Thursday, March 19, 2009

Shocked and Law . . . and Gentle Ben

Here are some observations on topics of current interest.

First, the AIG mess.

Congress is shocked; the House passed a punitive tax on these bonuses, even though it authorized them just a month ago.  From the WSJ:

The legislation was rushed to the floor by Democratic leaders amid a storm of protest among rank-and-file lawmakers over AIG's decision to pay bonuses to hundreds of current and former employees, while receiving more than $100 billion in taxpayer assistance. Approved on a 328-93 vote, the measure would impose a 90% surtax on the disputed payments, effective for bonuses made after Dec. 31, 2008.

"These people are getting away with murder," Ways and Means Chairman Charles Rangel (D., N.Y.) said Thursday during debate on the House floor. "They're getting paid for the destruction they've caused to our communities."

Comment:  "These people" are not "getting away with murder".  They are just getting paid per contract.  
And Congress should be outraged by the entire bailout of AIG's counterparties, who are getting paid massive amounts of money in full despite entering into agreements with AIG even though they knew, or should have known, that AIG had no reserves for.  It is Congress that is trying to get away with murder by deliberately avoiding the real scandal.

On the appropriateness of this ex post facto punitive measure:

"Bills of attainder, ex post facto laws, and laws impairing the obligations of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. ... The sober people of America are weary of the fluctuating policy which has directed the public councils.  They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less-informed part of the community."  James MadisonFederalist Number 44, 1788.

Congress hasn't changed much since 1788, has it?
If they want to save money, how about a real debate about why the Afghan War, now in its eighth year, is worth fighting at this time of economic distress at home?


The Bernanke '60 Minutes' interview was summarized by CBS.  Here are some snippets of CBS' commentary:

The interviewer (Pelley) asked:

"You've been printing money?"
"Well, effectively," Bernanke said.  "And we need to do that, because our economy is very weak and inflation is very low."

Comment:  Consumer prices are probably 10% higher than they were 2, or at most 3, years ago.  That's hardly low inflation.  Sure, the worst economy in decades has temporarily caused price declines, but printing money to cure economic slowdowns has never worked.  It has been tried at least since Egypt under the Pharaohs and didn't work then.  It didn't work for the Romans.  It is perhaps even being discarded in Zimbabwe!  It won't work here.

When Mr. Pelley asked, re the TARP bailout plan of last fall:

"Was anyone on Capitol Hill skeptical?",  the Chairman answered:

"Well, I do remember one conversation I had where I was addressing a caucus of congressmen.  And a congressman said to me, 'Mr. Chairman, you know, I'm talking to bankers in my town.  I'm talking to shopkeepers in my town.  And they say things are normal.  Nothing's going on  We don't see any problem.'
And I turned to him and I said, 'You will,'" Bernanke recalled.  

Comment:  So TARP passed, and the congressman saw a mess occur.  

This is reminiscent of the scare tactics used to pass TARP.  It was threatened that if the bill did not pass, the Dow would fall 2000 points (to about 8500).  Well, the bill passed, and the Dow fell as much as 4000 points, industrial production plummeted, etc.  In fact, it wasn't until the passage of TARP that the panic in the financial markets began.  The Lehman bankruptcy was at least a week in hand, without special panic.
What actually happened is that everyone said that if Paulson and Bernanke are panicking and have to save the banks so urgently, we have to panic too- and so they did.

So Chairman Bernanke, who had uttered soothing predictions all throughout 2008, turned on a dime in the fall of 2008 and along with the Bush Administration and a sleepwalking (at best) Congress, helped create the mess that he told the congressmen that TARP was going to avert.

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