Why The AIG Bonuses Matter

The rush to legislate a 90 per cent bonus attack, harrassment of AIG employees and unbalanced public outrage over the bonuses is leading to a backlash. Most of the backlash is coming from those who object to the populist tone coming out of Washington. It’s most articulate objection to the bonus furor is that this is a distraction from the more important job of fixing the banking system and getting the economy out of the recession.

This line is being pushed by the Obama administration and its fans in the mainstream media. The Washington Post, for instance, recently wrote that “the bonuses were a distraction from what senior aides called the main focus: getting the economy working and people back to work.”

Unfortunately, the bonus issue is not just a distraction or a side-issue. It’s part of the larger problem, a gaudy demonstration of what is wrong with our financial rescue attempts.  AIG is perhaps the worst case scenario but it fits into the pattern that we adopted under the last administration: bailing out failed firms while leaving them in the hands of existing management, a recipe that was sure to privatize profits while socializing losses.

Paul Krugman explains the situation perfectly today.

At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.

This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

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