The Bailout

Dammit.  I usually find the reserve to just keep on talking about timeless issues, the human condition, and problems that persist and grow.  But this is just too much.  While I’m still going to avoid talking about the election and such, I just have to talk about the bailout.  It can no longer be avoided.

The source of my agitation is this article (http://www.thesmokinggun.com/archive/years/2008/1007083aig1.html) from the Smoking Gun.  Essentially, the executives of AIG have, days after the $85 billion bailout, thrown a massive executive party at a resort in California.  Now, let’s be honest, this article does slant the situation in the obvious direction.  But don’t they just bloody well deserve it?  I mean, seriously.  These people are seriously threatening even my steely impartiality and objectivity, if I do say so myself.  What on earth are these executives thinking?  Was the whole thing a scam and they simply no longer care because we’re all going to economic hell anyway?

OK, first, let’s be fair.  The invoice tells us that the vast majority of the funds were spent on either rooms or food and not on luxury services like spa services, exploding cakes, urinating ice statues, and the like.  Although there were sizable figures under those categories, to say that they spent a fortune (relative to the $450k price tag) would be improper.  I don’t want to pore through their invoice because it’s a limited source of information anyway, and you can only extract so much information from it.  Anyway, it seems to me that the exorbitant cost of their retreat resulted from their choice of location rather than any particular absurd excess.  Whether or not they might have simply gotten a convention hall for an executive summit is debatable, but any argument we might have lacks all basis because we have no context.  It’s highly probably there is a good reason why that location was chosen, possibly to secure ties to some other company or maybe something as small as associates of the company involved with the resort.

All that said, dammit, do you guys care that little about our money?  That $85 billion is supposed to be saving your asses, not letting you party like it’s 1929.  They must have known how this would look, which only strengthens the possibility that there is a good reason we aren’t seeing.  Of course, Occam’s Razor says they’re just partying because they feel like it and don’t give a damn if we despise them for it.

The basic issue at hand here, though, is not corporate irresponsibility.  In a perfect world, CEOs and executives can do whatever they want with their money.  However, the critical point here is that it must be their money.  The second that they control money they don’t actually own or have legitimate authority to manage, we have a problem.  Of course, that’s exactly what the government has done.  The government extracted that $85 billion from us against our will with the vapid promise that it was *still ours.*  Of course that’s nonsense because we have absolutely no control over how it’s spent.  So they give it to big corporations because those big corporations can incentivize the people in power however they need to in order to get a piece of that pie.  They’ll figure it out if it’s possible.  You can’t build a system that will get the job done properly that will not be open to willful subversion to the same degree.  If you count on intent, then intent will be its weakness.  If you count on structure and checks, then structure and checks will be its weakness, and so on.  If you count on open violence, then open violence will be its weakness.  It doesn’t matter on what motive power the government is managed, it can be subverted by an appropriate strategy because the only way it can’t give money to the wrong hands is if they can’t give money at all.  Anyway, I’m getting off topic.  My point is that those bankers now control a great deal of “our” money, so it pisses us off when they do stuff like this, and rightly so.  We’ve been robbed on the promise that we would get something in return, and later we were deprived even that (as usual I might add).  If there were no public money floating around, then why should it irritate you if these CEO’s throw flagrantly irresponsible parties?  You already got your goods or services rendered.  Just like how they don’t care if you burn that plasma TV after you buy it, you don’t care if they burn your money once you’ve paid for that TV.  It’s not yours anymore- you willfully parted with it in exchange for your new TV.

There are so many unfortunate fools who will blame the companies for this type of fiasco.  What bullshit!  Imagine if you were handed $85 billion dollars on a silver platter.  Well, that’s not strictly true.  Imagine that you could spend all of your assets and have some probability of pulling down $85 billion from the government cloud funds, and it pays off for you.  You’re A) going to party like a wild animal because you’re set, and B) you’re going to keep on using that money to try to get more.  It is obviously a very effective strategy.  Not only that, but there comes a time when they don’t even need to provide the same level of services.  Because when things are in the shitter, they get free money.  Does this sound like a good plan to fix the economy?  No.  These banks are going to do their damnedest to keep that free money flowing.  The only way they would stop would be if they could make significantly more money by actually working.  There must be a significant enough difference that their profits from being honest will exceed the free funds they get while cutting expenses at the same time.  Which probably is never going to happen.

My point is that these executives are being completely reasonable given their environment, even if they’re just being 100% wasteful.  Imagine if you were paid to spend money.  The more money you spent, the more you earned.  In fact, if you were so bad that you were in a constant state of poverty, you would get even more.  I’m not trying to argue that the poor don’t deserve aid, but I am trying to say that this incentive structure is just insane.  It will literally incentivize insanity.  Doing the exact opposite of the preferred behavior is rewarded.  Total madness.  “We want people to be wealthy, so we should give money to people who are poor.”  What the hell?  The banks are actually in this situation.  The worse they are at managing their business, the more money they get from the government, on the grounds that if they fail it will be bad for the economy.  Haha!  It would be hilarious if it wasn’t so sad.

Now a lot of people think that incentives are a crude way to look at humanity.  I would agree.  However, incentives provide a direct model upon which complications can be built.  It’s like how we discovered algebra before we discovered complex numbers, but the discovery of the complex numbers doesn’t invalidate the process of algebra.  Deeper structure to the human mind and personality doesn’t change the fact that they judge by application and comparison of incentives or utility functions.  If the deeper structure would predict that someone would pick a free $5 over a free $10 then your model is broken, no matter how complex or interesting or otherwise intuitive.

In fact, models tend to be constructed to formalize specific inconsistencies in the way that the world is filtered.  Fallacies are easily communicated through analogy, models, and other constructions.  For example, it seems perfectly logical that gun ownership would cause crimes involving guns.  Very intuitive, right?  The more guns there are, the more likely people will be to use them because they will be more available.  Actually, this is not the case.  In fact, I would wager that gun crime goes down if you decrease, or increase, the supply of guns.  The gun-control-slanted middle area is where the most crime involving guns will take place.  Those who really want to can legally acquire them, and they can be reasonably sure that nobody else will have one.  If you make them harder to acquire, it goes down a little.  Although crime might remain equally high- it’s just crime with guns that would probably go down.  However, if you increase the supply of guns, then the thugs no longer have the same certitude that they will not be met with lethal force.  Even if the probability that the person they’re mugging will be armed and belligerent are small, they only have to do it numerous times before statistics kills them.  Knowing this, a whole slew of crimes such as violent crime, muggings, robberies, etc. all would be expected to drop.  This is of course a theory only moderately supported by evidence, but it’s a reasonable hypothesis that deserves further testing.

Before I end this post, I want to talk about positive obligation.  There is no such thing.  Who cares?  Well, how come it’s possible to take out a loan which your children are then responsible for, even though they never spent a penny of it?  Irresponsible and morally reprehensible for the person, sure, but how come it’s even possible?  Simply put, it’s because the people lending the money are the people with the money.  They get to decide how those loans are paid back.  And it is true that if some loans where the client dies are paid back, it makes capital cheaper and more available.  This somewhat stimulates the economy, and at the expensive of only a little moral questionability.  This is acceptable to the people lending the money, and they have a legitimate case to make.  However, the day my government can spend money it doesn’t have on the good faith that I’ll pay interest on it?  Not a chance.  I’m not old enough to have a stake in the vast national debt.  So I just won’t.  If they make me pay for it, I will, but not because I want to.  I’m not going to put myself in a difficult position or enter direct conflict with the government- that’s just foolhardy.  You can’t fight them- they’ve got everything from the army up to and including the nuclear option.  So don’t.  Just do what they say, but keep to principles.  They can threaten you.  Let them, and accede to their demands.  Very simple.  It’s the mob.  You don’t pay, your life gets difficult.

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