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Perhaps if Jon Stewart could get AIG CEO Edward Libby to do an interview, more people could be arsed towards populist outrage. One of the things I don't regret about not studying economics in school is missing the class where I would have learned how to acquire 80% of something without owning it and why people should get bonuses for placing bets that can destroy a company in a matter of years.
Talking Points Memo has been doing a great job explaining the story, but I want to take issue with two things.
"I don't believe the bonuses themselves are the heart of the matter, nor the fact that they're going to the executives who caused AIG's implosion or even the galling reality that, since all money is fungible, they're being paid with taxpayer dollars."
You may recall that when I got on my high horse about this Friday I insisted you watch a CNBC video that was vastly more of a watershed than the whole Cramer-Stewart thing, or should have been. Perhaps lost in the jawdropping meltdown of the CNBC hosts was the agreement of Roubini and Taleb that compensation based on disastrous short-term risks are at the heart of the crisis.
Let's say, for example, that most of my compensation was based on Web traffic, and that I'm given a pile of money to increase it. So instead of investing in something that won't get the Reader a sexy boost in traffic in the very short run--say, hiring good bloggers--I pay bums to go to libraries and spend all day clicking on the site. We get a huge short-term traffic boost and a nice chunk of money from advertising, but it goes away when the money runs out, the story leaks, and the scandal destroys our reputation and the confidence of our advertisers, who would like a better audience than bums. I've thus been handsomely compensated for wrecking the long-term value of the Reader.
That's essentially what happened with AIG. $450 million to the AIG division that caused all the problems is a relative drop in the bucket compared to the hundreds of billions we're throwing at the company and its counterparties, but it's the compensation structure that led to those hundreds of billions coming out of our pockets.
Well, you may be asking, you might have made a bit of money, but is it worth being unemployed forever after you destroy your own professional reputation? That leads us to the second statement I have an issue with:
"More generally, the idea that there are a lot of jobs on offer at the moment for credit default swap writers strikes me as dubious."
It's impossible to say for sure. But after the epic and then-singular failure of the hedge fund Long Term Capital Management, the people who destroyed the company and who had to go hat in hand to Wall Street under the direction of the Fed almost immediately found more rich people to throw money at their subsequent venture. In fact, LCTM chief John Meriwether not only started his own hedge fund, he brought on Larry Hilibrand and Victor Hagani, who, as Roger Lowenstein details in When Genius Failed, were the two LCTM employees who probably bore the most responsibility for the firm's collapse.
Speaking of LCTM, the NYT--which has been doing a good job unwinding the AIG mess in a properly hostile manner--has a must-read essay by Tyler Cowen of Marginal Revolution arguing that the LCTM bailout (done privately but with the urging and assistance of the federal government) set a bad precedent: "With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system."
PS: Credit where credit's due: read Clarence Page. But as is so often the case a blogger puts it with the pungent language I'd hope for from taxpayers who are just as pissed about all this as I am:
That's what the real issue is, how important stuff like the economy, war, the political process, is only ever discussed by Serious People like it's a game, where all that ever matters is who is in, and who is out, what's hot like phat pants and what's not like Dockers. And that point, while obvious, is easily missed. "Jon Stewart's cool! Let's play the game his way now!" Happy claps! Happy claps!
It's not enough any more, guys, to make fantastic errors and then to carry on authoritatively as if nothing just happened. You will be called on it. In some ways, the blogosphere is to MSM punditry what Stewart is to Cramer: an insistent and vulgar demand for some responsibility, some moral and ethical accountabilty for previous decisions and pronouncements.
Braver, please. And louder.
Okay! Fuck you and your Bell Curve1, Andy. Love, The Fifth Column2.
Thers adds: "'Braver, please. And louder.' Bite me, Obi-Wan."