Obama Threatens Recess Appointments Eight Months Late
Industrious Revolution: Econ 210a, Introduction to Economic History at U.C. Berkeley, February 10, 2010

Well, That Was Quick!: Everybody on Obama on Blankfein's and Dimond's Bonuses

Ed Luce gets my defense of Barack Obama's unwillingness to go for full-fledged bank-bashing out onto the intertubes:

Obama says bonuses are part of free market: However, others pointed out that Mr Obama has to walk a fine line between the need to share the anger and pain of the voters on the bonuses and the objective of talking up asset prices to encourage the big banks to lend. They also pointed out that JPMorgan Chase, in particular, withdrew from the subprime market well before the crash and thus helped counterbalance the speculation.

“It is a very difficult line for the president to walk,” said Brad DeLong, economics professor at Berkeley. “This isn’t 1933 when there is zero private investment and when you can call out the money changers in the temple. There are opportunities to talk up asset prices and get more credit flowing and Obama needs also to pay attention to that.”

Mr Obama’s shifting rhetoric may also be a consequence of the breakdown in bipartisan talks in the Senate over the White House’s financial regulatory reform legislation.

Last week, Chris Dodd, chairman of the Senate banking committee, said talks with Richard Shelby, the ranking Republican, had failed. “The Republicans have chosen a scorched-earth strategy,” said Mr DeLong. He added: “They believe their success lies in the failure of everything the president tries to do.”

Me? I think Wall Street CEOs wealth needs to be tied to their firms: if their firms go broke--or would have gone broke in the absence of government rescue--they should go broke. Bank shareholders ought to be writing compensation contracts that enforce that, as indeed Silicon Valley VCs do.

And since bank shareholders don't write such contracts, the government needs to change the law to force such Silicon Valley compensation schemes onto the banking sector.

That said, I think Jamie Dimond deserves all the money he is getting: JPMorganChase was a stabilizing speculator in the financial crisis, doing what we want it to do, he showed a great deal of guts in guiding the bank to a position short subprime before the crash, and he should be rewarded.

Lloyd Blankfein I'm not so sure of. Yes, he got Goldman Sachs out of the subprime business and hedged its mortgage risk before the crash. But he did that by having the firm take on an enormous amount of AIG risk--and they did not do their due diligence on AIG.

My guess is that Goldman Sachs would have gone bankrupt in the fall of 2008 without government support, and that JPMorganChase would have survived--the only very large bank that would have survived, I think.