Stop Rewarding Failure

There has been a lot of talk in the news lately about the outrage over the bonuses (165Megabucks) AIG is giving its employees. But the most surprising thing is that all the talk, from congress, from AIG, and from the media, is about how they cannot avoid giving the bonuses because of contractual obligations. What a load of disingenuity that is!

Many, many employers are currently forcing their workers to take paycuts during this downturn. My own employer is compensating us with unpaid leave, which is very nice of them, but we didn't have any options about the temporary paycut. AIG could do the same thing. But they say these are "retention bonuses," not performance bonuses. They also say these people are only working to shut down the company, which contradicts the "retention" bit.

These bonus are a giant fraud, and congress is complicit by putting up with such lame excuses. The media is also complicit by spending so much time reporting on the lame excuses, instead of pointing out how lame they are.

Even worse than the excuses, however, is the proposed solutions. Congress is proposing to withhold the bonus amounts from the next payment to AIG, or to tax the company to recover the amount. All the solutions have one theme in common: the people get to keep their bonuses, and the company pays the penalty for them. This means that no one is being punished. Fining a company does not hurt those to make the poor decisions, because they just deduct the amount from the balance sheet and spread the harm over all the shareholders, while their own salary and bonuses remain unchanged.

The only real solution to the crises we face is simple: STOP REWARDING FAILURE. If the banks were allowed to fail because of the bad types of loans they made, those loans would stop and bankers would remember the lesson. The bailouts just reward the decision makers for their bad decisions, and teaches them they can continue making bad decisions and count on the government to bail them out next time too. The automakers are talking up how poorly their companies are doing so that they can get bailout money too. And the lesson all big business owners are learning is that failure pays big dividends from the government.

But that's nothing new. The public education system has been practicing that policy for decades already.

Bailout/Stimulus mania

Just in case anyone has not noticed this pattern, I wanted to spell it out clearly.

Congress passes the bailout on Oct 3, 2008. Between Oct 3 and Oct 9, the DOW drops 20% and stays down.

The senate OKs the stimulus on Feb 9, 2009, making it clear that it will pass shortly, which it does on Feb 14. Between Feb 9 and now, the DOW has dropped 21%.

Lesson: government meddling in the economy is the worst thing that can possibly happen.

The next worst drop in the DOW is Nov 18-20, 2008, when congress was discussing bailing out the automakers. The DOW dropped 10%, but congress decided against the bailout and the DOW quickly recovered.

What would happen if we let the insolvent banks fail without government interference?

On Mar 7, 2008, Bear Stearns stock lost 80% of its value, the failed company, and was acquired by JPMorgan. The DOW was down 4% between Feb 29 and Mar 10, and quickly recovered.

Lehman Brothers filed for bankruptcy on Sept 15, 2008. The DOW dropped 7% from Sept 12 to Sept 17, but regained that 7% two days later. I cannot call it an actual recovery, because the bailout was only 2 weeks after that.

Lesson: Business failures, even big ones, are minor blips in the economy.

So the word "mania" in the title is meant in the sense of "dementia", not "craze".