Balkinization: Bailout Bonus Hot Potato: Where Does the Buck Stop?

Bailout Bonus Hot Potato: Where Does the Buck Stop?

Frank Pasquale

It appears that the Dodd-Geithner drama over who bears the blame for the AIG bonuses has been resolved: Geithner's fessed up. As I noted during a past bailout blunder, Treasury's increasingly incompetent handling of troubled financial institutions reminds me of Scott Veitch's fascinating book Law and Irresponsibility. Veitch shows how law, commonly billed as a method of forcing individuals to take responsibility for their actions, too often diffuses, obfuscates, or short circuits legitimate methods of assigning credit and blame. As one reviewer puts it, "the legal regime itself is effective in generating conditions of extreme harm while creating a circumstance where there is almost no responsibility attributed to any party, including a state level actor."

As the bailout unfolds, phobia about "nationalization of the banks" results in a regime where no one appears to be in effective control of the situation. The "sanctity of contracts" becomes a catch-all shibboleth for rewarding even the most revolting greed. Late-night legislative sausage-making, dubious in even the best of circumstances, becomes a Ring of Gyges for passionately intense lobbyists. Everyone from Obama to Dodd to Shelby to Boehner can rail against the bonuses, while happily taking contributions from the Wall Street worthies they're unable or unwilling to hold accountable.

The outrage over the AIG bonuses is rooted in legitimate worry about a hapless, drifting state. The rage may eventually be quelled by sober economic analysis of the "real value" of executives and traders. But Americans now have a sick feeling that even after the repudiation of the most fatcat-friendly regime in our history, "Change We Can Believe In" has turned into continuity we can't stand. Consider Senator Ron Wyden's comment on the Dodd-Geithner contretemps:

"I pulled out all the stops," Wyden [said], "to convince the president's economic team that [an anti-bonus amendment] was vital to the White House for two reasons: 1) the president had spoken out against bonuses; 2) fury about bonuses would kneecap confidence in the president's entire economic policy."

But no one inside the president's economic team was in favor of it. As Wyden put it: "If the White House economic team had made it clear that this was important, this provision would never have been removed. I don't believe the president has been well-served on the bonus issue by his economic team."

A couple months ago, I thought that President Obama's strategic decision to defer to "safe hands" like Geithner and Summers on macroeconomic matters was wise. I even held out hope that the government would use some of its leverage over the banks to induce them to invest in our future--projects such as green energy, universal broadband, and health information technology that will be perennially neglected by investors obsessed with quarterly earnings.

But these hopes are fading as a neo-feudal reality begins to emerge. Whatever their failures, however reviled they are by the public, the potentates at our leading banks appear to believe themselves entitled by divine right to determine what projects get credit and which are denied. Rather than assert the people's prerogative to demand investment that builds a better future for us all, our putatively progressive Treasury Department contorts itself to resist the "nationalization" label--even as conservatarians like Lindsey Graham and Alan Greenspan consider it. Like the Rubin-ites who rolled over Robert Reich and Brooksley Born in the Clinton administration to prevent derivatives regulation, these "centrist" Democrats are pushing the Obama administration into a hollow establishment "consensus" that commands the respect of few outside the Beltway Bubble, Greenwich, and the Upper East Side. For these worthies, we are impertinent even to ask about the long-secret destinations of the AIG money.

We live in "a world in which, according to 2006 statistics, one percent of the world’s adults own forty percent of all global assets[,] [t]he richest ten percent own eighty-five percent, while the poorest half own less than one percent." We should not be surprised when those in that glittering top percentile pull out all the stops to preserve and intensify those inequalities. But we are still inevitably disappointed by an administration that promised so much, and appears more at drift than mastering the financialization that has brought the nation to the brink of ruin. That's the kernel of truth and sorrow at the core of public outrage over AIG.

But there is still hope for redemption. Even a once-ardent fan of inequality like Judge Richard Posner can change with the times to acknowledge the problems caused by extremes of wealth:

[C]onsideration should be given to steeply increasing the marginal income tax rate of persons who have very high incomes. Such incomes typically contain a good deal of economic rent (that is, income above what the person could obtain in his next best employment), and taxing economic rents is, in principle anyway (I will explain this qualification shortly), highly efficient because it has minimal substitution effect.

I hope Judge Posner will join me in applauding the US House of Representatives' vote for a 90% tax on the lucre of bailout bonus recipients.

Unfortunately, according to the NYT, "Members of both parties raised doubt about whether the legislation could survive a court challenge, saying it was tantamount to a retroactive 'bill of attainder,' which is banned by the Constitution." Haven't they heard of United States v. Carlton, where the Supreme Court noted that it "repeatedly has upheld retroactive tax legislation," explaining that as long as "the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches"? Perhaps they're just projecting the revealed political preferences of our many horsemen.

Cross Posted and Updated from Concurring Opinions.

Posted 10:48 PM by Frank Pasquale [link]