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Why Obama Was Smart to Come Out Strongly Against the AIG Bonuses

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Earlier this month, New York Times op-ed columnist Thomas L. Friedman took some heat for writing that he feared the Obama presidency would be "eaten" by the problem of dealing with the banking system.

Less than two weeks later, the White House has had to move quickly to keep Friedman's prophecy from coming true. And the president was smart to do it.

When news broke over the weekend that AIG was getting ready to pay out approximately $165 million in bonuses, it immediately dominated the news, even spilling over into today's coverage. While we can all agree that it is distasteful to pay millions of dollars to these people, in the bigger picture, with all the problems facing the country, there are bigger fish to fry. Unfortunately, for political reasons, it was vitally important for the president to get out in front on the bonus issue.

On This Week yesterday, Lawrence Summers, the director of the National Economic Council, was asked about the AIG bonuses, and he played down the possibility of the Obama administration moving to stop them (even while expressing how "outrageous" AIG's conduct was). He said:

"The government cannot just abrogate contracts."

But a day later, President Obama came out strongly against the AIG bonuses, declaring:

"It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay, ... How do they justify this outrage to the taxpayers who are keeping the company afloat."

As a result, Obama said he has asked Treasury Secretary Timothy Geithner to

"pursue every legal avenue to block these bonuses and make the American taxpayers whole."

I was very happy to see the president forcefully step in and oppose the bonuses, and not just because of how disgusting the idea is that the company that nearly brought down the financial system was rewarding those responsible for causing the near collapse. The political angle was even more important.

There was a danger that the Republicans were going to grab onto the populist anti-bank feelings in the country to position themselves as the party of the people, with the Democrats being cast as the party of the bankers. Factually, of course, we know that this notion is not true. Over the last eight years, a Republican administration and the Republican Congress (for the first six years) treated "regulation" like it was a curse word, allowing the greedy to run amok and bring down the economy in a heap of risky derivatives. Now in control of the White House and both houses of Congress, the Democrats are left to clean up the mess. And it is a mess that has to be cleaned up for the economy to rebound.

But cleaning up the mess will inevitably lead to money being spent to shore up the financial system, and therein lies the danger. Republicans, who are fighting Obama more than they're trying to solve any problems, would certainly point to such aid as proof that the Democrats were looking out for the bankers at the expense of the American people. After all, as the minority party, Republicans can express outrage, but with no obligation to clean up the mess the party left on the president's doorstep.

This is a point Ben Bernanke alluded to in his interview on 60 Minutes yesterday. The Fed chairman said:

"The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis."

He goes on to note that:

"I think the biggest risk is that, you know, we don't have the political will. We don't have the commitment to solve this problem, and that we let it just continue. In which case, you know, we can't count on recovery."

The "political will" he is talking about is the ability of the U.S. government to sign off on spending millions to rescue the financial system at a time when people are outraged over the conduct of the banks (as they should be).

The point, though, as Bernanke explained in the interview, is that the banks' problems are our problems. He made this analogy:

"If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, 'I'm not gonna call the fire department. Let his house burn down. It's fine with me.' But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, 'What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?' That's where we are now. We have a fire going on."

The idea that Obama has been hamstrung by a lack of political will to fix the financial system if it means helping the banks that caused the debacle in the first place is not new. In his first seven-plus weeks in office, the president has boldly laid out an ambitious and impressive agenda, trying to address major problems facing the nation, including the economy, energy policy, health care, global warming and education. But when it comes to the rescue of the financial system, the administration's proposals have seemed uncharacteristically more timid. Obama and Geithner have avoided coming out with bolder actions, like temporary nationalization of failing banks or mortgage principal reductions, seemingly due to fears of how those actions would play politically.

But with Obama's strong statements on the AIG bonuses today, he is showing that he understands the politics of the issue, that Americans are livid at what the bankers did to the economy. And he is showing that he is siding with the public, not the bankers.

The question remains how Obama can do what he needs to do to clean up the financial system while not losing the support of the average American. Where Bernanke's "political will" will come from. But today was a good first step in that direction. Polls show that Obama enjoys great trust with the electorate, and if he acts boldly to fix the system, I think Americans will support him, even if it requires money, so long as they feel like he's on their side (and his solution works, of course).

In a profile of the groundbreaking comedian Dick Gregory in the New York Times on Saturday, Gregory is quoted as saying:

"This economy can't be fixed in two years. And the last guy with the gun gets blamed for the crime."

He's right. But I'm more concerned that Obama will be viewed as the last guy with the gun on the banks. That is why he has to move boldly to fix the problem. If he does, the American people will support him. And the Republicans, who are already rudderless and solely the Party of No, will be pushed even further into irrelevance.

And going after the AIG bonuses will help him build some of the political will he needs.

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