AIG Bonuses and Political Will

Simon Johnson writes on TPM Cafe:

Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs - no one likes oligarchs, but their factories employ a lot of people. There is naturally resistance - pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment. The question becomes: does the government have the “political will” to get the job done?


It is striking that Ben Bernanke now asks whether the United States today has sufficient political will.

The term that I have used in the past is ‘political legitimacy.’ Solving a financial crisis requires a government with enough political legitimacy to ‘rearrange’ the status quo—reduce the debts of some people, force other people to absorb losses, all for the common good.

To be truthful, I didn’t think that the AIG bonuses were such a big deal. But the government’s arguments that these bonuses are contracts that can’t be broken completely misses the point. In a financial crisis, governments *have to* break contracts…that’s what they do (just think about the Obama mortgage plan, which modifies mortgages for a whole bunch of people…and mortgages are contracts too).

If the Obama Administration does not stop the bonuses because they are ‘contracts’, it becomes much much much harder to do the other contract ‘rearrangement’ that needs to be done. They waste their political legitimacy on something small.

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