Robert Waldmann on Market Failure, Fiscal Policy, and Unemployment
Tim Fernholz on the Obama Budget

AIG, Bonuses, and "I Told You So"

Paul Krugman says "I TOLD YOU SO!":

AIG: Preliminary thoughts on the tax bill:

  1. It’s not the way you should make policy — it’s clumsy, and it will punish some innocent parties while letting the most guilty off scot-free

  2. But — there wasn’t much alternative at this point. And for that I blame the Obama people.

I’ll leave to others the question of who knew or should have known that the bonus firestorm was coming; but it’s part of a pattern. 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.

The situation can still be recouped--a switch of Wall Street from Traders' Option Compensation Schemes to Silicon Valley Compensation Schemes would be a good thing. Certainly J.P. Morgan would be absolutely astonished at what we have now--and would be asking every shareholder of every bank if they were crazy.

I must say I feel like saying: "I told you so" as well:

  • Last March I warned that it was time for the government to nationalize Fannie and Freddie and set them to work borrowing at the Treasury rate and buying up and reworking every mortgqge in the country...

  • Last August I warned that it was time to go to the Swedish model of bank nationalization and recapitalization...

  • Last October I warned that government injection of capital into banks needed to be accompanied by government oversight of operating decisions...

  • Last November I warned that TARP-favored companies could not be or be perceived as being firms that took government money with one hand and gave it out to the Princes of Wall Street with the other...

  • Last December I warned that the populist requirement that the guilty of Wall Street suffer would place very tight constraints on anything the government could do...

Now I am wracking my head for extra things to tell people so that I can say "I told you so" later on. Here is one:

  • Put a provision for a $1T extra fiscal stimulus in the Budget Resolution to be triggered if the economy continues to sink between now and August.