Welcome To Capitalism…

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This could be interesting: Reuters is reporting that “Edward Liddy, chief executive of AIG, is scheduled to appear with other witnesses before the House of Representatives capital markets subcommittee…” Will members of the committee ask the really deep questions? We’ll see.

As anyone with a t.v. or a browser surely knows by now, there’s been a big brouhaha in the news lately about the $165 million worth of bonuses the (notorious?) AIG is supposedly legally bound to pay members of its financial products division – the same folks who brought on the company’s downfall by selling lots and lots and lots of credit default swaps. Before we get too outraged about these bonuses, though, consider a couple of facts. First, as morally reprehensible as the bonuses are, they amount to less than 1/1000 of the roughly $180 BILLION bailout (which, if all goes according to plan, the government should be able to recoup anyway – these are loans, not grants). But more importantly, if the contracts promise bonuses for sales (rather than for profits), the salespeople over at AIG’s financial products division clearly did a bang-up job! They were wildly successful at selling their product – that’s why there’s a crisis! Of course, since sales usually lead to profits, it’s not surprising if businesses commonly “incentivize” sales per se. But it seems to me that what we’re currently witnessing (not just at AIG, but throughout the financial system) is the cost of incentivizing sales and profits independently of their broader social effects… or even independently of their broader corporate effects. The outrage should not be directed at a few executives and salespeople. It should be directed at the socially unconscious profit-motive itself (Adam Smith not withstanding; Smith’s “invisible hand” presupposed individual morality). But the politicians certainly aren’t ready to go there… yet.

By the way, I’m NOT suggesting that socialism or communism is the answer. But I do think that the capitalist world had better get down to the task of revamping the economic system so that producing socially responsible (that is, non-destructive on some reasonable social cost-benefit analysis) products is incentivized, rather than just sales and profits of any old product. Pushing for that, combined with regulation of the sorts of over-leveraging practices and complex derivative products that led us to this point, seems to me to be the most worthy outlet for outrage.

UPDATE 3-19-09: Well, I’ve watched part of Liddy’s testimony, and it turns out that none of those bonuses recently paid out to the financial products division of AIG were “performance bonuses”; rather, they were “retention bonuses”. That is, they were not rewards for sales or profits, but rather simply incentives for the employees to remain with the company… to undo the damage they had done. So here is a new way to make sure that you prolong your job, no matter how badly you do it: just design products that are so complex that no one else can understand them, and so destructive that your services will be needed indefinitely, if only to defuse them.

Is it just me, or has the world become one huge Dilbert cartoon?

2 thoughts on “Welcome To Capitalism…

  1. From what I’ve heard, the bonus contracts are also based in England, which has stricter laws making it much harder to break contracts. The only way out would be thru special legislation by congress. There is a lot of posturing going on by our politicians, but hopefully it is only a show for their constituents. If they really were to do something like that, it would undermine our credibility and legal system.

  2. I agree. Even Obama seems to be indulging in a little demagogy here, but I suppose he feels the political need to jump on the bandwagon – or to grab the reins and actually drive it.

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