past (for now), they are now able to exploit incredibly low interest rates to generate significant profits. The banks are also apparently still able to profit from their toxic assets, including entire banks, by getting taxpayers to continue to take care of their problems.

This is hardly surprising. Despite all the talk about the Democrats being socialist and Obama being anti-business, the fact seems to be that things are just as they have always been. The folks in power, in general, see to it that the financial companies are well taken care of and that taxpayer money gets funneled to the right places.

This transference of money from the taxpayers to the financial folks seems to be rather unfair. After all, the financial folks were largely to blame for the financial mess. They also seem to be doing nothing to really earn this money, but rather are simply being handed profits at the expense of everyone else.  Given the large number of unemployed Americans, it would seem a better choice to use the money to help them, rather than to pile even more profits into the corporate coffers.

As a final point, given the rather large federal deficit, it would seem to make sense to curb the channeling of money into these financial institutions. After all, why should the nation go into debt so that these few might profit even more?

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Did TARP Work?

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While the media spotlight has mostly moved away from TARP, worries about this bailout still remain.  One obvious concern is the question of whether TARP worked or not. Another concern is whether or not the money is being used responsibly. A third concern is whether we (the taxpayers) will ever get our money back.

It is tempting to answer to all three questions seems to be “no”, but it is worthwhile to consider these matters in somewhat more depth.

The usual argument that TARP worked is that the economy has recovered to a degree. For the most part, this seems to mean that the economic bleeding has slowed for the general population and the surviving big losers are now turning  a profit. Of course, to infer that TARP caused (or even just contributed to) the recovery from the fact that the recovery followed TARP would be fall into the post hoc, ergo propter hoc fallacy. After all, the mere fact that one thing follows another does not establish a causal connection. More than a temporal connection is needed if someone wants to claim TARP worked.

While some experts say TARP helped, equally credible experts say that it did not. Not being an expert myself, these leaves me only one logical option: suspend judgment on the experts’ claims. After all, I have no rational way to decide which experts are in fact correct.

While I admit no expertise in economics (assuming meaningful expertise is possible), I do know that the burden of proof rests on the folks who claim that TARP worked. So far, I see no convincing causal evidence that TARP did the trick. As such, my position is to suspend judgment about its effectiveness. I am inclined to think it did not, but this is based on the view that the money was probably not used responsibly, which takes me to the second matter.

The overwhelming evidence seems to be that the money was not and is not being used responsibly. As noted in numerous news reports, some companies that received bailout money continued to dole out large bonuses and continue business as usual. Of course, the businesses do not deserve all the blame. After all, most of the money was handed out with no strings attached. The usual claim is that the folks in DC were in such a hurry to “save” the economy that there was no time to include such restrictions. That is, of course, absurd. After all, there are centuries of guidelines about lending money available and there seem to be many obvious guidelines that would have been easy to put in place. Like most folks, I certainly would like to have gotten a loan on such amazing terms and without any limitations. But, when I take out a loan, I have to face numerous questions, undergo a credit check and  show that I can pay it back. If only the financial folks were held to their own standards in this matter, they would probably have never gotten a penny.

I suspect that the real story might involve the fact that many of the people handing out the money to the current Wall Street folks were (and are) former Wall Street folks (or their friends). As such, the evidence seems to be that the money is not being used in an adequately responsible manner.

In regards to the third matter, my view is that we will not get our money back. Obviously, we are not getting dividend checks from the companies we involuntarily invested in. While some money has been paid back, it goes back to DC and is no doubt quickly spent again (perhaps on more TARP programs). As such, the general population will not be seeing that money ever again. Of course, this is no different from our other taxes. Of course, I could be in for a surprise. Maybe we’ll all have lower taxes this year as our massive “investment” and loans yield the sort of amazing profits that the financial folks have been handing to themselves all these years.  Or, to dream the dream of Wall Street, would it not be amazing if we got some fat bonus checks next year?

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GM

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In a bit of a flashback, the government bailed out GM to the tune of about $20 billion dollars. Despite shoveling this much cash into the dying company, it still died. Or rather died a financial death on the form of bankruptcy. Now the state owes 60% of GM, a company that has a rather impressive negative net worth. Or unworth, to borrow a bit from the notion of the undead. Of course, that is something of an apt term-just as the undead are formerly living beings that continue to move around after death, GM is a formerly profitable company that continues to move around after its financial death.

While people are calling GM “Government Motors” and getting fired up with rhetoric about socialism, I am going to bypass all that for now. Instead, I’ll do a bit of math.

The logic behind dumping about $20 billion into GM was that it would help save jobs and save the economy. Now, if we just took $20 billion and hired people at $40,000 a year, we could hire 500,000 people for one year. Or hire 50,000 for ten years. Or, …well, you can do the math. Alternatively, we could have put that money into starting up new businesses and, in all probability, created many viable new companies that would hire people.

While I do believe that the state has an obligation to protect the citizens, this should be done in an effective manner. That is, the action taken should get the most for our tax dollars. This has clearly not been the case with the Bush and Obama administrations’ handling of the crisis.

But the money wasn’t spent that way. Rather it was spent to try to save GM, which failed anyway. Of course, the folks in the government are trying to put a positive spin on it: GM will shed its bad components and re-emerge as a leaner and profitable company. However, this is something of a serious gamble. GM’s track record has been one of more or less unrelenting failure and bad decisions for years. Pouring money into a company with that sort of track record seems to be a rather bad risk. If GM fails to arise like a phoenix from its ashes, then we (the taxpayers) will be, to use the technical term, screwed once again.

But, suppose that GM does rise out of the ashes like a mighty fire bird? What will that do for the taxpayers? Will we get a slice of the profits? Will we each get a new car? Will we sell off GM for a small percentage of its worth to some friend of who ever happens to be in office when that happens? Whatever might be said now, we have to wonder what we will get out of this. The more cynical might say “screwed again.” Perhaps.

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The World Economy

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As the world economy continues to flounder, the G20 conference is in full swing. The hope is, of course, that the world leaders will be able to save us from the mess they were unable to prevent.

Oversimplifying things a great deal, the two main strategies that are coming out of the meeting are 1) throw money at the problem and 2) increase regulation. On the side, the Chinese are making a play to weaken the role of the United States in the world economy. Part of this is their suggestion that the US Dollar no longer be used as the foundation of the global economy.

While American businesses are quite happy to have money thrown at them, they are less amenable to regulation. They are most especially against regulation that would allow agencies outside the United States to interfere with their operations.

As far as the money solution goes, the obvious flaw is that the money has to come from somewhere. While governments can keep taking out loans and value can be created by complex financial means, the magic trick can only work for so long. At some point a solid foundation must be found from which the world economies can recover, or not. After all, when you are falling, clouds will only slow you down so much (that is, not at all).

As far as regulation goes, the general idea is a good one. The economy wrecking problems stemmed in part from the fact that the folks minding the store were not, in fact, minding the store. Also, as people have pointed out, many of the economy wrecking antics were perfectly legal (not all, though). Thus, good regulations that are properly enforced would help avoid another such meltdown (when or if the economy recovers). Obviously, the United States is not going to accept outside regulation. While we (like other countries) are happy to meddle with others, we prefer that others not meddle with us.

Of course, given that the world economy is transnational, the idea of world regulations does make some sense. After all, most of the big players are multinational corporations and have used that to their advantage. Effective world wide regulation would help deal with some of the problems. Unfortunately, if such regulation were to be handled like the UN, then it would most likely be ineffective.

I suspect that no country would be willing to give other countries serious regulatory teeth in regards to its own business. As such, any international regulations would probably be fairly toothless.

Banks & Cars

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The Obama administration recently began holding at least some corporate leaders accountable for their failing companies. Of course, by “some” here I mean “one”, specifically Rick Wagoner of GM.

The fact that the Obama administration requested that Wagoner step down has struck some as a bit odd. While it is sensible and ethical to remove a failed leader, it seems a bit odd to single Wagner out. After all, while GM has taken some taxpayer money in the form of loans and GM is not doing well, the company seems to have had no roll in the massive economic meltdown. Strangely enough, the corporate folks who bear the greatest responsibility for the meltdown have been untouched by any punitive actions. In fact, some of these folks have been paid bonuses (although some decided to return the money).

Naturally, there is speculation about why the Obama administration has not been as severe with the financial folks as it has been with the (once) Big Three US automakers. The more cynical have suggested that the key difference is that the financial folks bought the politicians. For example AIG seems to have donated generously to both Obama and Dodd in the past. While the Big Three (especially GM) once wielded considerable influence in Washington, those days seem to be over. Perhaps it is because the Big Three no longer have the money to give generously to the politicians. A truly cynical person might see the folks in government acting a bit like a mob: “pay us, and you’ll be fine; don’t have the cash for us…well, some things might get broken…”

It has also been suggested that some of the folks in the Obama administration are just a bit too closely connected to the financial folks that are being bailed out. This, one might contend, would bias the Obama administration. This is, of course, well worth considering. For all the talk on the right about Obama’s administration being socialist, they all seem well connected to capitalism. But, I could be mistaken about this.

Of course, perhaps it is the case that the Obama administration is yielding to the public desire for CEOs to be punished and Wagoner just happened to be th unlucky fellow to be dragged up on the alter to be sacrificed. But, this merely raises questions as to why he was selected.

Compensation

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While the Dow has taken an upswing, there is still plenty to worry about in the economy. Meanwhile, people are still upset over the AIG bonuses. On the plus side, the mystery of who allowed the exception that made such payouts legal was solved: Chris Dodd.

Dodd claimed that the Obama folks made him put the exception into the law. Two reasons are given for this decision by the Obama folks: 1) concern about the possibility of legal problems and 2) the view that such compensation would be needed to retain the top people.

I can understand the concern about legal worries. After all, breaking contracts after the fact does seem to be a rather thorny area-especially when the contracts are held by people who have access to some of the best lawyer (and politicians) money can buy.

As far the retention argument, that requires some consideration. The argument is that such exceptional compensation is needed to get top talent to stay with (and supposedly save) bailed out companies.

Is it the case that people will only take a job that pays exceptionally well? Clearly not-people routinely take jobs that pay very poorly. These people often work very hard at these jobs-witness the typical sweat shop laborer. Those folks work long, grueling hours for tiny amounts of cash.

Of course, most people who work such jobs do so because they have no choice. The top talent folks have a choice, hence they can demand more compensation or go elsewhere to get it.

Of course, people who do have choices often work very hard for less than exceptional compensation. One might wonder why these top talent folks should be entitled to such exceptional compensation when other folks would be glad to have such jobs even at a fraction of the pay. In other words, what justifies the claim that such folks should get that exceptional compensation? Why not just say “godd riddance” to these folks and get people in there who will do the job for less? After all, isn’t that what companies do to save money? For example, when companies outsource they are getting people to do the same job (or so they claim) for far less. Surely the same logic should apply all the way to the top.

It might be argued that the top talent cannot be replaced in this manner-that they are so top in their talent there are no other folks that can be hired to do the same quality of work at a lower price. Of course, given that many of these top talent folks were instrumental in wrecking the economy, one wonders about their talents and motivations.

Of course, there are top talent people that do earn their money. As odd as this might seem, a professional athlete or a top actor can be good examples. For example, if a star player or actor is paid $50 million, but she brings in $75 million in profits, then she has certainly earned her pay-just as a McDonald’s worker who gets paid minimum wage but whose labor makes a profit. The basic principle is that compensation is justified by contribution. So, exceptional contributions earn exceptional compensation.

In the case of athletes, actors and other stars, it is obvious that they can bring in massive profits and hence earn those massive paychecks. For example, a single star can significantly impact the box office take of a film. This is because people will see the film because of her and would not see the same film if it had not starred that actress.

However, is the same true in the case of the top talent in business? Does a top talent person really create wealth in proportion to their compensation? Prior to the economic disaster it seemed as if they did-top talent worked all sorts of “magic” that created money out of nothing. But, as it turned out, that money largely went back to nothing once again.

So, my view is this-if a person really does contribute exceptionally to the success of a company, then they have earned exceptional compensation. Such people would be well worth the price. After all, if paying $30 million in salary and bonuses gets a person whose efforts and ideas single handedly generates $100 million for the company, then she is a good deal. Unless, of course, you can get a person who would generate $80 million in return for $5 million and so on.

No doubt some top talent earn their keep and then some. However, I suspect that in many case, the “top talent” of corporate folks is somehow getting sweet bonuses in return for little or nothing.

I’ll also repeat an offer I made before: if I can get permission for a leave of absence from Florida A&M University, I’ll gladly be a top executive for a bailout company for that oh so pitiful $400,000 a year. I bet I’ll do far less damage than most of the current “top talent” has done.

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