Monday, March 23, 2009

Government Failure: The AIG Fiasco

As I've said before, saving AIG - something that was done by the previous administration and furthered by the current - was a hopeless mistake. The bonus scandal is just one example of what economists call unintended consequences; expect more of them in the future.

There's more however: here's the magazine The Economist on how the government's populist "do it all" approach is actually making things worse:

It is a measure of how deep the anger runs that most press attention at the weekend focused on the government's new proposal to increase its scrutiny of executive pay rather than on leaks of the Treasury's long-awaited plan to tackle toxic assets. ...

Bankers are not the only ones feeling the heat, however. The Treasury knew about the bonuses before it gave AIG its most recent shot of state aid. And Senator Christopher Dodd, who faces a tough re-election bid, has come under pressure to explain why he did not try to stop such bonuses when he helped to write the bail-out legislation.

Mr Obama has been trying to catch up. ... But the president's critics say that, once again, he has let Democrats in Congress define an issue in such a way that it makes the administration's job of winning the public's trust more difficult. Indeed, Mr Obama did little to quell the outrage last week. In an appearance on the Jay Leno show he sang along with the chorus of disapproval and maintained that America had to get back to “an attitude where people know enough is enough” and a “sense of responsibility”. It was left to Mr Leno to say he thought it a “little scary” that the government could impose a tax on someone it doesn't like.

Recessions produce economic insecurity and are ripe for populist politics. The danger is that Mr Obama risks being seen to be pandering to populism. Worse, some are wondering how well the relatively inexperienced Mr Obama would fare with a full-blown crisis given his wobbles over a minor issue such as bonuses. Others maintain he is still running last year's presidential campaign, and that he needs to show himself as more presidential, by using his position to calm and explain, rather than merely echo the public's frustrations at Wall Street. To be fair, Mr Obama did take a stab at that when interviewed by Mr Leno, but the call for more regulatory “common sense”, perhaps a plea to Congress, got lost amid the rage and the gags.

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