At RCP, Mort Kondracke touts Republican House member Paul Ryan's (R-WI) "Sweden" plan for addressing the financial crisis:

In the case of the bank crisis -- and other areas of economic policy, too -- Obama and his top advisers ought to mix it up regularly with conservative Rep. Paul Ryan (R-Wis.), who, they would discover, has some constructive ideas that Obama might adopt. Such as: Instead of injecting vast new cash into the banks, institute a system of government insurance guarantees to protect asset-holders against losses. Also, triage the banks and commence a Resolution Trust Corporation-style liquidation of those that can't be saved.

(Emphasis supplied.) This is in essence, the Sweden plan. There is a hitch however. Ryan proposes:

Last night I tried to make the point that folks who are trying to pooh pooh the AIG bonus issue are missing the mindset behind them that effects economic and financial policy on a wider scale. I wrote:

What's interesting about the new DC J-List insiders' (just kidding) take on the AIG bonus mess is how they do not make the obvious connection to the bigger problem of Treasury's timidity regarding the financial crisis. Of course in the scheme of things, the AIG bonuses are a drop in the bucket -- but the problem here is, to coin a phrase, "systemic." Too much energy and political capital has been wasted by the Obama Administration in propping up the old Wall Street order and not enough in trying to figure out what exactly would be best for the country.

Via Digby, Atrios puts it more succinctly (and less charitably):

What's interesting about the new DC J-List insiders' (just kidding) take on the AIG bonus mess is how they do not make the obvious connection to the bigger problem of Treasury's timidity regarding the financial crisis. Of course in the scheme of things, the AIG bonuses are a drop in the bucket -- but the problem here is, to coin a phrase, "systemic." Too much energy and political capital has been wasted by the Obama Administration in propping up the old Wall Street order and not enough in trying to figure out what exactly would be best for the country. Thus when Yglesias writes:

NYTimes:

Spurred on by a tidal wave of public anger over bonuses paid to executives of the foundering American International Group, the House voted 328 to 93 on Thursday to get back most of the money by levying a 90 percent tax on it. . . . In one sign of the bonus issue’s political potency, 85 Republicans joined 243 Democrats in the House in voting for the measure, rather than for a rival proposal put forth by the Republican leadership. Only 6 Democrats voted against the bill, along with 87 Republicans.

The GOP House Leadership voted against:

The Obama political team seems to be out of whack these days. Via Greg Sargent, Axelrod reveals some real political tone deafness:

People are not sitting around their kitchen tables thinking about AIG,” Axelrod said. “They are thinking about their own jobs.”

I assume Axelrod said that earlier in the week. No way he said that yesterday or today. At least, I hope not.

Speaking for me only

We should be so lucky. In any event, the Fed pumped a trillion dollars into the economy yesterday (yes a trillion):

The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. . . . [T]o the surprise of investors and analysts, the [Fed Open Market] committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.

This is known as quantitative easing, increasing the money supply and, hopefully spurring economic activity. But the general view is quantitative easing is not especially efficient. Krugman wrote in September 2008:

Here's the next furor:

Fannie Mae is due to pay retention bonuses of as much $470,000 to $611,000 this year to some executives despite enormous losses at the government-backed mortgage company. Fannie's main rival, Freddie Mac, also plans to pay such bonuses but hasn't yet provided details.

Via Greg Sargent, President Obama accepts the responsibility for the AIG bonus fiasco:

Asked if he wished he’d known about the bonuses sooner, Obama said, in the course of answering: “Ultimately, I’m responsible. I’m the President of the United States…The buck stops with me.”

President Obama will be held responsible (or will get the credit) for what is done with the financial crisis in any event come 2012. That is why he should not worry about the short term politics but instead focus on what he thinks will work. My own view is that the policies he has implemented so far are much too timid and will not work.

Speaking for me only

I've been listening in the background to the AIG hearing and I am not hearing enough questions like the ones Steven Pearlstein poses in the WaPo today (see also this NYTimes story on criticisms of AIG's payments to counterparties):

I suspect that when confronted with the prospect of a bankruptcy and a prolonged and public investigation, the sharpies in London and Connecticut might have been receptive to the idea of renegotiating those bonuses in favor of new contracts -- contracts that increased their base pay but tied their bonuses to success in reducing future taxpayer liabilities at AIG.

. . . A more hard-knuckled executive would have gone to the counterparties of those derivatives contracts and suggested that it would be a real shame if AIG were forced to file for bankruptcy, and offered some sort of workout.

[AIG] certainly could have been more upfront with [its] new owners -- the taxpayers -- about not only the bonuses but also the identity of the counterparties to those derivative contracts, who were the indirect beneficiaries of the government's bailout.

More . . .

AIG CEO Edward Liddy is appearing this morning before a House Banking subcommittee. CNN has a live feed.

Here is Liddy's op ed in today's Washington Post. Here is the part of it that really bothered me:

Although we have wound down more than $1 trillion in the portfolio of the AIG Financial Products unit that is at the root of the company's troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that's why we're winding down this business.

(Emphasis supplied.) "Taxpayers" could walk away from AIG right now and avoid any further direct "downside." The government bailout is not premised on the idea that "taxpayers" needed to protect their "investment" in AIG. AIG has become nothing more than a "backdoor bailout" for other financial institutions. This is unacceptable. That is what I would ask Liddy about.

Speaking for me only

Tom Friedman writes:

If you didn’t like reading about A.I.G. brokers getting millions in bonuses after their company — 80 percent of which is owned by U.S. taxpayers — racked up the biggest quarterly loss in the history of the Milky Way Galaxy, you’re really not going to like the bank bailout plan to be rolled out soon by the Obama team. That plan will begin by using up the $250 billion or so left in TARP funds to start removing the toxic assets from the banks. But ultimately, to get the scale of bank repair we need, it will likely require some $750 billion more. The plan makes sense, and, if done right, it might even make profits for U.S. taxpayers. But in this climate of anger, it will take every bit of political capital in Barack Obama’s piggy bank — as well as Michelle’s, Sasha’s and Malia’s — to sell it to Congress and the public.

Forget for a moment that Friedman actually has no idea whether "the plan makes sense." Let's deal with the fact that there is no one who has enough "political capital" to sell the idea described by Friedman. At this point, only a temporary takeover of major bailout recipients will work politically. More.

A person knowledgeable about the inner workings of AIG over the last decade sends me this e-mail:

They guy who deserves 95% of the responsibility for doing subprime with FP [Financial Products] which caused the disaster was the CEO [of FP] Cassano who is long gone. FP (Financial products division) had at its peak maybe a trillon dollar notional of derivatives many of which were unique, complex transactions. Only a small portion of the work to unwind is dealing with toxic stuff. How you unwind the rest could affect the company (taxpayers) by billions of dollars if you are not smart. (compared to 160mm [in bonuses])

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