With the nation set ablaze by irresponsible corporate antics, the American public is searching for someone to blame — and all fingers now point to AIG.
AIG has become the red herring of the recession, blamed for a system-wide failure. In this economic downturn, amid firings and foreclosures, people’s despair is turning to anger. Every witch hunt finds a witch, and in this one that witch is AIG, to be burned to rid the nation of evil. In accord with the hysteria of the masses, Congress has called for an inquisition, demanding the return of the AIG bonuses.
It is an outrage that huge bonuses are being paid out in a company that has failed on many levels, but these bonuses were set in place at the beginning of 2008, before the government took control of AIG. They are retention bonuses to keep employees from leaving. The people responsible for the mess are gone. The bonuses are legal contracts that must be paid or the government will be sued.
It is true that AIG, 80 percent of which is now owned by the government, has played a huge part in the destabilization of the whole system. It is also frustrating that $165 million (if not more) of taxpayer money paid for AIG bonuses, but one should not lose sight of the big picture and allow this witch hunt to distract from the real problem: frozen credit. If AIG fails, the whole system will go with it.
Along with questions about the bonuses, there have arisen questions about the merit of the bailout. The people’s goodwill and President Barack Obama’s remaining political capital are being drained. People feel their hard-earned money is being wasted on Wall Street and feel abandoned by the government on Main Street. Because of the AIG debacle, trillions of dollars loaned to failing financial institutions are being doubted as the right path to economic recovery. But the bailout of the financial system is still necessary and the right thing to do.
The biggest factor in this recession is the freezing of credit. Without the flow of credit, the whole economic system fails to operate. Individuals willing to buy now-plentiful homes or cars cannot. The banks are hoarding their money to recoup their losses from the housing bubble. Small businesses cannot get loans to expand or cover their payroll, forcing them to lay off employees and thus expand the downward economic spiral. The trillions being loaned to financial institutions are not going to the banks or the investors on Wall Street, but ultimately to every American bearing the burden of this economic crisis.
Searching for a scapegoat is meaningless and sidesteps the bigger issue. The real culprits of this great recession have been developing for 30 years. Deregulation, artificial growth and the CEO culture of Wall Street is one side. A culture of overspending and over-borrowing through credit cards and subprime loans, a lack of saving and the erosion of income growth from year to year is another. And the government’s irresponsible policies and insufficient attempts to address the long-term problems facing this nation is a major one.
While AIG played a big role in worsening it, the recession is the product of a system-wide failure. Main Street, Wall Street and Washington are all responsible. Once the economy recovers, there will be time to fix blame on the real causes of the economic crisis. The hope is that Obama can survive the recession with enough political capital to fix the system. In their call for heads, Congress and the masses are like the Puritans of Salem and the McCarthyites of the Cold War. In a witch hunt, everyone gets burned along with the guilty.
Kalvin Southwell is a sophomore majoring in economics and history.