A solution for those absurd banker bonuses

Paul Krugman is pissed about the bankers who have lost hundreds of billions of dollars, and have yet paid themselves large bonuses. Maureen Dowd is also pissed. She wants disgorgement - she wants to get the money back. Of course, many, many, many people are pissed. I would say the "pissed off" group includes pretty much every American who does not live in Greenwich, Connecticut or various neighborhoods in Manhattan.

I would like the money back as well, but I don't want it back by demanding back their bonuses. I'm going to take the logic that justifies these bonuses just a bit further.

There are a couple of justifications for paying people in the financial industries lots of money. First, there's the idea that they earned it. If I negotiate a deal worth $100 million, and I negotiate a 1% fee, that means that I get $1 million. And I get it because I negotiated it, and all parties agreed to it. I am selling my services for what they are worth. That's the free market at work. I have no problem with that. I've benefited indirectly from that system; I used to work at an investment bank as a secretary, and I got good bonuses because the people that I worked for negotiated good fees for our company.

The second justification for paying large bonuses is that if you don't pay your best people well, they will leave and go elsewhere. There are a couple of problems with this argument at this point in time. First, where are they going to go? Pretty much all banks are in the same boat. Second, if your bank just lost tens of billions of dollars, then the people who work for your bank are not very good at their jobs. Seriously, would you want "Lehman Bros. mortgage bond trader" on your resume right now?

But let's take this justification at face value. The idea is that people who provide essential services should be compensated well for providing those services. Lawyers who negotiate extremely complex contracts should get paid more than ambulance chasers. Investment bankers who negotiate multibillion dollar LBOs should be paid more than people who arrange standard mortgages. As I wrote above, that's the free market at work.

But let's think about this a little differently. Right now these banks and other companies are in dire straits. The federal government is providing an essential service by bailing them out. Some people think we should be demanding partial or total ownership of these banks in exchange for our money. We're handing over large checks, we should get equity (this is Krugman's argument). But that way, some would argue, lies socialism, and banks should not be nationalized. I tend to agree. I'm not in favor of the government running my bank, even if it's in serious trouble.

When lawyers negotiate deals, they don't ask for equity in the deal, unless there are unusual circumstances; they get paid straight fees. Bankers might get equity, and venture capitalists by definition do get equity. So some equity in exchange for the taxpayer's money is a good idea, but it will not work for the whole deal.

So let's get back to this idea of high fees for essential services. The government is definitely providing an essential service to these bankers and insurance companies, and all their assorted associates. How can we charge them high fees for these essential services?

Simple. Raise their taxes. The Bush administration lowered taxes for the wealthy, arguing that would stimulate greater economic growth, because individuals are better stewards of their own money than the government. That argument is not working all that well right now.

I would love to see Republicans try to argue against raising taxes right now. I understand that raising taxes in a recession is supposed to be a recipe for disaster, so maybe we can wait six months or a year. But we are definitely providing essential services to rich people right now.

Rich people argue that they are wealthy because of their own initiative. This is true to an extent, but not the whole picture. They are capable of acting on their own initiative in ways that make them wealthy because they live in the United States of America. If they lived in Zimbabwe, no matter how resourceful and ambitious they are, they would not be wealthy (unless they were part of the corrupt ruling regime). The government is not only providing essential services right now by bailing out the financial system, it has been providing essential services for decades. Centuries, even. A reasonably effective, if often flawed, judicial system. An excellent, if often flawed, educational system. Roads, airports, etc.

One large problem with this bailout is that if the banks et al. lose huge amounts of money, even if they don't pay bonuses, they don't pay negative bonuses. Even if we get every dime of the bonuses back, all $18 billion, that's still a tiny fraction of the money required for the bailout. We can't make these bankers pay us directly for providing the essential service of bailing them out. And even if we could get money from them, it still wouldn't be enough.

One of the essential services that the government is providing is a form of insurance. The FDIC works because it is an insurance company, of sorts. Banks pay insurance premiums on their deposits; the FDIC uses that money from the premiums when it has to bail out of savings and loan or a bank. That's what the (former) $100,000 limit was for; deposits were insured to $100,000. Now it's $250,000.

There is no official insurance fund for the bailout, besides the Troubled Asset Relief Program, but that is an ad hoc insurance program, developed on the fly. The insurance fund that the banks are relying on is the pool of money that is the United States government's ability to borrow money, which is, in turn, backed by the financial stability of the United States as a whole. So, in a sense, the taxes that we all pay are payments into this insurance fund that we call the United States government that is bailing out our financial system. This is, in a sense, another version of the "essential services" that we, as a country, are providing to bankrupt bankers. We are providing them with ad hoc, made-up-on-the-fly insurance coverage for their mistakes. The problem is that they haven't paid into the insurance fund as fully as they should have; that's why the federal government has a huge debt.

So, to make sure that the insurance fund that we call the US government is fully funded, we need to charge the people who rely on that insurance fund the proper premiums. Which, in this case, is called "raising taxes." I think we should start with the capital gains tax.