More on AIG bonuses

Hi all,

As usual, many of you had interesting comments on my March 19th note on the AIG bonus scandal. Louise (my former wife) replied: “Thank you for the thoughts.  I just can’t buy these arguments.” She no doubt reflects widely held attitudes about these bonuses, corporate remuneration more generally, greed and excessive risk taking by financial sector players, and the government’s role in the mess (at least I hope that there is public anger over that too). My Bulgarian friend Nedialko Dumanov (a banker) raised questions in his reply that give me a second shot at explaining my own outrage. His note and my reply are followed by some additional comments by some of you. Thanks so much.


Hi Warren,

First for AIG bonuses – it is a crime. Bonuses for bringing a company to bankruptcy! Retention bonuses – it is funny. If these managers were wise and smart why does the company need hundreds of billions governmental aid?! How could people who produced huge loss could be valuable employees?!

Where is the free market economy? What about competition and comparative advantages of countries? Why should companies who did not performed well and made huge losses be given hundreds of billions, which they will waste as they did with the previous billions?!! It is terribly stupid to give money to someone who has proved that he can not manage them properly!

If I had US dollars I would sell them immediately.

Nedialko [Bulgaria]


Dear Nedialko,

The retention bonuses were not for AIG management. They were for employees expected to leave AIG’s sinking ship to work for competitors who were thought to be vital to efforts to contain the losses the products they created were causing. As a shareholder of a company I would want to pay what it takes to employ people who increase the long run profits of the company by more than they are paid (thus increasing the value of my shares). If their remuneration takes the form of part salary and part performance bonus, that might work even better. However, the use of bonuses has clearly gone wrong in some, maybe many, cases by focusing too much on short term performance and by creating incentives to fudge the accounting. The remuneration of top management sometimes seems grossly excessive as well.

When AIG reported a $11.5 billion in annual losses for 2007, it also announced the resignation of Joseph Cassano (the guy most responsible for those losses) as head of AIG’s Financial Products division, “saying an auditor had found a "material weakness" in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to "retain the 20-year knowledge that Mr. Cassano had." (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.)”[1]

What can and should be done about such abuses? I believe in letting supply and demand set the price (remuneration package) as long as competition is unimpeded. Imposing limits/caps on what the market can pay when supply and demand would set a higher price is rarely successful. If a firm wants someone and is not able to pay the salary/bonus needed to get him or her, it is hard to prevent the two from finding some other (equivalent but less efficient) way to reach a deal. Babe Ruth and Steve Jobs are unique and worth paying almost anything to get. But such cases are extremely rare. There are dozens of very talented men and women who are able to do outstanding jobs at leading Citibank, GM, or Microsoft. It is very unlikely that one of them is so uniquely qualify relative to the others to be worth $34 million per year. So what has gone wrong in the market?

Managements sometimes appear to be enriching themselves at the expense of owners. Something is wrong with my rights, or the use of them, as a shareholder to evaluate and control management (and employee) remuneration. Corporate governance needs strengthening. There may be other sources of this problem as well. Let’s see what we can learn from the current experience.

Within weeks of its first public disclosure of losses in February 2008 AIG’s compensation committee offered retention bonuses to several hundred Financial Products division employees. Later AIG’s new, government appointed boss, Edward Liddy, argued, as I stated in my previous note, that these employees were important for negotiating the unwinding of Credit Default Swaps they had created. Without them, he argued, the liquidation of the Financial Products division could cost tax payers much more. I am in no position to evaluate the veracity of Mr. Liddy’s claim, but it seems plausible to me that the guys who made the deals are the best ones to undue them.

More alarming than the public’s reaction to AIG’s retention bonuses was the reaction to how AIG used the $173 billion received from the government. Serious questions have been raised about the need to bailout AIG (actually its separate Financial Products division, as its insurance units are fine) in the first place, but the reason, justified or not, was that its failure could spread losses to other creditor financial institutions causing a cascading domino of failures the economy could not easily absorb. Thus it should not be surprising that much of AIG’s bailout cash went to honor its obligations to other financial institutions. At the top of the list of beneficiaries was good old Goldman Sachs. However, it was the large payments to foreign banks (Societe Generale, Deutsche Bank, UBS, Barclays, BNP Paribas) that drew the most criticism. U.S. entities, including the U.S. government in a very big way, receive hundreds of billions of dollars of financing from foreign banks, governments and others every year. If these foreign lenders suspected that their repayments were in doubt—that, for example, American banks (or the likes of AIG) would discriminate against and not fully honor their obligations to foreign lenders, the American financial system would collapse. It really would be another great depression. The American government would be forced into default on its huge debt as no one would be willing to buy it or hold what is already out there. No one would finance stimulus packages, bailouts, or wars in Iraq and Afghanistan, much less the regular parts of the budget that exceed tax revenue.

The congress that (perhaps) foolishly authorized the funding for these bailouts in the first place began stomping its feet (rather too late) demanding its (our) money back. Fine, but to seek to deny payment to people who had already done the work they promised to do or to tax it all away after the fact was a series and damaging over reaction, though tax payers did seem to want to punish AIG employees even if it cost them more in higher taxes because of higher bailout costs. “White House Chief of Staff Rahm… Emanuel said that although the anger of the public and Congress is understandable, ‘everybody woke up the next day, took a deep breath and realized, let’s not govern out of frustration.’”[2] Thank God for that.

I urge you to read Robert J. Samuelson’s column "American Capitalism Besieged", in today’s Washington Post. Here are two quotes from his op-ed piece:

“Schumpeter, one of the 20th century’s eminent economists, believed that capitalism sowed the seeds of its own destruction. Its chief virtue was long-term — the capacity to increase wealth and living standards. But short-term politics would fixate on its flaws — instability, unemployment, inequality….

“But Schumpeter’s question remains. Will capitalism lose its vitality? Successful capitalism presupposes three conditions: first, the legitimacy of the profit motive — the ability to do well, even fabulously; second, widespread markets that mediate success and failure; and finally, a legal and political system that, aside from establishing property and contractual rights, also creates public acceptance. Note that the last condition modifies the first two, because government can — through taxes, laws and regulations — weaken the profit motive and interfere with markets.

“The central reason Schumpeter’s prophecy [that capitalism would not survive] remains unfulfilled is that U.S. capitalism — not just companies, but a broader political process — is enormously adaptable. It adjusts to evolving public values while maintaining adequate private incentives.”

Best wishes,



Yeah, this is a lot of hot air, and it’s largely stupidity if not outright demagoguery.  If someone pays me a “bonus” to ensure that I stick around and I do stick around, they damn well better pay up.  If AIG management thought it prudent to make such commitments to employees contingent on nothing else but the always implicit avoidance of bankruptcy, then they have to live with it.  If the current shareholders — now largely the U.S. government — think that was irresponsible, they can fire or otherwise penalize those managers.  That horse, however, has largely left the barn since the government asked Mr. Liddy to come out of retirement to keep AIG from careening into bankruptcy.  Instead of having AIG-FP folks commit hara-kiri, as Sen. Grassley so obscenely suggested, America would do better to have a few dozen members of Congress fall of their own swords, very real swords.  And if they don’t have swords, a quick jump from the top of a House or Senate office building would suffice.

[Kelly Young, Washington DC]


Hi Warren

I think you are right about what you said.   But the distaste for the actions that Congress has had to face over the last few months trying to control what has happened I think has frustrated so many of the Members.  Had the Treasury for example gone up to Congress early and laid out the issues it was facing to Members like my old boss Chuck Grassley and explained it to him I don’t think you have had him go off the way he did.  Here you have one of the tight fisted guys I have ever met… and the stories I could tell you about that would make you laugh for weeks.  As it doesn’t make a difference if it’s his money or the governments money (he has returned over $100,000) a year from his office budget which we often told him by doing that it is then used for those that go over their budgets each year, it has never made a difference to him, he did not spend the money. 

For him to be voting for some of these bail outs goes completely against his grain.  Then to find out from the press that a company like AIG was giving out those size bonus’s to people that ran the company into the ground and at the same time expecting billions in tax payers money because they are too big to go under it does not make since to reward them.  They should be I am sure in his mind feel lucky they still have jobs.  They should want to stay and help revive their own reputations.  Who would or should hire people that did what they did to that company.  I think that is some of the feelings going around the hill.   Sort of what is the next shoe to drop, what are we going to be surprised by tomorrow.   I think they have had it up there in dealing with these kinds of issues …finding out about them after the fact.  I have seen Senator Grassley several times take on an issue such as this one when he feels someone or some group is stonewalling him on information.  But when he gets the information and understands that the taxpayers are getting the best they can for whatever the issue is then you will see that they will someone that will work with them.  It’s a matter I think of being blindsided and frustrated so yes maybe Congress does deserve some of the blame.  But when they are asked to do what they are doing they do have a right to know all the facts and when they are not given them they react the way they are.  Their phones are ringing off the hook from their constituents yelling at them for what the government is doing by propping up these failed companies with their tax dollars.  Many of them don’t feel its right.  So they are squeezed the whole issue. 

So yes maybe they are wrong for saying all that and reacting the way they do, but much of that could have been dealt with had they not been blindsided by issues like this.  There are 500+ members that feel they voted and did the right thing without knowing they were approving issues like this.   And know its coming back to bite them in the butt too.

Ed  [Redfern, Washington DC]


I read with great interest, Warren.
And I understand the outrage at the, well, outrage. Politicians love their TV time and soapboxes. And America reacts tot he transparency of big payouts, something you and I knew but that, in our transparent culture, is coming to light for many more for whom the dollar figures seem extraordinary.
But I keep coming back to this:  if the US taxpayer is paying, bailing out, contributing, then we get a say in how and why the money is spent and accounted for…I am not seeing that accountability. The CEO of Fannie Mae waves his huge salary for a year (probably not going to change his lifestyle. And considering the robber baron CEO who came before him, the decimation of their business, and the struggles of their current and laid off employees, the big wigs taking a hit seems fair to me). But then four others get 1/2 million dollar bonuses.  Now? 
These stories are so rampant, the big paydays are still coming for some, and the US taxpayer is paying for it and thus taking the hit.
I understand the demagoguery that’s happening and question that, of course. But I don’t think it’s just the optics that seems off about what’s going on behind the scenes.
On another note, hope you are well!

David [Singleton, Washington DC]


Hi Warren,
Welcome home.

I agree with you on this, even though I am a member of the proletariat. Although I’m not sure that they were all retention bonuses. I read somewhere recently that up to half went to people who have already left AIG, and many of these people are non-US citizens who live, consume and invest abroad. That doesn’t smell right, in my opinion.

All best,

Ken [Weisbrode, Florence, Italy]


Thanks, Warren.  I love all of this talk about government taxing the bonuses away.  First, not being a tax lawyer, I question Government’s ability to impose a tax on money that has already been earned and paid (which would make it a wealth tax, as opposed to an income tax).  Second, I question whether the targeting of such a specific group of individuals with a law (when they have broken no existing law) is not a Bill of Attainder (an area of Constitutional law with which I admittedly know little, but the idea is that the Government can not target specific individuals with its laws).
The most depressing trend in all of this had been the willingness on the part of Obama and the vast majority of the Congress to disregard legal boundaries such as the idea that contractual rights should not be cavalierly thrown aside because they yield a distasteful result.  This trend is also seen in the idea that bankruptcy judges should be given a power to alter mortgages that were not made with the understanding that their terms could be unilaterally altered by a judge (which would have affected the calculus of those making the loans).  This reminds me of the story of Argentina which, around the turn of the last century, was recognized as one of the most potentially economically potent countries in the world but pissed it away through populism (in a parallel to our circumstances, Juan Peron actually alleviated economic problems at one point by prohibiting evictions).  Mitt Romney said that he feared this country would become the "France of the 21st Century."  I am worried that, if we don’t watch our step and get back to disciplined respect for property, we will become the Argentina of the 21st century.
Later- Jim [Colt, Washington DC]


I agree.  A knee jerk political response to a case of business judgment.   Retention is a legitimate risk as an ongoing concern.  No on going concern means the fed loans default.
I’m not sure why we thought the political DC and NY States Attorney would act any differently.  The dog spots are still in the same place.
Dan [Mariottini, Washington DC]



Can employees quit after receiving retention bonuses? If so, they are not retention bonuses.

Regarding the rule of law: When Condi Rice ordered Stanford Social Science dean John Shoven to cut a department; he arbitrarily cut the Food Research Institute. I asked the new dean, Wally Falcon, how Stanford could do that inasmuch as the Institute was established with Herbert Hoover’s money for a specific contractual purpose. "We have our lawyers," he said!    

I’m sure there is a way to abrogate AIG contracts if the government really wants to. How about a retention-bonus tax to be applied when the employees don’t have to stay, have "defrauded the public," or a tax on "excess" bonuses for bailed out executives. I know this is a slippery slope, but I though we would see more creativity out of government lawyers.

You are hoping that Obama will come to his senses? These are his senses!


Jim [Roumasset, Hawaii]

P.S. Do you think Larry Summers has lost a step or two? He used to be more articulate. Maybe getting beat up by Harvard women cost him. "Names will never hurt me," indeed!


Nice to hear from you. I have a somewhat different view on the government’s actions.

First, it is very much the pot calling the kettle black for members of Congress and the president to criticize the financial practices, compensation, and perks of the financial companies when they can’t control their own government’s ridiculous spending, debt, and complete failure to properly handle the idiot beggars at its door.

They dare to propose suing companies as shareholders when they sit there with sovereign immunity as they attempt to impose slavery through the financial practices of the government and Federal Reserve. And then they dare to use force (taxation) to steal what they failed to properly supervise through their police power when they made those ridiculous bailout packages initially.

As I mentioned elsewhere previously, I don’t think there should have been any bailouts, stimulus, or anything else. Those banks, however large, should have been allowed to crumble like the World Trade Centers by their own ignorance instead of at the hand of terrorists.

The banks had no business financing all that crap, and without government assistance they would have probably renegotiated the mortgage loans on their own or otherwise tried to either salvage the business or cut loose the losses by simply forgiving loans and issuing 1099s for debt forgiveness, in which case the owner of the home would have a house to protect, would owe taxes to the government on the debt forgiveness, and the shareholders in the banks could sue the directors if they so choose, as it is their responsibility to look after the managers of their company, and unlike voters, they are voluntary participants in the ‘company.’

Now, instead, the government has ‘extended a helping hand’ by destroying the government’s financial credibility (as no reasonable person could expect the debt to be repaid, which means the fuse is lit for a complete meltdown).. Banks that were deceptive and greedy in their loan practices, leading along simpler people without the sophistication to understand monetary policy.. Weakened by the crisis, the government is breathing new life into bullies so that they can continue to financially abuse people while driving up the federal debt on which people also pay taxes. I don’t think the crisis is over. I think it has just begun.

I think the next great act of terrorism is going to come from militias in the United States, not from Muslims, who, of course, were not so greatly affected by the financial ‘crisis.’ When the Muslims hit, they killed their victims. Others were merely angry observers. What the financial community, government, and fed have done has inflicted great injury while leaving the victims alive, hurt, scared, and of course angry, often with little or nothing to lose. Good luck making peace with that group before they take out Washington once and for all.

Congratulations, Wall Street and Washington! You have worked a miracle! You have given radical Muslims and the extremist right-wing neo-Nazis a reason to work together to blow Washington D.C. off the map!

David [Garland, Richmond VA]


[1] Matt Taibbi, "The Big Takeover" March 19, 2009

[2] Michael D. Shear and Paul Kane, "Obama Looks for Calm in a Firestorm" The Washington Post, March 22, 2009, Page A10

AIG Bonuses

The issue of bonuses is complex. In some societies, Christmas (or year end) bonuses are a traditional way of sharing the risk of how well a firm does each year between firms and their employees. In poor years, employees share the firm’s fate by taking home less (no bonus or a smaller bonus). The signing bonus in sports increases a star athlete’s salary above and often millions of dollars above his or her fellow athletes. In the case of sports we all recognize that the club owners pay such big bucks out of the desire to maximize the income of the club for their own benefit. Generally we cheered the lucky athletes for their great skills and for getting some of that money for themselves (earlier rules in base ball, for example, imposed monopoly like restrictions on recruiting that kept more of the clubs’ incomes for the owners and less for the players).

Companies have also increasingly fashioned stock options and other bonus incentives (partially influence by tax laws) as a tool for rewarding above average performance and increasing the firm’s profits. For senior management (and financial market traders) performance bonuses were some time VERY large. Many shareholders (and society at large) are increasingly questioning whether bonuses as structure today do in fact increase shareholder value. The practice needs and will get a serious review by shareholders.

Weaknesses in corporate governance may make it difficult for shareholders to properly monitory or control the salaries and bonuses senior management give themselves. If performance bonuses are a reward for improving the firm’s profits, something has gone wrong if bonuses were paid in 2008 when many firms made losses. The structure of bonuses in many firms, especially financial firms, reward very short term profits (making loans) without sufficient regard for the longer run impact(loan repayment) of investments made today. Thus long run profits were sometime sacrificed for very short run gains. It is fair to say that in many instances the bonus system is broken and needs to be fixed.

The outcry over AIG $165 million in bonuses paid this week, on the other hands, seems largely misplaced. First of all they are not performance bonuses. They are retention bonuses—bonuses paid to keep valuable knowledge employees from leaving a sinking ship. Chief Executive Edward Liddy, appointed by the government in September 2008 as part of the government’s infusion of $173 billion, “said he knew about the bonuses since October but determined that they could not be legally altered. He also said he believed the retention bonuses at the financial products unit were necessary, so that competition would not take AIG’s best minds away…. I am trying desperately to prevent an uncontrolled collapse of that business,” he said. “This is the only way to improve AIG’s ability to pay taxpayers back quickly and completely and the only way to avoid a systemic shock to the economy that the U.S. government help was meant to relieve.”[1] Losing the staff with the inside knowledge to unwind AIG’s credit default swaps and other complex instruments could cost the tax payers a lot more than the bonuses for keeping them.

From here the story gets totally bazaar and ugly. The fact that the government had put tax payer money into AIG gave the government a responsibility to ensure that those funds were used as intended in the public interest. But Congress’s reaction to the bonuses demonstrated some of my worst fears of the likely consequence of government involvement in “private’ enterprises. Congressional rantings befitted a ship of fools. No one can deny that many businesses (and investors) have made foolish and costly mistakes. At least in the beginning they thought they were doing so with their own money, which sharpens the mind. AIG’s bonuses may or may not have been good business decisions (saving the taxpayers money), but it is laughable to think that Congress can make wiser ones. What are we to think of Congressman Barney Frank’s complaint that: "These are not the people you want to retain — you need to get people who understand the mistakes and undo them,"[2]

The Federal Reserve (which provided the initial $80 billion bailout money last September) approved the bonuses last fall. Pointing figures at who knew what, when only undermines the credibility of Congress and the Administration and is irrelevant. Fannie Mae, which is now fully owned by the government, is paying four top executives retention bonuses of over one million dollars each. In this instance, at least, the government (FHFA) considers the bonuses a sound business decision.[3] One of the most ludicrous rants from Congress, and there are many to choice from, came from Congressman Paul Kanjorski, D-Pa "Why wasn’t this committee informed? And do you realize that the actions that you take at AIG and took in this precise case not only impacts AIG … but it may have jeopardized our ability to get a majority of this Congress to support further legislation to provide funds to prevent a recession, depression or meltdown?" It is hard to believe that these are the words of an adult.

Congress’s and the Administration’s demands that the AIG bonuses be stopped, and then after they had been paid that they be returned, ran into the constraint that these are valid contracts made with people who had other options and that we still believe (most of us anyway) in the rule of law. Such contracts can be abrogated or renegotiated in the contact of bankruptcy but AIG is not operating under bankruptcy rules. Congress’s rantings can be dismissed as the political posturing that it is. After all few of us are happy about out of control bonuses that don’t really always seem to be serving the interests of (long run) shareholder value. But the efforts today to pass tax legislation to tax back most of AIG’s bonuses reveals a big brother mentality that is truly scary. Sadly President Obama has joined in the demagoguery. The government has already increasingly intruded into the internal affairs of a growing list of company. “Late last week, Kovacevich gave a talk at Stanford University, complaining about how unfair it is that the government forced his bank to take $25 billion in bailout money last year when it could have easily raised private capital — and then compounded that outrage by changing the terms of the deal and forcing Wells to cut its dividend.”[4]

In my opinion the financial sector crisis is being resolved and is about over as a result of actions taken by the Federal Reserve. The sight of a hysterical and vindictive government willing and able to bully the financial industry and potentially any other area of the economy is dangerous and threatens to derail or at least delay the market’s return to health. Investors will be more reluctant to restart investing and lending under these conditions and the economy cannot recover until they do. I hope that President Obama comes to his senses soon.

[1] By David Goldman and Jennifer Liberto, "Tug of War over AIG Bonuses" CNN, March 18, 2009

[2] Ibid.

[3] Zachary A. Goldfarb, "Fannie Plans Retention Bonuses as outlined by the Government", The Washington Post, March 19, 2009, Page D01.

[4] Steven Pearlstein, "Wall Street’s Dangerous Refusal to Learn", The Washington Post, March 18, 2009, Page D01.

Travel Notes for March 2009

Hi from Astana


When I first started coming to Kazakhstan in 1992 I was struck by the dramatic difference in the quality of customer service in the post communist country and the standards of the non-communist world. Under capitalism we make money serving others and you can make lots of money serving others better than anyone else. In the communist world, they explained to us, “they (the government) pretend to pay us and we pretend to work.” Service was begrudging and lousy. In fact, Hyatt and other international hotel chains refused to establish hotels in Almaty for a several years because they concluded that it would be too difficult (costly) to train local staff in the service levels expected at four star hotels around the world. Today, the Hyatt Regency I stay in when in Almaty and the Radisson I am staying in now in Astana provide excellent service, which is to say normal service. Impressive progress has been made toward the service orientation of capitalism. You can’t appreciate the transformational nature of this reorientation of incentives unless you have seen both.


Even in the United States we have abdicated standard setting and enforcement in a growing number of areas to the government. I guess we are wealthy enough to afford it (i.e., to absorb the costs and inefficiencies of government rather than private provision of almost anything). But there are limits beyond which we will lose the wealth from which we afford such wastes. I was thinking of this while looking at the water purification facility hidden in the back of the Intercontinental Hotel I stayed in for three weeks in Nairobi a few weeks back. If Western travelers had to rely on third world government standards and enforcement of water purity, food quality, etc. (even electricity), we wouldn’t travel to the third world. What we rely on and trust in is the greedy self interest of international hotels to protect their reputation as clean and safe places to stay anywhere in the world.

International Cooperation

International cooperation is useful if not essential in almost every area of life. The need for different power plugs in different countries and driving on the left some places or on the right in others, stand out as examples of where cooperation on standards falls short. But modern technology overcomes some of these areas of limited standardization. We do manage to send emails and visit the WWW anywhere and from anywhere in the world seamlessly. Making payments anywhere is getting easier. Thus I was struck when leaving Nairobi two weeks ago with a “final” security check point (those at the gates after having passed one to get into the boarding area) at the entrance to the gate waiting room and another one on the other side of the room on the way to the plane. Guessing that the first one was Kenyan and the second one British Air, I ask the Brit at the second one why the guys at the first one didn’t trust him (my way of trying to be nasty). He shrugged and said that their two governments had not yet managed to negotiate an agreement on the matter so they were both required to have check points. More over, if I were arriving by in the U.S. in Atlanta, I would have to take my shoes off and go through it all again before being let back into the country. Fortunately this is not the case when arriving as I am at Dulles in Washington DC. There is more work to be done

Buy American—Dumb and Dangerous

The every thing but the kitchen sink stimulus package bill (I can’t remember its cute name) included Buy American restrictions on where the money could be spent (this particularly upset our Canadian friends whose economy is highly integrated with ours). This is dumb (it reflect ignorance of basis economics) because if we can’t buy cheaper better foreign goods and services, foreigners will not have the dollars with which to buy our relatively cheaper, better goods and services (ever hear of comparative advantage?). Increases in American exports were the one positive factor keeping our economy going last year. No jobs will be saved by “buying American”, they will just be shifted into less productive areas lowering our (and the rest of the world’s) standard of living. Every college student who has taken basic economics knows this. It is dangerous because it could lead to a rise in protectionism around the world (Buy Kazakh, Buy Russian, Buy German, etc) of the sort that was a major cause of the depth and duration of the Great Depression when retaliatory tariffs were raised all over the world in response to high tariffs in the U.S. Do we never learn anything?

The return of Marxism?

This is a dangerous time in many respects. One is the danger of a backlash against capitalism, despite the great wealth it has helped create and the huge increase in the standard of living of hundreds of millions of people around the world that it has made possible. We must address its weaknesses and vulnerabilities very carefully and thoughtfully. The economic Forum I participated in here in Astana, was full of anti-capitalist rhetoric. Ed Phelps, a Nobel Prize winner in economics (Bob Mundell, another Nobel Prize winner in Economics was also participating in the Forum), made the absolutely stupid proposal that the American banking system be restructured with government subsidies to focus on business lending. The chair of my panel, the last of the day, ended by quoting Marx (Karl not Groucho) favorably. Those of us who believe in the virtues and merits of capitalism (and this includes most of Obama’s team despite some very disappointing moves toward bigger government) have a big challenge to defend it in the coming years. This will require some adjustments in the government’s regulatory role and improvements in macro policies that contributed to the current crisis, in the never ending search for the best balance (partnership is the currently popular word) of the public and private sectors.

All the best,