Helicopter Money vs. Stolen Bonuses
Money is hard to keep in perspective, especially when the bad guys steal yours.
This week Americans discovered that we are to pay multi-million dollar bonuses to the very AIG executives who bankrupted the company (a fairly small part of AIG called the Financial Products Group in London). Many of the recipients no longer even work at AIG. The claim that we had contractual obligations to pay them is silly – these guys would get zero but for the bailout. Any semi-conscious lender would bust these contracts as a condition of the loan.
What? Treasury Secretary Geithner removed limits on compensation in the bail-out bill? Oops.
Made-for-cable outrage. We are shocked to learn that federal bail out money ended up in the bank accounts of the bankers we are bailing out. Shocked.
This is where the problem of perspective comes in. Our city is ablaze, the firefighters are out in force, and although it is irritating to see looters pocketing the family jewels, it is a poor reason to stop fighting the fire.
Americans have lost $13 trillion worth of housing and stock market value since mid-2007. A $30 trillion global economy is actually melting. Employment riots are happening every week, China is starting to tremble and is suddenly a nervous lender (although it announced its case of the jitters the day after Hillary complained about Tibet). The EU, the world's biggest economy if you can call it that, is utterly paralyzed. There is precisely one person on the planet with the power to turn this thing around and he has spent the past week doing damage control because an economically trivial mistake was politically pitched for prime time. The ill-gotten AIG bonuses are less than one percent of the $200 billion we are lending AIG. It will cost us a lot more than that if the AIG bonuses become the legislative lever that lets the Senate tie up Barack Obama's recovery plan.
Did Geithner screw up? Yep. But his job, after all, was to keep the financial system from collapsing. Given that AIG was not remotely the only company being bailed out, it would be astonishing if Geithner HAD focused on small, ill-advised expenditures like this.
Now self-righteous populist indignation cascades from Washington like a mighty river. Republicans attempt to outdo Democrats in their disdain for unworthy rich bankers. Fingers point randomly at potential villains as Congress rushes through a bill to impose a 90% tax on any bonus from any company getting any bail-out money — a sure-fire approach to create very bad legislation. Remember this scene next time someone tells you that we should nationalize our banks.
Even the financial press has lost perspective. The Wall Street Journal leads with the AIG bonus story but tucks below the fold the news that Ben Bernanke's Federal Reserve is preparing for a bit of "quantitative easing", which means that the Fed will open wide the sluice gates and flood the land with liquidity. Specifically, the Fed's Open Market Committee will double its purchases of mortgage-backed securities from $600 billion to $1.25 trillion and buy another $300 billion of student and other loans or related securities.
Translation: grab your bucket Martha, the government is dumping a trillion dollars from helicopters. Since the fed cannot lower interest rates below zero, they have decided to crank up the printing presses. But since cash is only a tiny part of what we call money, they don't print money, they buy back government debt. Of course they have to be prepared to take the money out again when the time comes or we start looking uncomfortably like Zimbabwe.
Note that Congress did not approve this move. The Fed controls monetary policy without Congressional oversight (legislatures cannot sensibly rule central banks and almost nowhere have the power to do so). As a financial stimulus, this dwarfs anything that the Treasury Department could do on its own.
How will this help the economy? Well the Fed buying up every mortgage in sight means that mortgage rates are going even lower. This can represent real, permanent stimulus for homeowners who refinance. In 2008, the average rate on a 30 year fixed mortgage was about 6.50%. If the Fed lowers this by 200 basis points to 4.50% and all homeowners refinance, households would have roughly $200 billion per year to spend. It works out to about $2,000 per household that refinances (although at a time when home values are down and unemployment is up, not everyone will be able to refinance). It should push rates on auto and student loans lower as well.
Helicopter Ben did not make headlines, but compared to the $1.50 per household that Congress wants to seize from naughty bankers, he stands a much greater chance of actually defibrillating the economy.
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