Friday, March 20, 2009

cutting off the nose spites the face

I don't necessarily believe those AIG employees deserve that $165 million in bonuses. But I do believe it is dumb for Congress to pass a law imposing a punitive tax on bonuses of firms that are getting bail-out money.

Yeah, sure there is the question of the rather odd way the financial sector tends to structure its compensation - bonuses are a normal and expected part of the overall pay, just paid out as "bonuses" to keep base compensation down because there are tax advantages for the companies to do that. I'm fine with fixing that loophole.

But in the short run, this bonus tax is dumb because it might cause the leadership - people who get paid bonuses - of some financial institutions to decide to put their personal interest ahead of that of the shareholders and indeed of the country as a whole and decline federal assistance. That may not cause their bank to fail, but it may well constrain their ability to lend. And that will put a damper on the economy, deflating some of the already inadequate stimulus package and keeping the squeeze on credit a little bit tighter.

I'm sure President Obama will sign it, and a lot of people will cheer for it. But it's dumb. To claw back some of that $165 million, we are undermining the effectiveness of the TRILLION dollars-plus the US government and the Federal Reserve have poured into the system.

And besides, as Steven Pearlstein notes, there are other things we SHOULD be riled up about.

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