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Slapping Down AIG Won’t Solve the Problem

Let’s say Rep. Barney Frank (D-Mass.), New York Attorney General Andrew Cuomo, and other lawmakers incensed over AIG’s bonuses win their battle. The AIG executives return the money, responding either to public pressure or to legal action. The outrage dies down. Everyone feels justice has been done.

But AIG is only one villain in a cast of many, Mark Thoma at Economist’s View points out. His argument bolsters President Obama’s remarks today, in which he contended the AIG debacle should be used as a catalyst for overall financial reform.

Thoma documents this view with a concise rundown of the unsuccessful search for just one party to blame for the economy’s meltdown. Taking aim at AIG alone, he explains, doesn’t go far enough.

From Thoma:

For the crisis to have occurred, there must have been (1) a source of vast amounts of liquidity, (2) a reason for most of that liquidity to go to one sector, the housing sector, rather than being spread around to a variety of industries, and (3) a failure to detect and prevent the bubble from developing in the industry where the excess liquidity found a home.

The managers at places like AIG were part of the problem, and they surely don’t deserve rewards for their performance, that is not the argument here, but they and others like them were only one part of the problems we now have, they didn’t cause the problems by themselves…I wish I could point to a single villain, it would be easier in a many, many ways to be able to do that, but I don’t think we can, and doing so runs the risk of delaying the reform that is needed by causing us to focus on only a small set of the larger set of “villains”.

Thoma finishes by declaring something to keep in mind, as the outrage against AIG continues:

There’s plenty of blame – and reform – to spread around.

The question is whether the AIG controversy will prompt those reforms – or, in a worst case scenario – serve merely as a distraction.

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