No Rewards for Failure

As someone who admits to not being an economy wonk, it’s difficult for me to write from a position of authority.  Indeed, I think America is in the midst of taking a crash course in macroeconomics, and the learning curve is pretty steep.

Still, I think there are a few basic concepts that I can hammer out here.

The first is that the economy is not made up of independent moving parts that can be replaced or dropped completely, it’s not a simple machine with easily replaced parts; you don’t just drop out a gear and put in a new gear and all of a sudden everything is working again.  Everything is interconnected, and the major institutions have their own gravitational pull.

Okay, bad example the last thing I want to do is replace one complex system (the economy), with another complex concept (astrophysics).

Suffice it to say that it appears to be the rule of the game that a lot of the institutions that we see in the news lately wouldn’t just go under by themselves.  There’s something like a drag effect, the larger the institution and the more connections it has with other institutions in the market, the more the health of the economy relies upon the survival of the institution.  If that institution is allowed to fail completely, it will drag down with it other institutions which will create even more undertow on other institutions, and so on and so forth, creating, potentially, a chain reaction.

What does this mean?  That as painful as it is, a bailout of some form or another is probably the only near term solution available.  The institution must survive in some form or else other institutions will collapse in their wake.

This also means, however, that rescuing these institutions does not mean that the people who instigated the failure should be in any way rewarded, nor does it mean that the institutions should be allowed, or even trusted, to operate under the same parameters that they once operated under.  Doing both or either would be unprincipled, unwise, and unfair.

You would possibly save the economy from complete and total implosion now, sure, but you would do nothing to change the culture of Wall Street in such a way to make it more responsible and less safe.  Thus, you would have failed to create a long term fix to the problem.

Senator Obama on the topic:

As of now, the Bush Administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness, and reform.

First, there must be no blank check when American taxpayers are on the hook for this much money.   

Second, taxpayers shouldn’t be spending a dime to reward CEOs on Wall

Third, taxpayers should be protected and should be able to recoup this        investment.

Fourth, this plan has to help homeowners stay in their homes.    

Fifth, this is a global crisis, and the United States must insist that other nations join us in helping secure the financial markets.

Sixth, we need to start putting in place the rules of the road I’ve been calling for for years to prevent this from ever happening again.

And finally, this plan can’t just be a plan for Wall Street, it has to be a plan for Main Street. We have to come together, as Democrats and Republicans, to pass a stimulus plan that will put money in the pockets of working families, save jobs, and prevent painful budget cuts and tax hikes in our states.

And that’s got the hallmark on it.

This is a fairly reasoned and measured response to the past week, as well as a decent framework within which to work out a long term solution as opposed to an immediate and irresponsible flop plan.

From Paul Krugman comes Chris Dodd’s plan, an alternative to the no-strings-attached $700 Billion bailout that would install levels of oversight as well as penalize executives.  This rings to me to be about just right; saving the organizations but not rewarding the failures that put them in this mess to begin with.

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