The real problem is Washington's riverboat gamble on saving the economy with free money.
Members of the Obama administration have taken turns deploring the billions of dollars in year-end bonuses the finance industry is getting ready to hand out. Never mentioned is what they think firms should do with the money. Give it back to their customers? Spend it on office decorations?
Firms can't just wish away revenue sitting on their books. That's an accounting crime. More to the point, aren't surging banker bonuses amid a general downturn the proximate and necessary outcome of Washington's recovery Heimlich, which involves doling out free money to banks and artificially goosing asset prices?
After all, whatever sloppy incentives are introduced into the mix, Ken Feinberg is on hand to fix them by fine-tuning banker pay. Voilà, Washington has figured out how to stoke a credit bubble with one hand while making sure with the other that it feeds only good and sound "long-term" purposes.
Of course, Mr. Feinberg's clever calibration of carrots only works with the seven bailed-out firms under his direct control. As he grandly told PBS, "The private marketplace should be able to have the flexibility to adopt these programs on their own."
Unpack the ironies and contradictions in that sentence.
Mr. Feinberg is no dummy. Everyone knows the folderol about bonuses is a substitute for tackling the political challenge of "too big to fail." His every explanation has consisted of pleading political necessity over good judgment.
Yet the urgent problem now isn't TBTF, or even banker bonuses. These are distractions. The urgent problem is the giant riverboat gamble that Washington can save the economy by doing what comes naturally—spending money carelessly, creating massive new entitlements without funding them, dishing out cheap credit to politically favored sectors, telling business people where and how to invest.
Mr. Feinberg is an apt symbol indeed, for this gamble is built on the conceit that Washington can hector the recipients, whether auto companies, banks or homeowners, into behaving in ways that are "responsible." So far, however, human nature is proving a disappointment: Take the outbreak of tax fraud related to the government's emergency home-buyer's credit.
Nor is the larger gamble looking so good either. Banks continue to fail at an alarming rate, the dollar is under assault, and Washington is looking at a future of trillion-dollar deficits. One might have guessed it would take a decade of Obamanomics to produce European welfare state levels of youth unemployment, but at 18.5% we're there.
About the only positive sign is the price surge in normally uncorrelated assets—stocks, bonds, commodities, gold—as fund managers use cheap credit to play the carry-trade opportunity.
All this might be defensible if time were being bought to clean up an accumulation of past excesses. Instead, the president is creating a new one. It's no exaggeration to say the Senate health-care bill taking shape is the equivalent of climbing aboard a train about to plunge into a canyon and deciding what it really needs is a bomb on board.
By one metric alone, it might succeed—somewhat reducing the numbers of those who tell pollsters they are "uninsured." But it does so in a fashion reminiscent of the means the Clinton and Bush administrations used to raise the homeownership rate from 64% to 70%—which produced the subprime wreckage around us.
The Senate bill includes a mandate requiring all citizens to buy health insurance, but the penalties have been progressively weakened. Insurers, though, would still be required to take all comers, including the already-sick, and charge them a standard rate.
Kaboom—a monumental incentive for Americans not to buy health insurance until they get seriously ill.
Which leads us to a question: When are Ben Bernanke and Larry Summers going to have a quiet conversation about how to steer Team Obama off its suicide mission?
We know they were recently rivals for the Fed chairmanship. We know the Fed itself has become compromised. But who else is there?
The Fed's three-decade habit of rescuing the financial system from episodes of failed risk-taking has crossed into absurdity in the current crisis. Half the Fed's brain wants banks to lend out the massive reserves the Fed has been creating on bank balance sheets. The other half fears if these reserves ever leak into the real economy, it will fuel an inflationary blowout. Yet it still might be possible to muddle to a lasting recovery. It depends on real confidence emerging at some point to replace the short-term grab for gains created by zero-rate borrowing.
Real confidence is what the Japanese, our predecessors down bubble road, have lacked and still lack. Real confidence means real "reform"—the hopper is hardly barren of ideas, like raising the retirement age, enacting the Breaux Commission's Medicare proposals, instituting a flat tax and eliminating the tax distortions that every serious economist knows contributed to the housing bubble and the health-care bubble.
"Change," to borrow a mantra, has to start somewhere. Over to you, Ben and Larry.
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