March 19, 2009

Obama's State-Ownership Society

Hatched by Dafydd

Back in the precambrian era -- in fall of 2008, I of course mean -- we warned in several posts that when the federal government takes an "equity interest" (ownership in whole or in significant part) in private companies, it creates a grave threat to the capitalist system:

When government buys a significant stake in private companies, it creates a terrible conflict of interest; decisions that should be made entirely on economic grounds -- attempting to maximize the long-term profit for the owners of the company, whether stockholders or private consortia -- are made instead by politicians pushing a particular political ideology, or else trying to benefit big campaign donors.

Corporate management is ultimately accountable to the owners (though owners can be derelict in their fiduciary duties), while politicians are accountable only to voters and donors, neither of which may have any particular concern about the financial viability of particular private companies in the government's stock portfolio.

This is how we explained it in the first post linked above:

The latter especially is a key element of Woodrow Wilson, Benito Mussolini style fascism; it invariably leads to the State, as the $700 billion gorilla on the board of directors, exerting overwhelming control over corporate decisions... which it will exercise on the basis of politics, not profits.

When people read "fascism," they immediately tend to envision concentration camps, jackboots, and Nazis goosestepping at mass rallies; but the real danger of fascism, especially liberal fascism (fascism with a smiley face, as depicted -- against author Jonah Goldberg's wishes -- on the cover of his book Liberal Fascism), is government control of corporations. The more control is handed over to politicians and bureaucrats who have no hand in actually producing the product (loans and securities, in this case), the more critical decisions will be made on irrelevant political considerations, often leading to financial disaster... and another bailout, leading to even more government control. Eventually, the State completely hijacks the corporation for political purposes... and we're well on our way to Hugo Chavez-land.

The threat posed by the government taking an equity interest in private companies can be minimized by making it a matter of law that the holdings are fully divested as soon as buyers can be found at market prices -- either the company buying back its own stock or private third parties taking it off government's hands; in the third Big Lizards post linked up top, "Is It Adios to Capitalism - or Only Au Revoir?", we discussed this possibility:

With the long-expected decision today by President George W. Bush, Treasury Secretary Henry Paulson, and Fed Chief Ben Bernanke that Treasury will spend $250 billion of the $700 billion buying equity stakes in nine top banks, thus injecting "liquidity" directly into the industry, we stand at a crossroads. The question is whether this is "goodbye" to Capitalism or just "see you soon"... whether this is a permanent break from free markets or just a necessary but temporary bank holiday....

The direct injection of liquidity by Treasury buying equity is also outside the market, because that money is extracted from people by force, in the form of taxes. But at the core, even this direct investment is an attempt to buy time to complete the "transparentizing" (horrible neologism, I know) of the toxic assets -- the recreation of the information that was lost by multiple unregulated securitizations of massive collections of mortgages.

Once the [timely, honest, accurate, and believable information] has been restored to the mortgage-backed securities and other instruments, the market can reboot itself...

With the restoration of the missing THABI information, the market can reboot, and the catastrophe will be averted. So long as partial-nationalization of the banking industry lasts only long enough to retransparentize the toxic assets, thus allowing the market to begin functioning again, it will be an acceptable, even necessary intervention.

Alas, there is nothing in the Obama administration's bailout that implies they will, in fact, consider this a temporary expedient; from everything I've read, they see it as a permanent "reform."

There are two classic anti-capitalist examples of divesting funds for political reasons; together, they point out the very real danger when government becomes a part owner of the private sector through enforced or distressed nationalization (we have seen both in the present crisis):

  1. When universities, big corporations, and of course government programs in the 1970s dumped all their investments in companies based in South Africa or doing business in South Africa, even if they were based elsewhere, to protest Apartheid; this was in response to purely political pressure from black activist groups here in the United States.
  2. And when the usual suspects more recently dumped all investment in Israel, Israeli companies, or companies that did not ritually denounce Israel, in response to purely political pressure from antisemitic, anti-Israel, and generally pro-Palestinian and Islamist activist groups.

Both are examples of government trying to use equity ownership to bully the private sector into purely political actions that have nothing whatsoever to do with the companies in question.

When the government is a significant investor in a company, it cannot help running those companies; government funds never come "string free." Worse, the State runs those companies not to make profits, but to score political points.

In fact, that is exactly what is happening in the case of American International Group (AIG): We have such a huge investment in that company now, $80 billion, that how much they pay employees in retention "bonuses" (inducements to continue working for AIG, rather than jumping ship to some less shaky company) has become a political football.

In fact, the U.S. House of Representatives has just voted overwhelmingly, 328 to 93, to enact a confiscatory tax on AIG employees -- almost by name! -- if AIG fulfills its contractual obligations by paying the employees who stayed on for the work they did (reducing AIG's liability from $2.7 trillion to $1.6 trillion):

Spurred on by a tidal wave of public anger over bonuses paid to executives of the foundering American International Group, the House voted 328 to 93 on Thursday to get back most of the money by levying a 90 percent tax on it....

But there was no doubt after the House vote that the lawmakers were keenly aware of their constituents’ anger, which was focused on A.I.G., although the House measure would apply to executives of any company getting more than $5 billion in federal bailout money.

Hours after the vote, the office of Andrew M. Cuomo, the New York attorney general, said A.I.G. had turned over the names of employees who received bonuses, in response to a subpoena.

Before releasing the list, the attorney general’s office plans to review it and assess whether individuals on it might have reason to fear for their safety.

“We are aware of the security concerns of A.I.G. employees, and we will be sensitive to those issues by doing a risk assessment before releasing any individual’s name,” Mr. Cuomo’s office said in a statement.

Well that's mighty decent of them.

So the bill was openly and unabashedly driven by constituent anger -- anger that cannot possibly be based upon a sober and detailed consideration of whether those particular employees deserved those particular bonuses; in fact, the most likely culprit in ginning up such rage and fury is Congress itself, along with the president, who have been demonizing AIG and its employees for months now. It happened again in the debate on this very bill:

“The people have said ‘no,’ ” Representative Earl Pomeroy, Democrat of North Dakota, shouted on the House floor. “In fact, they said ‘hell no, and give us our money back.’ ”

“Have the recipients of these checks no shame at all?” Mr. Pomeroy continued. Summing up his personal view of the so-far anonymous A.I.G. executives, he said: “You are disgraced professional losers. And by the way, give us our money back.”

Great leaping horny toads. I had to wipe spittle-spray off my face after just reading it! "Disgraced professional losers?" Is Earl "Elmer Gantry" Pomeroy (D-ND, 85%) under the impression that these bonuses are going to the actual folks in the credit default swap area, who are the ones who brought AIG down? Or is Pomeroy just blindly striking out against anyone who makes more money than he?

And while we're on the subject, I think there is not a single Democrat in Congress to whom I could not say, “You are disgraced professional losers; and by the way, give us our money back.” And with a damn sight more justification, Earl.

Contrariwise, John Hinderaker -- my favorite blogger on my favorite blogsite, Power Line -- makes a compelling case that the bonuses were in fact perfectly proper:

  • They were retention bonuses, not performance bonuses.
  • They were paid, not to the employees responsible for the collapse, but to other employees who have worked hard for months after the collapse to rescue AIG... rather than jumping ship with their expert knowledge of AIG's exact portfolio problems, taking jobs with other companies that had better futures.
  • As John writes, "[the employees] satisfied the terms of the bonus by wrapping up a portfolio for which they were responsible and/or staying on the job until now. As a result of the efforts of this group, AIG's financial products exposure is down from $2.7 trillion to $1.6 trillion.
  • They stayed at AIG precisely because of those bonuses; but now the government, having eaten the fruit of that labor as an equity holder, wants those bonuses to go, not to the people who earned it, but to the government itself!

But note how carefully the Times dances around the question of who exactly is getting the bonuses, and what those people's roles were in the collapse:

The $165 million in bonuses has spawned rage in part because it was paid to executives in the very unit of A.I.G. that arguably turned a stable, prosperous insurance company into a dice-rolling financial firm in search of quick profits.

But there must have been hundreds of employees working in the financial products division! Does the Times think that every employee, from vice president down to secretary, was personally responsible for the foolish decisions that nearly killed AIG? Do liberals fantasize even that every executive in that division was responsible?

If new (post-collapse) AIG CEO Edward Liddy is telling the truth, and so far no current or former employee has come forth to contradict him, then the bonuses are going to people who were not responsible for the collapse, but are responsible for helping AIG deal with the collapse after the fact.

These are the people that Rep. Barney Frank (D-MA, 100%) calls corrupt:

Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee and has been among A.I.G.’s fiercest critics, spoke contemptuously of the bonus recipients as people “who had to be bribed not to abandon the company” they had nearly ruined.

Wouldn't that same language, "bribed not to abandon the company," apply to every employee who ever demanded a raise?

It's another example of liberals' inability to deal with complexity; for all their protestations of having more subtle minds, they are really quite simplistic: The poor (and the rich who "represent" them) are always good; the productive core are always bad; and every moral question is the same shade of neutral gray.

John makes the same point as we anent this ridiculous 90% "tax," which is actually a deliberate attempt at confiscation, as the president made clear yesterday in Orange County. John writes:

The legislation introduced by the Democrats today to tax these bonuses (and possibly a few others, although it isn't clear that any others have been or will be paid that are covered by the statute) at a 90 percent rate is an outrage. It is, in my legal opinion, obviously unconstitutional. It is evidently intended to calm the current political firestorm and not to achieve any real objective.

John refers to the legislation as "introduced by the Democrats;" while that's technically true, it's only a half-truth: Democrats may have proposed it, but the House GOP split almost 50-50 on what Hinderaker (a lawyer) and I (a "sea-lawyer") see as an obvious bill of attainder.

In fact, the AP version of the Times article demonstrates Republican cowardice in the House: 87 Republicans voted against the "tax"; but 85 Republicans voted with the Democrats, blaming those retained employees for all of our woes... most switching at the last minute:

Minority Leader John Boehner, R-Ohio, said the bill was "a political circus" diverting attention from why the administration hadn't done more to block the bonuses before they were paid.

However, although a number of Republicans cast "no" votes against the measure at first, there was a heavy GOP migration to the "yes" side in the closing moments.

This is out and out pandering by the GOP... and it's vile. If we cannot even count on the House Republicans to stand up to liberal demagoguery, to stand up for Capitalism, then what is the point?

It's time for Minority Leader Boehner (R-OH, 100%) to fish or get off the pot: Does he lead a party that is distinct from the liberal Democratic majority, that is center-right, and that still believes in Capitalism, the rule of law, and conservative principles of governance? Has he learned the lessons of 2006 and 2008? Or does Boehner believe that the GOP's best shot at returning to power is to morph into a quieter, gentler version of the Democratic Party, pushing a slightly more restrained version of Obamunism?

I'd really like to know the answer to that conundrum before the next election.

Hatched by Dafydd on this day, March 19, 2009, at the time of 6:59 PM

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The following hissed in response by: Dick E


Your description of the situation is spot-on. Unfortunately, it doesn’t make for sound bites as pithy as “million dollar bonuses paid from your tax dollars.”

I know Republicans who were really ticked off at AIG even though they knew the bonuses were paid according to pre-existing contracts. They didn’t calm down until they got a fuller explanation of the fact that these were retention bonuses and why they were necessary.

So it’s not surprising that so many Congresscritters are all in a leather. (Picture Reid, Pelosi, Frank -- uh, never mind.)

As for the legislation, Democrats are not about to let a little thing like a Constitution get in the way when they know in their hearts that what they want to do is righteous.

The above hissed in response by: Dick E [TypeKey Profile Page] at March 19, 2009 9:01 PM

The following hissed in response by: christianatheist

Sheesh Dick,
Thanks a lot for that mental image!

The above hissed in response by: christianatheist [TypeKey Profile Page] at March 20, 2009 6:26 AM

The following hissed in response by: UNRR

This post has been linked for the HOT5 Daily 3/21/2009, at The Unreligious Right

The above hissed in response by: UNRR [TypeKey Profile Page] at March 21, 2009 6:37 AM

The following hissed in response by: Insufficiently Sensitive

I know Republicans who were really ticked off at AIG even though they knew the bonuses were paid according to pre-existing contracts. They didn’t calm down until they got a fuller explanation of the fact that these were retention bonuses and why they were necessary.

Anybody see Michael Steele's purple-faced email and video yesterday, joining the Obama-led (fueled by MSM and hysterical Congress) lynch mob in denouncing those bonuses?

If that's the position of the Republican National Committee, the idiots are indeed running the asylum. The Republicans have shot, but missed their foot and hit more sensitive anatomy a yard higher. Shaky hands are no good this year.

Any principled leadership, calling for ending the hysteria and explaining the bonuses as Hinderaker has done, would be a step in the right direction. Sure, it would be shouted down today, but that one step would lead to others, and as the country wades deeper into the flames, those looking for solutions instead of a new Russian Revolution would eventually be able to find and follow the path.

Vote no for all Congressional incumbents next election.

The above hissed in response by: Insufficiently Sensitive [TypeKey Profile Page] at March 21, 2009 8:28 AM

The following hissed in response by: Dafydd ab Hugh

Insufficiently Sensitive:

Vote no for all Congressional incumbents next election.

Um, that's how we got the current Congress -- and president -- in the first place.


The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at March 21, 2009 12:33 PM

The following hissed in response by: Insufficiently Sensitive

Um, that's how we got the current Congress -- and president -- in the first place.

Not quite. Agreed about the President - but without the MSM he'd not have made it. Let's leave the MSM out for this discussion.

There are a number of old fossils in the House and Senate who survived. If all incumbents had been voted out, we'd have had a chance at cleaning up the messes that are carefully hidden and defended by Chris Dodd, Barney Frank, Chuck Shumer, Nancy Pelosi, etc etc etc. Particularly the Community Reinvestment Act and all its protagonists and beneficiaries.

The above hissed in response by: Insufficiently Sensitive [TypeKey Profile Page] at March 22, 2009 10:40 AM

The following hissed in response by: Dafydd ab Hugh

Insufficiently Sensitive:

There is a gap in your logic. You say we should "Vote no for all Congressional incumbents next election;" but only conservative Republicans might possibly heed that call.

  • Moderate Republicans won't automatically vote against their incumbents, because that's an inherently drastic reaction; by the very fact of being moderate, they don't do "drastic."
  • And certainly liberals, whether Republican or Democratic, will not automatically vote against incumbents, because for the most part, they like the current Congress just fine.

So only conservatives might listen to your plan... meaning conservative votes will be diluted compared to moderates and liberals. What would be the effect of that?

  1. Conservative Republican members of Congress would be defeated. Their only power base is the collection of conservative Republicans... who must vote against them according to your plan. They will be replaced by either a more moderate Republican (a conservative isn't likely to run against a conservative in the primary), or if the defeat occurs in the general, by a Democrat.
  2. Moderate Republicans would be more likely to be defeated, losing the conservative part of their power base. They might (a) lose to the Democrat in the general election, or (b) lose to a more conservative Republican in the primary.
  3. In order not to be defeated, the moderate Republican would be forced to turn to moderates and Democrats; thus, if not defeated, he will turn left.
  4. Democrats would be unaffected, since the conservative Republicans wouldn't have voted for them anyway, and Democrats and liberals have no reason to vote against them.

The only case that is in any way beneficial to your cause is case 2a, where a moderate Republican loses the primary to a conservative Republican, then wins the general against the Democrat. Let's consider that case.

If conservatives around the country are wasting their energy campaigning against every, single Republican incrumbent in Congress, it will be dissapated; they will be more or less impotent.

But if instead they focus their combined energy on a few races where either (a) an incumbent squishy moderate Republican is running in a state or district that might well vote for a more conservative Republican, or (b) an incumbent Democrat has some serious problem with his reelection (due to corruption, foot-in-mouth disease, or some other issue), or (c) an open seat where there is no incumbent, then we might make real progress.

A possible example of (a) is Arlen Specter (R-PA, 40%), though more likely he will either be reelected and change his party to Independent, or he will be defeated in the general by the Democrat. It's just possible, though, that he could lose the primary; and if the Democrat is egregious enough, and if the economy hasn't very obviously turned around, the more conservative primary winner could win the general.

A very good example of (b) is Chris Dodd (D-CT, 100%); he is already in very serious trouble in Connecticut; if conservatives can line up behind an electable conservative Republican, we can flip that seat.

(Alas, I have no idea what-all seats will be open in 2010; but I'm sure there will be possibilities.)

But of course, this strategy would be very different from "Vote no for all Congressional incumbents next election." It does, however, have the advantage that it might possibly work to improve the next Congress.


The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at March 22, 2009 2:03 PM

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