March 20, 2009 7:51 pm

Not populism but opposition

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On Thursday, in a fit of legislative rage, the US House of Representatives passed a bill that was scarcely longer than a spray-painted slogan, and about as well thought out. It voted to tax at 90 per cent big bonuses paid to executives of companies that get money from the troubled asset relief programme. “Retention payments” – bonuses – worth $165m had been paid by the financial products division of AIG Seven employees were scheduled to get more than $4m apiece. Since the financial products in question include the credit default swaps that precipitated the global financial meltdown, and since AIG would have been bankrupt had it not received $173bn of government funds over the past year, the public insisted that AIG be not just stopped but punished.

There were good arguments against legislating vindictively. First, in just six months, AIG’s employees have unwound a thousand billion dollars’ worth of its riskiest positions, and AIG cannot afford to lose their expertise. Second, a deal is a deal, and the bonus contracts were signed before the start of the bail-out. Third, this is a scattershot remedy. By hitting employees of all major Tarp beneficiaries, it will reduce the competitiveness of the whole US financial sector. These arguments have been ineffectual because the public’s gripe is not with the arguments but with the principles behind them.

The fury of US voters over the past few days has been cast as populism, but it is something slightly different. Populism implies that the protesting class is subjugated by, or at least socially subordinate to, the class against which it is protesting. That is not the case here. It is the middle class that is most upset and, while it has not exactly thrived of late, the new economy has not required it to shine anybody’s shoes. For years, though, the level at which executives were paid was an affront to middle-class common sense. The explanation has always been that the pay is fair but in ways too complicated for non-financial specialists to perceive. This was taken to imply a mix of hard work and unbelievable genius. The case for stratospheric executive salaries in the financial sector has been destroyed along with the global finance system. Bonuses to AIG’s financial products division are a powerful symbol that executives will not understand this unless they are made to.

What until recently looked like discontent with a slow economy is starting to look like opposition to a system. People who speak for, or simply from within, that system lack the standing to calm the public. Honest men such as Edward Liddy, appointed chief executive of AIG in September, find themselves in indefensible positions. Mr Liddy, testifying before Congress, won a certain amount of sympathy by asking his employees to “step up and do the right thing” by giving back half their bonuses. But if the bonuses really are necessary to retain key workers, as Mr Liddy has argued, how is paying them back the right thing? Mr Liddy’s own faith in AIG’s compensation model has been shaken in ways that he himself may not see. He is from another era.

Suddenly there is a distrust of all insiders. Opacity is impermissible. Everything has to be public. Barney Frank, chairman of the House financial services committee, threatened to subpoena Mr Liddy if he did not reveal who got the bonuses and how much they got. In New York, a court granted Andrew Cuomo, the city’s attorney-general, the right to make Bank of America (which received $45bn from the Tarp) disclose the names of those paid bonuses by Merrill Lynch last year. It cannot be otherwise. Some knowledgeable observers say the AIG bonus recipients are duping the public. Others insist the bad apples have left AIG, and those who remain are valuable servants of the public interest. But we cannot know until we know who they are.

Similar uncertainty surrounds the public-private partnerships that the Treasury envisions will buy toxic assets. Most Americans are inclined to believe private capital will be better able to price arcane financial instruments than government will. But is that because the market works better than government or because the old “players” know where the bargains are hidden? Americans are beginning to view those who wrecked the financial system like the secret police in a former communist country – you need to keep them from wreaking havoc in a new sphere.

So people want to take the fixing of the system into their own hands. Now that the internet has solved the organisational problem of mobs, they can, with the results that we saw this week. Politicians struggle to stay ahead of popular discontent. Within about 72 hours, Barack Obama moved from resignation and fatalism to oratorical outrage, promising to use every means at his disposal to claw the bonuses back. The president is in some ways a politician of the next generation. But in other ways he is little more than the custodian of his party’s wish list as it existed before last September. He was no less blind to the looming AIG bonus debacle than was Mr Liddy.

The process set in motion with Tarp and continued with Mr Obama’s stimulus plan is starting to outrun people’s ability to understand or predict it. Reform becomes ad hoc. The old ways lose their logic. Americans are all brought up to believe there should be no taxation without representation. Once the government has agreed to fund 80 per cent of AIG with its citizens’ money, on what grounds can those citizens be denied a say in it? If government forces General Motors to abrogate the pay agreements it has made with unions, does that release AIG from its contractual duty to pay bonuses? Most people have looked to the Great Depression and the New Deal for clues about will become of US society in this downturn. It is unlikely to provide a reliable basis for prediction.

The writer is a senior editor at The Weekly Standard

More columns at www.ft.com/caldwell

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