Speaking of Economics and AIG Bonuses

Dear Attorney General Andrew Cuomo,

I hear you are mad as a wet hen. Me too.

AIG has been playing, Who Wants to Be a Millionaire again. And this time 73 of the folks who helped create the worst financial crisis in modern economic history, won the big prize.

Thank you for revealing the following information about the AIG bonuses.

• The top recipient received more than $6.4 million;
  
• The top seven bonus recipients received more than $4 million each;
  
• The top ten bonus recipients received a combined $42 million;
  
• 22 individuals received bonuses of $2 million or more, and combined they
  received more than $72 million;
  
• 73 individuals received bonuses of $1 million or more; and
  
• Eleven of the individuals who received "retention" bonuses of $1 million
  or more are no longer working at AIG, including one who received $4.6
  million;
  

These payments were all made to individuals in the subsidiary whose performance led to losses causing the near failure of AIG. Therefore, what we are seeing is that the individuals who lost so much money that it brought the firm to the edge of bankruptcy, forcing a taxpayer bailout, are the very people who are receiving bonuses. Something smells fishy, doesn't it.

The contracts under which AIG decided to make these payments contain a provision that required most individuals' bonuses to be 100% of their 2007 bonuses. That means that last Spring when AIG identified the coming crash, they locked in bonuses for 2008 at 2007 levels knowing that their real performance would be disastrous in comparison to the year before.

I've heard that you are taking a hard look at all this. Does that mean that you, like me, think that all of this sounds, well, criminal?

Some writers from the Huffington Post suggest this solution.

The trustees need to split off the derivatives unit from the rest of the firm and separately incorporate it. This step leaves AIG's other businesses free to operate as usual. If the recipients of the bonuses refuse to waive them, then the derivatives unit should at once be thrown into bankruptcy, terminating all obligations to pay them. Right now, press reports suggest that the firm's top management waited until the last minute to inform the government of what was happening. AIG CEO Edward Liddy, accordingly, should be asked to resign at once, for the sake of public confidence and to send a clear signal that gaming the system is unacceptable.

Barney Frank seems to think some strong tactics should be used to call a halt to this too.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Well, thanks for working on this problem. I hear that President Obama has your back.

BRD

Econom-nom-nomics Part I: Bubbles, Past and Present

Dear Frank H. Fleer,

You invented bubble-gum, so I'm assuming you're an expert on bubbles. Perhaps you can shed some light on our current situation. See, our economic bubble just popped, and I don't get the rationale behind our government's actions in reinflating it.

Perhaps some background is in order. Let me explain:



So that's how we got here. The government lowered interest rates back in the early 2000s to avoid the painful process that naturally happens when a bubble bursts. The bubble reinflated (more so, really) and then popped again in 2008. And again, the government is throwing everything at the problem to try to avoid the pain: Bank Bailouts, Auto Bailouts, Mortgage Bailouts, Stimulus Plans, and Spending Plans. All of these things are designed to keep the bubble growing bigger.

But Frank, all these programs, initiatives, and efforts cost a LOT of money. And President Obama doesn't seem to mind. Here's what he's decided to spend in 2009:


Now, if that goes through, here's what our national deficit will look like, compared to the past few years:

Eek! That's a LOT of money we're spending as a nation, and all with no guarantee that any of it will work.

Indeed, I worry whether our government's reaction will lead the country to become something akin to a socialized, command economy, where the government controls all the functions of production (a la China). This, in my mind, would be a bad thing, as it reduces the incentive for innovation and achievement, and treats people and their work as cogs in the government's machine.

It puts a tough question to our country's leaders right now: Is the bottom line growth of the economy the only thing that matters, or should we be concerned about the direction our country is taking on a deeper level?

Frankly, Frank, it seems that our country right now is so wrapped up in 'fixing' this problem that it is failing to consider the consequences--short- or long-term--of the policies it is establishing. And who knows how that bubble will end up popping?



TheUkieVillain

Funny Money, or the case of the appearing and disappearing mega-funds

Dear Dylan Thomas,

You may wonder why I write to you on this topic. You are no economic expert. But I come to you because I fear going gentle into that dark night. Is that a bit dramatic? Really I am trying to make sense of it all. But I admit I am confused and a bit afraid.

So what do I see as the "dark night"? Our economy has depended too much on credit...bad credit, and it is all falling apart. There is no money, spending is down, and the economy is in a tail spin. They say it could be a depression, utter disaster, maybe the beginnings of the end. But there is a chicken in my pot every night and I have not even had to cut cable yet, so I don't feel it coming. But foresight is golden, as they say, and not everyone has been as lucky as me. It's jobs that are being lost, and if mine were lost it would not take long before I too would begin to suffer. However, it is not suffering that I see as the dark night.

So, the government wants to help. And so it should. It is here to do what we cannot do for ourselves, and the economic stability of the nation is one of those things that we as individuals cannot control in the big sense. So lets talk about that a minute. And to do so I am going to use a metaphor and see if it fits. It may not. I am bringing it down to my level, just to make sense of it.

OK, we need jobs in this country. Jobs produce money for families who then spend it and, in so doing, employ more people. It is a cycle of positive growth. Right now we are in a negative cycle of job loss, less spending, and more job loss. Add in a "credit crunch" that means people have a harder time borrowing money, and the cycle speeds up.

Here is the metaphor that makes sense to me, poor though it may be. Let's say my car breaks down and I need a way to get to work. If I can't get to work I can't pay rent or food. If I can't pay rent, I lose my house and without food, I die (dire situation!). So it is worth an investment of cash in a new means of transport in order that I can keep my job. I would do this even if it means borrowing that money. I get this concept and this is obviously what Obama is trying to do right now. You gotta spend something to get something going.

But lets say I am broke with no car and I go to the Mercedes dealer and pick out a big ol' Mercedes SUV. And lets say my borrowing capacity is unlimited (as it apparently is for the government). The Mercedes will get me where I am going fast, reliably and in style and with as much junk as I want packed into it. Great, right? Or let's say I think it would be better if I borrowed a bunch of money to lay rail from my house to my job and started up a train service. I could not only get to work, but I could give others rides and charge them for it. An investment! Or I could buy a helicopter.....you see where I am going? Just needing transportation does not make unfettered borrowing OK. What I need is a Ford Festiva that has four wheels and a decent engine that will get me back and forth. That is it. And you know, if it looks junky, more the better. It shows that I am putting money into the important things...my house, food. I am not spending money to impress everyone. I am not trying to maintain a facade.

What I am saying is, we can fuss and cry about the countries "dire situation", but that does not make borrowing insane amounts of money OK. But how do we know, when it comes to the American economy, what the Ford Festiva-level stimulus plan would look like. Some say we are getting the Festiva plan, while others say we are getting the train rail with boxcars filled with pork. But either way, if the senators did not have time to read the bill, let alone truly vet it, then who really knows what we are getting?

I am just not comfortable with the fact that no matter the plan, (remember, Bush had 2 stimulus plans already in place and voted for by many of these same senators as well as the new President) it is based on the concept of printing up more "Funny Money". We are not pulling from reserves, we are just saying "Spending on this would be good and would create jobs? OK, lets do it!" Something about this just rubs me wrong. Plus, we are not even sure it is going to work. But I do like BRD's point that at least spending on projects gives us both jobs for people now and the fruits of their labor. That I can get behind.

I know I am rambling a bit here, but I am really trying to understand. I am trying to put responsibility where it belongs and look for a rational solution. I guess I feel like at a time like this, people without jobs SHOULD be doing things like canceling cable. But then that would put cable workers out of work, and then we have more unemployment. So what are we to do? Our current solution is to just use credit cards (more funny money) to buy the things we want without heed of paying things off. And this is just not working.

And here is where things get personal in the whole deal. I was raised to stand good for my debts, and to never borrow more than I can pay back. Hard work and good choice making were taught and reinforced. But to me, the more the government does for me. . . things that I could do for myself. . . the more they give me to boost my standard of living, the more I become their slave. How can I support a plan for our country that makes us more and more dependent on the government and puts us more and more in debt? I just feel like this plan goes against everything that I want to be and want for other people around me. The concepts, no, buzzwords, borrowing and bailout are our new economic salvation. I just don't like them.

And this is what makes me want to continue...to work hard...to take care of myself and those around me who are part of my community. I continue to hope, no doubt prolonging the agony, that these mechanisms will work without forfeiting the light of freedom that I cherish. But I fear as well. And so, Dylan, I continue to rage, rage against the dying of the light.

Thank God, most literally I mean God, that HE is my source of light, not the small actions of this government. That my true freedom can never be taken away since, to quote myself, true freedom* is "to have God in your heart and you love Him." :)

Yours sincerely,

CaDh8

In the Land of the Free

*Note from BRD: Upon investigation we found that this quote comes from an excellent piece on the meaning of freedom produced by the TV News team from Altoona, PA, circa (approximately) 1984. The occasion of this hard hitting report was the occurrence of July 4 and a much anticipated family celebration of same at the Highland Park.

Bailout 101

Dear Karl Marx,

This is what our new president says,



So, we're trying to figure out this "Stimulus Plan." What is going on? Do we want a stimulus plan? Do we want the government to give out this money with abandon. We don't know. We just hope.

Of course hope is a two-edged sword. Friedrich Nietzsche said, "In reality, hope is the worst of all evils, because it prolongs man's torments." And that's what I worry about on the one hand. On the other hand, I don't. I think that the right kind of spending, the kind that encourages real human productivity, like jobs programs--the shovel-ready jobs (our newest polito-phrase)-- is never really bad. That kind of spending is like spontaneous generation. You print up some money down at the mint and you say to the person in soup line, I'll give this to you if dig the ditch, build the sidewalk, fix the radiator, mine the coal. Two things have been created: 1) Paper money, 2) Real sweat equity from someone who would otherwise have been standing idle. Both are something from nothing. Yet in the end, real value has been created.

If I don't print the money and the person doesn't do the work, but stands motionless, that value and the opportunity of the day has been lost. You have created nothing from nothing.

Money never means anything. Gold doesn't mean anything. It is all symbolic. We can't eat gold. It can be showy, but even that is symbol. So print money? Yes, do that, if it generates productivity.

But this example is so simplistic. We didn't even ask if the formerly unemployed person was in that state because that person is a poor producer. Perhaps this indigent enjoys indigence. If that is the case, printing money to pay for her day-labor will not produce value, at least not very much. Let's go to an even more complicated example.

What if we have a bank that is performing poorly? It is about to collapse. In this scenario, the executives of that bank already make more money than Croesus. When money is printed at the mint and the bank gets some of it, with the stipulation that the executives take a lower salary than before, the question that immediately arises is whether the bank workers are actually incentivized or disincentivized? (Are those words?) Will value be created? My gut says no. I mean, I believe in the caps on salaries and bonuses completely, but I just don't know if I believe in any of this top-down bailout bahooey.

We all want stuff. We need stuff. You, Karl, might say that it doesn't matter whether we need it or want it because stuff, or commodities, makes the economic world go round. But what is the healthiest way for everyone to get a fair amount of stuff? When the economic system begins to crumble, I think we have to look at the fundamentals. The foundation of the dyke is crumbling. A few patches and some thumbs won't do the trick.

You say that "The value of one commodity is to the value of any other, as the labour time necessary for the production of one is to the other . . . under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time." This is a fundamental. However, wall street and the gang forget or deny this. They prefer, smoke, mirrors, and unrelenting bonuses.

Simon Johnson, an MIT economist estimates that the US banks have a capital shortage of $500 billion. What does that even mean? How about this phrase, "Liabilities far exceed assets"? Lions and tigers and bears, oh my!

What do you believe? Do you believe that any wealth created by this capital--would be "surplus value" to which the owners of capital had no claim--surplus value stolen by the owners of capital from the owners of labor?

I think you might be right. I think that the value, of the assets, the real value, might be what we should look at, and if the true liabilities do indeed far exceed the true value of the assets, then we should NOT pull on blinders and put trillion dollars thumbs in liability-laden dykes. We SHOULD instead, invest in our labor, whether person by person or project by project, but we should create value, not subsidize liabilities.

I personally have stopped judging by Wall Street. I wish they wouldn't tell us, "We're doing what the economic experts tell us to do." These same economic experts were driving the yacht when it hit the shoals. I think we had better go back to the basics. Let's check our fundamentals. Let's look to labor.

BRD

True Democracy and Economic Wealth

Dear Thomas Jefferson,

These are some definitions:

Democracy

Government by the people, exercised either directly or through elected representatives — The American Heritage Dictionary

a state of society characterized by formal equality of rights and privileges

political or social equality; democratic spirit

the common people of a community as distinguished from any privileged class; the common people with respect to their political power — Dictionary.com

If those definitions are anywhere close to reality, then a true form of democracy would not allow for the perpetuation of unlimited control, by one set of individuals, of our most valuable life resources. The American form of democracy is failing, slowly but surely, and tumbling into some form of post-modern classed aristocracy because of an untoward and malignant commitment to private property. We are beset as a nation by an underlying and pervasive notion that those who own property are graced with some form of the Divine Right of Kings to hold that property and pass it on as royalty to, not just the third and fourth generation, but ad infinitum.

Our nation is peppered with individuals who swear allegiance to democracy and then wrap themselved in a motto like that of the British monarchy, "Dieu et mon droit." We might say, "Terre et ma droite."

Thomas, here are some statistics you might find interesting. Look at them and then tell me what you think. It's not me who's the crazy one here is it? (Full data)

The top 10% of Americans control 68.8% of the wealth. The top 20% control 81.6% of the wealth. The average wealth of the top 1% of the nation is over 10 million dollars. The average wealth of the bottom 20% of the nation is almost NEGATIVE 10 thousand dollars. A fellow named David Chandler developed this little "L Curve" to demonstrate how skewed the control of resources in the United States has become. It wasn't like that when you were thinking about democracy was it?



Here is my simple recommendation, based on the principles of democracy. Wealth must be redistributed. That redistribution need not be done during the lifetime of the earner. Certainly, people deserve to experience the fruit of their labor. They should also be able to pass on a reasonable amount to their children. However, there should be limits to the amount of money that can be passed from generation to generation. OK, you heard me say it and I wanted to say it to you first.

Well, I've got to go to work now. My pile of money lies along the space in the middle of the football field, so I must spend my time working hard. But then, that is what makes democracy great. Work is a great gift. I just think that the descendents of the very wealthy deserve to engage in the American democratic struggle, just like the rest of us.

Betsy

P.S. I don't think you've heard the last from me on this. I have some thoughts on Social Security Tax that I'd like to run by you.