I know this will come as a complete surprise, but some Democrats have been lying to you. But before we get to that, let’s review.
AIG was deemed dangerously insolvent a few months ago, so insolvent that it required the government to step in and save it. It was one of the “too big to fail” companies. It got TARP funds. Then, as a part of the “stimulus” bill, signed into law under the Obama administration, an attempt was made to add a provision to strictly limit such payments as those now causing the faux outrage:
Around the same time, Congress and Obama’s team were passing up an opportunity to put in place strict laws to revoke bonuses from recipients of the $700 billion Wall Street bailout. In February, the Senate voted to add such a proposal to the economic recovery bill that cleared Congress, but in final closed-door talks on the measure, that provision was dropped in favor of limits that affect only future payments.
“There was a lot of lobbying against it and it died,” said Sen. Ron Wyden, D-Ore., who proposed the measure with Republican Sen. Olympia J. Snowe of Maine. He said Obama’s team is sending mixed messages on what will and won’t be tolerated on bonuses, with the president coming out strongly against excessive Wall Street rewards but top officials not following through.
“The president goes out and says this is not acceptable, and then some backroom deal gets cut to let these things get paid out anyway,” Wyden said. “They need to put this to bed once and for all.”
They also need to “put to bed once and for all” this nonsense that they “didn’t know” until a couple of days ago. And, of course, had anyone actually read the bill that they claimed was too important to delay, they’d have actually caught this, one assumes. But it appears, at least initially, that reading legislation before it is signed is just not a priority for this administration or Congress.
And surprise, surprise, we’re finding what they did pass sucks.
While administration officials insisted Tuesday that neither Obama nor Geithner learned of the impending bonus payments until last week, the problem wasn’t new. AIG’s plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored.
A November SEC filing by the company details more than $469 million in “retention payments” to keep prized employees.
Back then, Rep. Elijah E. Cummings, D-Md., began pumping Liddy for information on the bonuses and pressing him to scale them back.
“There was outrage brewing already,” Cummings said. “I’m saying (to Liddy), ‘Be a good citizen. … Do something about this.’ ”
Around the same time, outside lawyers hired by the Federal Reserve started reviewing the bonuses as part of a broader look at retention and compensation plans, according to government officials who spoke on condition of anonymity. The outside attorneys examined the possibility of making changes to the company plans — scaling them back, delaying them or rescinding them. They ultimately concluded that even if AIG’s bonuses were withheld, the company would probably be sued successfully by its employees and be forced to pay them, the officials said.
In January, Reps. Joseph E. Crowley of New York and Paul E. Kanjorski of Pennsylvania wrote to the Federal Reserve and the Treasury Department pressing the administration to scrutinize AIG’s bonus plans and take steps against excessive payments.
“I at that point realized that we were going to have a backlash with regard to these bonuses,” Kanjorski said in an AP interview. In a meeting with Liddy later that month, he said he told the AIG chief that “all hell would break loose if we didn’t find a way to inform the public … and that we should take every step to put that information out there so we wouldn’t have the shock.”
And of course, Kanjorski is right. This is a “distraction”, as Rahm Emanuel is labeling it, that the administration could have avoided had the Treasury Secretary been on top of it and the President had exerted even a bit of leadership. Instead, both are in extreme cover-up mode. And as more and more info comes out, the time-line of events they issued has less and less credibility.
This wasn’t something that just emerged as a problem last Tuesday as Geithner is attempting to claim. This has been known and waved off for months. And that includes the provision that was going to be inserted in the “stimulus” package but died due to apparent Democratic lobbying.
Edward Liddy, CEO of AIG, has a piece in the Washington Post today. It is useful for a couple of reasons, one of which is to try to nail down the timeline in this dustup.
But first, this from another Washington Post article:
Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward.
A point or two to remember. One – $55 million had already been paid out under the very same plan in December of last year with little or no coverage. This wasn’t something new nor should it have been a surprise. This was a plan that was already in place and one has to assume, unless they weren’t doing their jobs, known to the appropriate people in the administration (not necessarily Obama, but at least Geithner).
That brings us back to the Liddy piece. Liddy joined AIG in September of 2008 to begin the difficult task of saving the insurance giant and structuring it so it was again profitable and able to pay the taxpayer funded bailout money back as quickly as possible. There’s a very telling paragraph in Liddy’s piece which makes the point that the plan which is such a huge surprise to the Treasury Secretary and President shouldn’t have been a surprise to anyone:
To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high.
In the meantime, AIG has restructured its 2009 compensation system (note the use of the word “compensation” by Liddy and not “bonuses”) and made all the cuts and changes I noted yesterday.
The fact that this is just another part of the same plan that paid out $55 million last year without a peep, was in place, per Liddy prior to his assuming the Chairmanship and has been in place for at least a year strongly argues one of two things – A) someone is not telling the truth about when they “knew” this latest payment was going to take place or B) someone was not doing their job and is now trying to cover that up like a cat covering crap.
Obama aides defended Timothy F. Geithner’s handling of the situation yesterday, with White House press secretary Robert Gibbs saying the president has “complete confidence” in the Treasury chief.
Sounds like a “heck of a job, Brownie” moment to me.
The other shoe concerning the AIG “bonuses” and the administration’s knowledge of them is beginning to drop. The Politico reports that all of the outrage from both Congressional and administrative officials is simply a front. All of them knew.
Watching the coverage the past 24 hours, it would seem AIG just made public its plans to give top employees big bonuses. Wrong.
AIG disclosed its retention-bonus program more than a year ago, including bonuses directed to those handling the exotic derivatives that got the company and the country into this mess.
The bonuses were essentially a nonissue when AIG got its initial bailout money, almost $150 billion under President Bush in the two months surrounding the presidential election. Joe Biden, then the vice presidential nominee, came out strongly against the bailout. Obama did not.
Timothy Geithner, then at the New York branch of the Federal Reserve, was a huge proponent and architect of the AIG bailout. So if Obama had strong private opposition to the idea it did not affect his pick for the person who would oversee all bailouts.
In fact, if you look at the first line in the letter AIG CEO Liddy wrote to Geithner, it is clear he at least knew about all of this before last Friday:
Thank you for the open and frank conversation on Wednesday regarding the compensation arrangements at AIG Financial Products and AIG generally. I admit that the conversation was a difficult one for me.
And there’s more:
You have also asked AIG to rethink our 2008 corporate bonus proposals. The proposals AIG originally submitted to you are part of a deliberate process, recommended by me and supported by the independent compensation committee of AIG’s board of directors.
So what you’re seeing out of the Obama administration is demagoguery at its worst. This was a plan being worked with the previous administration and the present administration, and when AIG payed those monies out last week Friday (they were required by law to do so prior to March 15), it was with the full knowledge and apparent acquiescence of the Obama administration, and, one assumes, key members of Congress.
As to the “why” of the situation, some reading of the AIGFP Employee Retention Plan – written last year – makes it clear that none of this was being hidden from anyone. And it makes for some very interesting reading – here, for instance, is the portion which details the impact of their failure to pay these “bonuses”:
Details Regarding Business Impact of Failure to Pay
AIGFP’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the required retention payments therefore could have very significant business ramifications. For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.
In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.
There are also substantial risks related to the hedging of AIGFP’s various books. Although we view the large-market risk books at AIGFP as generally well hedged, the hedging is dynamic – that is, it must be monitored and adjusted continuously. To the extent that AIGFP were to lose traders who currently oversee complicated though familiar positions and know how to hedge the book, gaps in hedging could result in significant losses. This is driven to some extent by the size of the portfolios. In the interest rate book, for example, a move in market interest rates of just one basis point – that is 0.01% or one-100th of one percent – could result in a change in value of $700 million dollars if the book were not hedged. It has virtually no impact on the hedged book. There are similar exposures in the foreign exchange, commodities and equity derivatives books.
AIGFP’s books also contain a significant number of complex – so-called bespoke – transactions that are difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale. Personal knowledge of the trades and the unique systems at AIGFP will be critical to an effective unwind of AIGFP’s businesses and portfolios.
In this current environment, any perceived disruption in AIGFP’s ability to conduct business, such as one that would result from the departure of a number of key employees, could also cause parties to limit or cease trading with AIGFP. Obviously, this would adversely affect its ability to continue to cost-effectively hedge its positions.
Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory action, at a minimum the disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well its commitment to honoring counterparty contracts and claims.
Essentially, as I pointed out this morning, the loss of key players could cost AIG and the taxpayer much, much more than the bonuses. Note the final paragraph where an example is used to point out the danger of seeing key players leave the firm while it continues to “unwind costs”. As pointed out the “personal” knowledge of the trades and transactions is critical. This isn’t necessarily about the “brightest and best”, but instead about those who know where the bodies are buried, how they got there and how to get them out of there and where they’re supposed to be. The possible downside of losing these key individuals is a potential cost of “tens of billions” to the tax payers.
Here’s something else which may interest you:
AIG has taken significant steps to limit overall compensation at AIGFP where it can and has committed to doing more. The 25 highest paid active contract employees have agreed to reduce their remaining 2009 salaries to $1. Salaries for this group ranged up to $500,000, and the average salary was in excess of $270,000. (There are apparently legal limits that may complicate the implementation of this and AIG will likely implement the lowest salary levels we can equitably put in place across the relevant jurisdictions.) The remaining 2009 salary of all other officers – anyone with a title of associate vice president or higher – is being reduced by 10% (subject to compliance with local law requirements).
In addition, other forms of non-cash compensation will be reduced or eliminated. We also believe that there will be considerably greater flexibility to reduce contractual payments in respect of 2009, and AIG intends to use its best efforts to do so. AIGFP intends to sell some of its books of business during the year. The employees related to these books will go with the sold businesses, and we intend to require the buyer to assume going-forward compensation payments.
It is also expected that, over the course of the year, employees will leave voluntarily or be terminated for cause and will therefore no longer be entitled to retention amounts from AIG. Because the plan was designed to provide security for employees, including protection against terminations without cause, AIG is required to pay the amounts owed to employees who are downsized. However, if a downsized employee finds new employment, retention amounts will be reduced by the earnings from the other employer. In addition, for employees in foreign jurisdictions who are not U.S. taxpayers, to whom the limits of Section 409A do not apply, AIG will have the ability to negotiate with employees who are downsized.
With all of these actions and other creative restructuring solutions, AIG hereby commits to use best efforts to reduce expected 2009 retention payments by at least 30%.
To review, the 25 highest paid contract employees are on a $1 a year salary for 2009. 10% salary reduction for all other officers. Non-cash compensation – reduced or eliminated. Selling some of it’s “books”. Downsizing. Retention payments for 2009 reduced by 30%.
As to the payouts themselves, this information is available:
Of the $220 million, about $165 million is required to be paid on or prior to March 15, 2009 and about $55 million was previously paid. In light of the large losses incurred last year, current and former employees will see their deferred compensation accounts reduced to the point where they will have negative balances. As a consequence there is no immediate prospect that employees will receive any payout of the at-risk piece for 2008 (about $93 million) or the remaining approximately $582 million in at risk pay earned from prior years. A senior AIGFP manager therefore worked in 2008 for about 43% of his 2007 expected level.
Did you ever hear about any of that in the phony cacophony that has blown up around all of this? AIG apparently had a plan, one has to assume it wasn’t one done in the dark, and it appears they were literally in the middle of executing it ($55 million having been paid last year and some more millions to be paid after March 15). The plan outlines how AIG planned to cut its costs while fulfilling the remaining contractual obligations they had. You and I may not like the fact that the bonuses are going out there, but if you take the time to read the retention plan, you can understand that there is a legal and financial reason for doing so.
All of this faux outrage, then, is politically calculated theater designed, as usual, to shift blame on the designated bad guy. It’s the usual reversion to populism when caught doing something unpopular. If you think a single politician, up to and including the President, is going to stand up and take blame, well, you have this example to dispel that notion. Insteadof leadership, we get demagoguery.
Once a community organizer, always a community organizer, I suppose – from an email I received recently from the Obama campaign email list:
The current debate in Washington over President Obama’s budget has made one thing clear — ensuring our long-term prosperity won’t come without a fight.
Partisan voices and special interests are showing real resistance to President Obama’s call for making the necessary reforms and investments in energy, health care, and education. That’s why we need to bring the conversation back into homes and communities across America.
Last week, thousands of you pledged your support for the President’s economic plan and encouraged your friends and family to join you in a national display of support. Now I need you to take the next step.
This weekend, supporters like you are organizing Pledge Project Canvasses to talk to people in their communities about this plan and mobilize support in neighborhoods across the country.
The eternal campaign continues with attempts to solicit the same ground support “magic” the campaign was able to solicit during the presidential campaign. However, doing that during a campaign when the focus is a person and his promises vs. attempting to do that when the person in question has gained the office and is now talking about concrete proposals which may or may not be in the best interest of the country isn’t quite as easy.
A couple of thoughts on this sort of an attempt. One – the tie that binds (getting Barack Obama elected) doesn’t necessarily extend to things like the budget or other specific issues. So the group that accomplished the former aren’t necessarily unified on the latter. That tends to promise lower turn out in the community events or, if they show up, some discord.
Two – the assumption is these events will demonstrate the will of the people and put pressure on Congress to act as Obama asks them to act, i.e. pass his budget. But there’s no direct linkage with this sort of activity and Congress like there was during the campaign when this sort of activity could be converted to votes. The Obama campaign used to brag about the “house parties” that were held at a grass-roots level demonstrating the power of his campaign and the promise of the votes to come. None of that translates into the same sort of power when aimed at Congress.
Three – it again demonstrates that the administration still hasn’t managed to get itself out of the campaign mode. Another example of that has been the AIG bonus debacle. Treasury Secretary Timothy Geithner and AIG CEO Edward Liddy discussed the bonuses on the 11th of March. Liddy sent Geithner a letter on the 14th explaining the reason for them and the possible impact of not paying them (explained in the AIGFP Employee Retention Plan). It’s not about “retaining the best and brightest”. In fact, it is a calculated method of hedging their risk and ensuring the tax payer doesn’t end up on the hook for even more billions in bailouts.
Instead of calmly explaining this in a joint press conference with AIG, Geithner and the administration chose to fan the flames of outrage and use it for political gain. That isn’t leadership, that’s politics. And it is also an administration in the campaign mode. That’s a dangerous mode to be in, especially at this time and place. When given the opportunity to have a frank and tough discussion with the public about bonuses it knew were going to be paid and explaining their necessity, the Obama administration reverted to the populist campaign mode of demonizing AIG instead of calming the emotions and fears of the public.
No one with any sense is going to argue that AIG should be doing what it is doing or that the insurance giant isn’t absolutely tone-deaf to the dirge playing within the economy. But the effort and the PR agenda to reclaim the bonus money pursued by our new president just underscores the “confusion and contradiction” his actions and words engender.
President Obama vowed to try to stop the faltering insurance giant American International Group from paying out hundreds of millions of dollars in bonuses to executives, as the administration scrambled to avert a populist backlash against banks and Wall Street that could complicate Mr. Obama’s economic recovery agenda.
We’re talking “hundreds of millions” of dollars here. But when confronted by a omnibus spending bill with hundreds of billions of dollars in 9,000 pork projects, meh, no biggie – “last year’s business.”
I mentioned last week that there was a narrative building which could be quite detrimental to the Obama administration. That narrative started with the British press, in a snit about the treatment of British PM Gordon Brown during a visit to the White House, noting that the administration seemed “overwhelmed”. Supporters claimed that was normal for a new administration, and besides, this one had been handed a very difficult crisis as they came into power, one that would test the abilities of even the most seasoned of administrations. But that didn’t stop the narrative from continuing to form. Then we saw others, even among supporters, begin to wonder. Camille Paglia and Howard Fineman were concerned that things seemed “not quite right” even after 50 days. Was this new administration in over its head? Even Paul Krugman carefully mentioned that those things which needed to be addressed immediately weren’t getting the attention they needed or deserved.
A feeling of uneasiness seemed to be settling over even the Obama supporters. Yesterday, Michael Goodwin, hardly someone who would be identified as a rightwinger, wondered out loud if there may indeed be something to the building narrative:
Not long ago, after a string of especially bad days for the Obama administration, a veteran Democratic pol approached me with a pained look on his face and asked, “Do you think they know what they’re doing?”
The question caught me off guard because the man is a well-known Obama supporter. As we talked, I quickly realized his asking suggested his own considerable doubts.
Yes, it’s early, but an eerily familiar feeling is spreading across party lines and seeping into the national conversation. It’s a nagging doubt about the competency of the White House.
As I said then, when I first brought it up, this is a narrative that if it becomes established, then becomes “conventional wisdom”. Speaking of “eerie”, this is very similar to the narrative that developed and established itself about Jimmy Carter. Goodwin goes on:
The tag of incompetence is powerful precisely because it is a nondenominational rebuke, even when it yields a partisan result. It became the strongest argument against the GOP hammerlock on Washington and, over two elections, gave Democrats their turn at total control.
But already feelings of doubt are rising again. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid were never held in high regard, so doubts about their motives and abilities are not surprising.
What matters more is the growing concern about Obama and his team. The longest campaign in presidential history is being followed by a very short honeymoon.
Polls show that most people like Obama, but they increasingly don’t like his policies. The vast spending hikes and plans for more are provoking the most concern, with 82% telling a Gallup survey they are worried about the deficit and 69% worried about the rapid growth of government under Obama. Most expect their own taxes will go up as a result, despite the President’s promises to the contrary.
Goodwin is right – the GOP sits on the sidelines for exactly the same reason that the Obama administration and Democrats should be concerned about this building narrative. Voters questioned their competence. And, of course, Democrats hammered the issue. Reid, Pelosi and the Democratic presidential candidates all talked about George Bush’s incompetence, and, by extension, the competence of the GOP. The shoe is now on the other foot and the same charges are beginning to be made about Obama and the Democrats. Warren Buffet has chimed in with criticism. The Treasury Secretary is a Saturday Night Live punching bag. The nomination process has been a disaster.
And it isn’t just the circumstances of a difficult situation which is making this seem worse than it is. No, there’s much more to it than that as Goodwin points out in his conclusion:
Which brings us to the heart of the matter: the doubts about Obama himself. His famous eloquence is wearing thin through daily exposure and because his actions are often disconnected from his words. His lack of administrative experience is showing.
His promises and policies contradict each other often enough that evidence of hypocrisy is ceasing to be news. Remember the pledges about bipartisanship and high ethics? They’re so last year.
The beat goes on. Last week, Obama brazenly gave a speech about earmark reform just after he quietly signed a $410 billion spending bill that had about 9,000 earmarks in it. He denounced Bush’s habit of disregarding pieces of laws he didn’t like, so-called signing statements, then issued one himself.
And in an absolute jaw-dropper, he told business leaders, “I don’t like the idea of spending more government money, nor am I interested in expanding government’s role.”
No wonder Americans are confused. Our President is, too.
Confusion and contradiction are not what people expect from strong leadership. It is what they expect from weak leaders. Obama, to this point, has exerted little leadership. He let himself get rolled by Congress on the “stimulus” bill, eventually becoming a front man trying to excuse their excesses and trying to spin the enormous social spending as economic stimulus. He was again pushed forward to pretend that the omnibus spending bill was “last year’s business” and the earmarks were Bush’s fault. Even the most rabid of supporters have had difficulty swallowing that bit of nonsense. Goodwin is right, what the nation and world is presently seeing from this administration is not the stuff of confidence and competence. It is, instead, precisely what those who actually looked at his previous accomplishments or lack thereof said we should expect – an eloquent and likable young man with no executive experience, no leadership experience and precious little legislative experience who appears overwhelmed by the job. The contradictions and confusion are a result of being pulled hither and yon by competing interests among his advisors and Congress as they try to convince him to back their agenda.
There are no timeouts in the job he’s won. Running off to Chicago for a 4 day Valentine weekend doesn’t slow or stop the world or the events always in motion from continuing to unfold. There’s a reason we usually don’t elect legislators to the presidency. And that’s probably even more true about inexperienced ones.
Unless something drastic happens in which the Obama administration is able to blunt and change the building narrative, watch for it to continue to grow.
Glad they finally noticed:
The Obama administration is increasingly concerned about a populist backlash against banks and Wall Street, worried that anger at financial institutions could also end up being directed at Congress and the White House and could complicate President Obama’s agenda.
Of course the greatest stoker of this populist backlash has been the Obama administration. I’ll be the first to agree that some of the financial institutions, such as AIG recently, have played into the populist condemnation by the administration, but instead of being specific about the AIGs of the world, they have instead gone after an entire industry to the point that “banks and Wall Street” are synonymous with crooks, swindlers and liars. Having established that narrative, seemingly purposely, there’s now a huge backlash building which may, in fact, cripple the administration’s efforts pertaining to both.
“We’ve got enormous problems that need to be addressed,” David Axelrod, Mr. Obama’s senior adviser, said in an interview. “And it’s hard to address because there’s a lot of anger about the irresponsibility that led us to this point.”
“This has been welling up for a long time,” he said.
Mr. Obama’s aides said any surge of such a sentiment could complicate efforts to win Congressional approval for the additional bailout packages that Mr. Obama has signaled will be necessary to stabilize the banking system.
As it is, there have already been moves in Congress to limit compensation to executives at banks and Wall Street firms that are receiving government help to survive.
Beyond that, a shifting political mood challenges Mr. Obama’s political skills, as he seeks to acknowledge the anger without becoming a target of it. A central question for Mr. Obama is whether his cool style — “in a time of crisis, we cannot afford to govern out of anger,” he said in his address to Congress last month — will prove effective when the country may be feeling more emotional.
And the country is feeling emotional because the administration has been making emotional arguments targeting the industry it wants to help. Not very smart politics. And they’ve now finally realized that.
“Never underestimate the capacity of angry populism in times of economic stress,” said Robert Reich, a professor of public policy at the University of California, Berkeley, and labor secretary under President Bill Clinton. “A big challenge for President Obama will be to maintain a rational and tactical public discussion in the midst of this severe downturn. The desire for culprits at times like this is strong.”
The “culprit” has been identified. In their desire to escape blame, government officials in Congress and elsewhere have almost unanimously used their access to the media to vilify banks and Wall Street while pretending they had no hand whatsoever in this debacle. Unfortunately they’ve been quite successful in the scapegoating. However, having established the narrative, they now have to attempt to reverse it because the public rage they’ve helped stoke may prevent them from doing what they think they need to do to turn the financial industry around.
The entire problem that the administration is now recognizing is one of their own making and another indication of their inexperience and lack of foresight. It’s one thing to demonize such industries when campaigning, it is, as they’re learning, an entirely different thing when you do it as the President of the United States. The administration now has to figure out how to reverse a narrative they helped build and establish. That should be interesting to watch.
A week or so ago, I highlighted a story about the possibility that Democrats were going to tax your employee health care benefits (after all, those among the 95% who are getting a tax cut have to have something to spend it on) and I was assured this particular plan comes up all the time and never gets out of committee. Well it appears those assurances of nothing to worry about were premature. The idea may not only get out of committee this time, but be signed into law as well:
The Obama administration is signaling to Congress that the president could support taxing some employee health benefits, as several influential lawmakers and many economists favor, to help pay for overhauling the health care system.
So you’ll pay taxes on your private health benefits to pay for health benefits for others, while government tells you how expensive your private coverage is and how they can run it much more cheaply and efficiently if only you’ll pitch in and pay for it.
Question: If taxes on your health care benefits are going to pay for a governmental health care system overhaul, and one assumes the purpose of the overhaul is to bring more and more of the health care system under governmental control, how will government “pay” for all of this in the future when you no longer have private health care benefits to tax?
Read the whole article. It doesn’t even take a double digit IQ to spot the law of unintended consequences laying in the weeds just salivating over this one.
There are plenty of good writers around, but there are only a few who cause me to pause during reading and think “Oh, how I wish I could write like that.”
Mark Steyn is in that group. Just about anything he writes is worth reading, and he is the best in the business at being funny and thought-provoking at the same time.
Occasionally, though, he captures the essence of an issue in a way no other current writer can. His current article at National Review, “The Brokest Generation“, is in that category. Go read it yourself, and then pass it along to the folks who are going to be paying for the folly of the Obama years (and the somewhat-lesser follies of the administrations that preceeded him).
It’s true irony that the chanting, swaying kids in the creepy Obama videos will be the ones who pay the highest price for Obama’s fumbling foolishness. Per Mark:
As Lord Keynes observed, “In the long run we’re all dead.” Well, most of us will be. But not you youngsters, not for a while. So we’ve figured it out: You’re the ultimate credit market, and the rest of us are all pre-approved!
The Bailout and the TARP and the Stimulus and the Multi-Trillion Budget and TARP 2 and Stimulus 2 and TARP And Stimulus Meet Frankenstein and the Wolf Man are like the old Saturday-morning cliffhanger serials your grandpa used to enjoy. But now he doesn’t have to grab his walker and totter down to the Rialto, because he can just switch on the news and every week there’s his plucky little hero Big Government facing the same old crisis: Why, there’s yet another exciting spending bill with twelve zeroes on the end, but unfortunately there seems to be some question about whether they have the votes to pass it. Oh, no! And then, just as the fate of another gazillion dollars of pork and waste hangs in the balance, Arlen Specter or one of those lady-senators from Maine dashes to the cliff edge and gives a helping hand, and phew, this week’s spendapalooza sails through. But don’t worry, there’ll be another exciting episode of Trillion-Buck Rogers of the 21st Century next week!
This is a connection we need to be making over and over again: when the mountain of federal debt finally collapses of its own weight, the younger generation will be hurt the worst. Most of the people who fomented the crisis will have long since passed on, or be comfortable in their retirement because of the assets they were able to accrue at taxpayer and lobbyist expense. They will have gotten what they wanted: time in the sun, running things, letting others pay them obeisance, getting respect they don’t really deserve. Either they are too stupid to realize what they are doing to the next couple of generations, or they are too mendacious to care. The sooner the younger generations learn the con job that has been perpetrated on them, the better.
China expresses some … um … “concern” about whether or not it will ever see its money back:
The Chinese prime minister, Wen Jiabao, expressed unusually blunt concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that the securities would maintain their value in the face of a global financial crisis.
Speaking ahead of a meeting of finance ministers and bankers this weekend in London to lay the groundwork for next month’s G20 summit, Mr. Wen said he was “worried” about China’s holdings of United States Treasury bonds and other debt, and that China was watching economic developments in the United States closely.
“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”
Just a little? There’s an old saying to the effect of “if you owe the bank $1 Million, then the bank owns you; if you owe the bank $1 Trillion, then you own the bank.” China’s feeling pretty nervous because it knows it can’t sell its holdings except at a tremendous loss — both from the normal discount expected, and from the fact that it is by far the largest mover in the market (e.g. what do you think would happen to Microsoft stock if Bill Gates started selling off?) — and it doesn’t see a whole lot coming out of Washington to instill confidence.
But there’s no need to fret PM Jiabao! Unnamed economists are here to save the day:
While economists dismissed the possibility of the United States defaulting on its obligations, they said China could face steep losses in the event of a sharp rise in United States interest rates or a plunge in the value of the dollar.
Whew! That was close. Nothing but a little market risk to worry about there, Jiabao. Default? Pffft … never gonna happen.
Back in the land called “reality” however, default is plays a bigger part since, aside from reneging on the debt, there are only three other ways for the government to pay for its spending binge: higher taxes, printing more money, or borrowing. Higher taxes impedes growth and leads to less revenue. Printing money leads to hyper-inflation. So, even though those two choices will be used to a certain extent, further borrowing is the only viable alternative to default. But who’s going to lend to us?
The bulk of China’s investment in the United States consists of bonds issued by the Treasury and government-sponsored enterprises and purchased by the State Administration of Foreign Exchange, which is part of the People’s Bank of China … much of the Treasury debt China purchased in recent years carries a low interest rate, and would plunge in value if interest rates were to rise sharply in the United States. Some financial experts have warned that measures taken to combat the financial crisis — running large budget deficits and expanding the money supply — may eventually create price inflation, which would lead to higher interest rates.
This puts the Chinese government in a difficult position. The smaller the United States stimulus, the less its borrowing, which could help prevent interest rates from rising. But less government spending in the United States could also mean a slower recovery for the American economy and reduced American demand for Chinese goods.
It may just be the case that China’s best option is to support its investment by propping up its best customer with yet more loans. Unfortunately, that means that Washington will have little incentive to slow down spending (since it owns the bank). The nasty little cycle of borrowing > spending > inflation > rising interest rates > falling dollar, will continue necessitating even more borrowing. China, in turn, will have serious questions about the value of its investment, and the US will start having serious discussions about declaring a default.
In short, China’s not just “worried” about the current fiscal mess. It’s crapping its collectivist shorts.