Some Context for the Shock and Awe Over Bailout Indiscretion

News stories suggesting that the hundreds of billions of dollars in federal bailout money are being misused or mismanaged are beginning to pile up. The consistent theme is that recipients of bailout funds are acting irresponsibly, up to the point that President Barack Obama personally labeled $18.4 billion in bonuses from Wall Street financial groups that have recently received federal bailout funds as "shameful." Other prominent examples include the $1.2 million decoration of Merrill Lynch CEO John Thain's office, executives of the Big Three arriving in Washington on private jets to request bailout money, bailout recipient Citigroup's plan to spend $50 million on its own corporate jet, and bailout recipient AIG's $440,000 resort stay for its executives, all accompanied by staunch criticism from various pundits and bureaucrats.

Perhaps most astonishingly was last month's disclosure that federal officials were failing to adequately track where the bailout money was going and how it was being spent. Today the Government Accountability Office issued a report reaffirming that not enough is being done to competently oversee the bailout. Currently the government is struggling to come up with remedies to the myriad problems that seem to sprout up on a daily basis, whether it be to cap corporate executives' salaries at $400,000, to limit the influence of lobbyists on how bailout money is handled, or to largely start from scratch.

The bailout law was bound to have its flaws for a variety of reasons (full official information on last year's bailout law, including its full text and amendments, can be found here, at the Library of Congress Website). Consider that Former President Bush, Henry Paulson, and Ben Bernanke spent months relentlessly assuring the American public that the economy was healthy. Bush went as far as to quote then-Treasury Secretary Henry Paulson as saying "this is far and away the strongest global economy I've seen in my business lifetime" just one month before massive bankruptcies butchered both the stock market and consumer confidence, and nine months after officials have since decided the recession officially began. It was only when those bankruptcies stole the headlines that Bush and Paulson properly acknowledged the scope of the economic problem, forced to make an about-face when Lehman Brothers collapsed and the Dow lost 500 points. The change in rhetoric was so abrupt that then-Republican presidential candidate John McCain made his infamous "the fundamentals of our economy are strong" statement the very day that Lehman Brothers went under. 

The dialogue from the administration instantly became one of frantic action; a demand for $700 billion, a number apparently drawn out of a hat at the Treasury Department, to be allocated largely at Paulson's discretion. The bailout dialogue was alarmist enough for John McCain to 'suspend' his campaign and give the economy his undivided attention, perhaps driving the final nail into the Sarah Palin-shaped coffin of his campaign. It was under these circumstances of incredible pressure from the executive branch and an incredible sense of confusion, uncertainty, and urgency among the public that the bailout bill was drafted. There was little or no time to seriously stop and think. In these conditions, perhaps one could understand why a bill on the scope of the first federal bailout would be less than perfect. 

At the time, John McCain placed the blame for the crisis primarily on predatory lending. Barack Obama went one step further and blamed it on the longstanding system set up to facilitate and reward predatory lending. These were and are simplified versions of the prominent schools of thought on the mortgage and banking industry's collapse.

It was with these perceived causes on everyone's minds that Bush, Paulson, and Bernanke promoted a plan that gave $700 billion of taxpayer money to corporate executives widely viewed as irresponsible in order to facilitate economic growth in a system widely viewed as broken. Yet the plan did not significantly address or alter the landscapes of either failed financial institutions and their leaders or a failed system, or both. The supposedly crooked executives got the money; it was poured the supposedly broken financial setup, and officials now agree that it was all done with inadequate checks and balances and inadequate oversight. Now it seems that said crooked executives have circumvented said broken system and have spent a lot of the money on themselves. These circumstances were apparently impossible even to foresee in the halls of government, let alone prevent, despite the fact that the bailout's crafters all harped about extortionate lending practices or flaws in the very fabric of the U.S. financial system.

It is with all of this in mind that much of the outrage over the current failings of the bailout seems somewhat hollow and naive, especially from President Obama, Vice President Biden, and Senator McCain. After all, each one of them voted for it.