Why the AIG bonuses seriously piss me off

[elfs]

There is only one way in which "wealth" and material value is created: something of an inferior utility is converted by labor and human creativity into something of greater utility. Rocks are smelted into metals; dirt is turned into food and wood; fibers are turned into cloth. Scale and combination give us cars and computers, bars and banks, networks and notepads, all of the material of modern life.

Along the way of creating this modern world, we discovered some important and interesting things about the way people who make stuff get inspired to make more stuff. A whole industry grew up around codifying the value of one's work, of making that codification highly portable, transferrable, and even manipulable in its own right. We discovered money.

But money is only a codification of value, a representation of what others value. The entire point of an investment culture is an ability to say,

I have made things of value, and have been rewarded. I see you make things of value, and I would like to reward you ahead of time in the hopes of encouraging and empowering you to make more, faster, by alleviating your financial burdens and enabling you to hire helpers now, rather than later. If we make this agreement then you agree to return to me some ongoing fraction of your later reward as my reward for having made this investment.

The entire point is to reward smart risk-takers and punish stupid ones, all the while enabling an investment culture that harnesses human creativity into creating more value.

One value people cans seek out is efficiency improvements in this investment system. One of the less obvious places is, say, mortgages: banks give people a vehicle for investment, their own homes, and get a return on their own investment in that vehicle, the mortgage. The assumption is that these homeowners, having a home, are happier than renters, and therefore are more productive. (This assumption has yet to be proven.)

AIG is supposed to be at the forefront of this particular enterprise: their purpose was not to necessarily create wealth so much as to figure out how to reduce inefficiency, to make sure less wealth was lost to the friction of the market. Instead, they slicked the floors with snake oil and pretended they'd not only reduced the friction, they'd figured out how to make things go faster: they'd increased the velocity of money themselves, yet somehow did this without actually creating value.

(Huh... why did I never think of that before? Why did no one else think of it before? Is that some kind of warning signal: can we create an upper limit on the velocity of money, a light-speed barrier so to speak, and when an institution claims to have broken it, can we call bullshit on it? I suspect the actual velocity of money between producers and investors would be hard to quantify in a way that makes monitoring the intra-investor velocity impossible.)

What pisses people off, most notably those of us who don't watch CNBC, those of us who look at our portfolios once a year, make index moves based on the last year's performance, is that AIG is delivering bonuses to departments responsible for this crisis.

AIG is set to deliver over $780 million dollars in "retention" bonuses-- dollars of taxpayer money to the very people who created the need for a bailout. Most of us are still happy to have a job. Some of us are being required to take unpaid leave, and many of us are making concessions to our employers so that they can stay afloat.

Yes, this is a nation of laws. And we can't retroactively break the contracts AIG has with its employees. But why wasn't AIG forced into bankruptcy court so a court panel could review the contracts, as permitted by law? I can't believe the laws as they stand aren't going to change in the next three years, and probably for the worse. And you can bet those who know they're the target of fraud investigations are going to squirrel away their cash somehow as fast as they possibly can.

The anger just grows as you watch the AIG Financial Products Division, the derivatives trading group that helped wreck the world's economy, walk off with $400 million in "bonuses." For what? What are they getting paid for? And why "retain" people who were so obviously reckless?

Man, I'm this close to the pitch and the feathers, I really am.

Comments

[solarbird]

Well, these are observationally derived - that's empirical. And there's an assortment of math (as you guessed) to justify the observations. But since economics is in no small part governed by psychological factors, it's really not like physics, and really isn't going to be.