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Tuesday, March 17, 2009

Why These Bonuses Are So Toxic for Obama

Do you know why the Whitewater scandal went nowhere while the bribery scandal involving William Jefferson ended his career? It's really simple really. One was simple and easy to understand while the other was rather complicated. The public had no patience trying to navigate all the complicated land deals in Whitewater. Now, when the public heard that the feds found money in Congressman Jefferson's freezer, that they could understand.

That's the first serious problem for the Obama administration. When someone starts to say that AIG is too big to fail, that is a difficult concept to wrap someone's arms around. Credit default swaps and other innovative financial instruments are things that the public doesn't really understand. The public really doesn't understand what it means that the financial world is interconnected and allowing AIG to fall would have ripple effects throughout the world. So, while the public isn't necessarily happy with these bailouts, it doesn't quite have the effect of something simple. The same is true of the stimulus package itself. The public knows that it's expensive but no one knows if it will work. In fact, to know if it will work requires significant understand of sophisticated economic concepts, and intelligent economists of all shapes have serious disagreements about it.

Now, when the public hears that executives at a bailed out company received hundreds of millions in bonuses, that they understand. (it's also why the budget full of pork barrel earmarks is so devastating) Such an event reaffirms all their deepest suspicions about politics and the cynicism of those in power. Since these bonuses are tied to Obama's bailouts, they are immediately laid at his feet. A complicated scandal usually goes nowhere. A simple scandal has real teeth. This is a very simple scandal.

The second reason is wrapped up in a term I have used before, the drip factor. In fact, I predicted something like this a few weeks back. The drip factor is when a series of bad news starts to eat away at a candidate until the entire policy is rejected. The best example was Iraq from 2005-2006 when the daily death toll finally turned the entire nation against the war. Something similar is happening to President Obama's domestic policy. The public was unsure about the stimulus however a popular president was going to get his first initiative even if there was some trepidation. Then, President Obama introduced a program to bail out borrowers and even more people turned away. Then, he signed a budget with nearly 9000 earmarks. Then, he proposed a future budget of nearly $4 trillion and announced that the deficit would balloon to nearly $2 trillion. Now, we find out that AIG, one of the companies he bailed out, is paying failed executives bonuses. Every policy has only so many drips until it is rejected, and it appears President Obama's policy may have reached its allotted amount.

So, the president had better get out ahead of this and his task is simple. He needs to stop these bonuses at all costs. Ironically enough, if he is able to stop them, he can turn this into just as much of a victory as it looks like a loss now. If he does, the public will get behind him. If he can't, he is in trouble of having the public reject his entire economic platform.


Anonymous said...

This is right Mike. His overall approval rating is high, but his approval rating over the handling of the banks is only about 48% according to a recent CNN poll.

Geithner and co. have to get on this situation sooner rather than later.

Anonymous said...

I guess the real question remains: if we let AIG go the way of Bear Sterns and Lehman Bros, will there be another round of panic selling?