The economy disdains uncertainty – and Obama is creating plenty of it.
Econ 101: Where Does Economic Growth Come From?
Growth in the economy, in no small part, depends on the availability of capital for investment. Companies raise capital through selling equity and debt.
The price of capital depends on uncertainty
Investment Capital isn’t free – inventors reap a reward for taking the risk of investing. For debt, the interest rate and other terms of the loan: less certainty, greater cost of funds. (Corollary: uncertainty not only hinders investment, it is a source of inflation.) Equity investment as well depends on the level of uncertainty. As the level of uncertainty rises, equity values (i.e., the stock market) fall. Falling markets make equity investment capital scarce, and quite expensive. When companies lack capital, they don’t invest in growth. If there is no growth, the economy falters. Yes Virginia, sometimes it really is this simple.
The Role Of Money Managers in the Economy
The bonuses are going to money managers. So, what role do they play in a recovering economy? These professional money managers determine in the largest part, the level of uncertainty in the market and the price for equity and debt. These are the very people that help determine if economy even has the ability to grow. Their role in the economic recovery is crucial and self-evident. Not only do these financial managers price debt and equity, they invest their own money wisely. If they have less of it, you will see further downward pressure on real estate in New York and other big cities.
No Legal Basis for Retroactive Retribution
There is no legal basis for retribution – that is why the meddling House approved a new bill today that, cloaked as a tax, would claw-back all but 10 percent of the bucks. The administration has no legal grounds to play hide-and-seek with an employee's bonus. The law (Section 111(b)(3)(D)(iii)) clearly states:
The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.Obama signed this into law. (But perhaps he never read it.) No matter, he was informed--and his Press Secretary approved. Suddenly he says he is ‘stunned’ by millions in AIG bonuses?
Saber-Rattling to Appease so-called Main-stream Media
The media put the spotlight on AIG business practices. They make it seem reprehensible, they invent a ‘wave of rage’. The UPI is there with twin rage lines: Tidal wave of rage at AIG's Liddy hits hard at Obama too as well as Wall Street greed feeds populist rage across the US. It is easy to find a middle class hairdresser or teacher to express jealousy over what the best and the brightest can do if they set their minds on it. Shooting fish in a barrel.
Tidal Wave Of Rage--Including Obama’s
Our Dear Leader expresses outrage and wants to blame everyone and everything. When it looked like things were going well, Obama was taking responsibility. Now he has flip-flopped, and some blame Chris Dodd. However Dodd may not be at fault, as detailed in this surprisingly good article by liberal Glenn Greenwald:
What actually happened is the opposite. It was Dodd who did everything possible -- including writing and advocating for an amendment -- which would have applied the limitations on executive compensation to all bailout-receiving firms, including AIG, and applied it to all future bonus payments without regard to when those payments were promised. But it was Tim Geithner and Larry Summers who openly criticized Dodd's proposal at the time and insisted that those limitations should apply only to future compensation contracts, not ones that already existed.It is Obama, with his cronies Tim Geithner and Larry Summers who are to be held accountable for the TARP law explicitly permitting the retention bonuses.
The Government Needs To Stop Meddling – and making it worse
As noted above, government regulation created the housing market collapse in the first place, by forcing banks to lend to bad credit risks. There are many that said Uncle Sam should never have bailed out AIG – that Chapter 13 bankruptcy would have been preferable. Prediction: Continued government interference in the economy will only make it worse. Why do they persist?
Role of Money Managers in AIG Recovery
The best and the brightest work 60-80 hours a week on Wall Street, and they have since Ike was a messcook. Their reward is monetary. If the monetary reward isn’t there, why should they work that hard? When the incentive for the best and the brightest goes away, they will go elsewhere. By the way, it isn’t just the Wall Street Winners that put in 80 hour weeks – just about any successful small business owner works those hours as well.
Before you argue that these money managers are to blame ‘well isn’t the economic recession their fault’ I will tell you emphatically no. First of all, the worst offenders have left AIG. Those that remain are vitally needed to restore the business. Second, the recession was caused by the government decision that every American should own a house, no matter how bad a risk they might be. Third, if you insist on penalizing AIG money mangers, then why isn’t your rage directed at the UAW for the Big Three Failure? Same principle, isn’t it?
Fact is: people on Wall Street and elsewhere have received bonuses for decades. This year is no different. Even WalMart gave out $2 Billion in bonuses today. More than ten times what AIG gave. Smart businesses reward their employees, because they know they need they cannot succeed without them.
Obama, Frank, Pelosi and Reid cannot escape responsibility for the mess
True, the initial government bailout happened on Bush’s watch. But Obama voted for it, along with the rest of the saber-rattlers. Moreover, the above TARP law specifically giving government endorsement to these bonuses was passed just a month ago. They must appease the so-called ‘mainstream media’.
They should do so by telling them – Washington should say::
‘We knew about these bonuses. We explicitly gave AIG the bailout money with that knowledge. Moreover, we are not going to retroactively tell AIG how to run its business. If we had any doubts about AIG’s success, we would not have bought the company.’Because if the government continues down the current path, there is no turning back. AIG’s reputation will suffer greatly, to the extent it may cost the government another $100 Billion to try to keep them afloat. If enough people leave AIG for greener pastures, AIG will just fail, taking the governments 80% ownership with it. Game over.
No Moral Authority to Act, Either
The government is acting arbitrarily in seeking to double tax these payments, though lawfully received. There can be no moral authority claimed in government-mandated abrogation of contracts. If we let Obama tax the bonuses of these hard-working people, there is another danger. That is Obama will start looking elsewhere to rattle his saber and seek ‘social justice’. And when they run out of rich, they will go after the middle class. That is what did Argentina in.
Bailout Mess – Huge Catalyst for Uncertainty
If the economy, and amount of capital for investment depends on uncertainty, shouldn’t the administration be providing stability? They would do this by doing predictable things. Instead, the message that Obama is sending is We will act arbitrarily, act in haste, act without legal or moral precedent. We will punish those that we see fit to punish according to the whim of the day. This is the high point of unpredictability
Effect of Increased Government Meddling
Each time the government passes a new law and creates a bailout, proposes a new tax, another change, another forced investment in bad risks, it creates uncertainty, and the market reacts. Given increasing uncertainty, professional money managers are certain to disdain investment. The market hates uncertainty. That is why the VIX has been above 40 pretty much since last October. Note from that graph, the S&P 500 has moved down in the face of uncertainty. Indeed, the Great Depression was also a time of prolonged uncertainty. Investment and the economy depend on certainty. Right now, the only thing the professional money manager is sure of is the unpredictability of the incumbents.
Barney Frank (who perhaps doesn’t really care about future generations since he will not have any) and the other democrats want to appear to be doing something, because the mainstream media will not leave them alone. Barney Frank in particular has more responsiblity for this mess than the rest. The media does not hold them accountable for their actions.
Perhaps we should never have bailed out AIG. But now that we have, we must leave AIG alone to try to recover. Continued harassment of AIG will only lead to its failure. Sixty years on, the debate may still rage. However, you read it here first. If the government taxes "AIG excesses" then it won't stop there. The witch hunt for the big incomes will be on, and it is Game Over.
You might ask, ‘Bob, why are democrats so damned incompetent when it comes to the economy?’ They are not incompetent. They know they are destroying the economy. They just don’t care.