President Obama today:
“When I saw an article today that indicates that Wall Street bankers had given themselves $20 billion worth of bonuses, the same amount of bonuses as they gave themselves in 2004, at a time when most of these institutions are teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don’t provide help then the entire system could come down on top of our heads, that is the height of irresponsibility,” President Obama told reporters.
“It is shameful.”
I will never defend Wall Street pay practices as they are basically indefensible, but I think the President chose his words poorly. If it is irresponsible for bankers to spend money they’ve borrowed from taxpayers, is it not equally irresponsible for the administration to spend money they’ve borrowed? Now, I know that many will draw the distinction that the bankers are enriching themselves and politicians are spending the money for the public good (as dubious as I and others find that argument), but that is a moral question, not one of responsibility. If the President meant that is was irresponsible for the bankers to spend the money when they need to replenish their balance sheets, that is not a moral question but one of judgement.
The President is outraged about the bonuses and rightly so, but this is what happens when government intervenes in markets. There are always unintended consequences. How much would have been paid out in bonuses if the government hadn’t stepped in with new capital for the banks? What would banks have done if the government hadn’t forced capital down their throats? Without taxpayer capital the banks would have faced some tough choices. Do we cut our dividend? Do we pay bonuses this year? Do we sell new stock or debt to raise capital? Government funding allowed them to avoid those hard choices.
The stimulus package that is about to pass in Congress and be signed by the President is no different. It will allow us to borrow and spend and avoid the hard choices. How is that any different than what the bankers did? It is every bit as irresponsible for the administration to borrow money and spend it as they see fit. The banks and the country face the same problem – a lack of capital. Neither will replenish their capital by continuing their past spending practices.
President Obama said something else at the presser for Geithner that I found interesting. He said something to the effect that the banks shouldn’t be doing this while we’re trying to “dig our way out of a hole”. Maybe Mr. Obama hasn’t done much manual labor so I’ve got a news flash for him. You don’t dig your way out of a hole. The first step in the process of filling a hole is to stop digging. That applies to economies as much as holes. Please stop digging.