Obama’s double standard on bailouts?

Today’s topic: Is there a good reason for keeping the Obama administration intimately involved in the firms it aids in Detroit but not the firms on Wall Street?

Complete Dust-Up: | Day 2 |

Why good governments don’t run industries
Point: Matt Welch

The premise of the question is inaccurate. The federal government currently owns AIG -- we’ve thrown more than $182 billion into that sinkhole thus far, fired the CEO, subjected his government-appointed replacement to repeated congressional grillings under oath, directed the company’s expenditures, then topped off that busy six months with a proposal to give the federal government “unprecedented new power” to take over any financial firm it deems untenably precarious. Though President Obama has gotten his hands dirty with effectively firing General Motors’ CEO and delivering bizarrely detailed lectures about consolidating “unprofitable brands,” the degree of control Washington has exerted over the two industries (roughly speaking) does not compare.

Here’s a useful example, especially when we’re talking about the efficacy of federal involvement in private industry: Back in October, the government partly nationalized nine banks, using $250 billion in taxpayer money. What’s already been mostly forgotten is that some of the institutions, notably Wells Fargo, did not want the money because their assets weren’t all that toxic and because with great Washington “investment” comes great political meddling. But bailout logic required forcing the government onto a comparatively healthy bank, lest the more needy recipients see their share prices battered.

Fast-forward to February, when the Associated Press reported that Wells Fargo was doing what it does every year: rewarding its top employees with an extended corporate retreat in Las Vegas. “These guys are going to Vegas to roll the dice on the taxpayer dime?” Rep. Shelley Moore Capito (R-W.Va.) thundered, incredulous. “It’s outrageous.” Needless to say, the trip was cancelled.

Now, do lavish retreats really improve a company’s bottom line, particularly in a climate in which Wells Fargo lost $2.3 billion in the last quarter of 2008? I would suspect not, but the fact is, I really don’t know. Neither does Washington. What Washington knows is newspaper headlines and public outrage, and so when the federal government sinks its hooks into private industry -- even forcibly -- you will see such spectacles as the Terry Schiavo-like bill retroactively taxing a single firm’s bonuses, bonuses that, however outrageous, amount to less than one-tenth of 1% of the AIG bailout alone.

Now, lest anyone think I’m rising to the defense of lousy executives, let me be clear: I want these people to fail. That is, I want bad decisions to be punished in the most efficient and pitiless way possible: by the marketplace. What I do not want is an open line of credit from my wallet to theirs, as legislators chase headlines and the president makes still more undeliverable promises about “never again.”

So here’s one answer to the question: Yes, any company that seeks corporate welfare -- and not just bailouts, either; I’m talking about stadium subsidies for the New York Yankees, or farm-bill handouts to John Mellencamp’s family -- should expect in return maximum and unpredictable meddling from the feds. I would be happy if the cost of doing business with my money is more expensive, because that way I might keep more of it or at least feel better about the way it was spent without my consent.

But for those who don’t share those goals, while hoping along with me that economic recovery comes as quickly and enduringly as possible, I fear this is not the most sound approach. There’s a good reason why all of Europe -- yes, allegedly (but not really) socialist Europe -- has been methodically selling off state ownerships in nearly every single sector while expressing skepticism at Obama’s nationalization binge: Governments are lousy at running businesses. Nothing the administration and Congress have done with their new companies has indicated otherwise.

Matt Welch is editor in chief of Reason magazine.

Bankers wrecked the auto industry
Counterpoint: Dean Baker

It is in fact very difficult to see any policy reason why the Obama administration feels more need to run the auto industry than the financial industry. After all, it was the greed and incompetence of Wall Street that is most immediately responsible for the devastation in Detroit.

The Big Three’s executives have committed many sins over the years, but General Motors and Chrysler would not be facing bankruptcy right now if it were not for this economic collapse. This is important to remember, and in my view provides most of the rationale for the bailout. Even Toyota and Honda, which are generally viewed as the world’s top car companies, have seen their sales drop by more than 30% compared with a year ago.

Because it was the bankers who wrecked the auto industry, it makes it especially difficult to stomach a situation in which Detroit gets micromanaged while the Wall Street crew continues to do business as usual. This is especially galling because pay scales on Wall Street are so vastly out of line with compensation elsewhere in the country.

Many pundits have expressed outrage over the fact that United Auto Workers members get paid $57,000 a year. The top Wall Street brass can earn more than 1,000 times as much.

Even worse, the Obama administration’s latest plan for dealing with toxic assets will reinforce these pay patterns. By subsidizing the purchase of these assets, banks will be able to substantially reduce the losses that they have incurred, in effect having the government directly pick up their bad bets. In addition, some investors will be able to take advantage of the taxpayers’ generosity to make large sums on assets that they might have purchased even without the subsidy. We may see some of the hedge and equity fund folks clear hundreds of millions or even billions at the taxpayers’ expense.

It would be interesting to hear an explanation from the administration for the difference in its treatment of the auto industry and the banks other than the fact that the banks have more political power. It is not clear what such an explanation would look like.

Dean Baker, co-director of the Center for Economic and Policy Research, writes on economic reporting at the American Prospect’s Beat the Press blog.