Don't let the AIG brouhaha divert us from the real task at hand

Like John Thain's million-dollar Merrill Lynch office redecorating fiasco, the AIG bonus scandal has the capacity to become what University of Connecticut Professor Emeritus of Political Science David E. RePass calls an "issue-public" capable of producing substantive economic change.

The task for policy makers is to get ahead of public opinion and find a way to both limit the bonuses paid by AIG (AIG) and other recipients of federal bailout money, while at the same time keeping the players in place who are critical to stabilizing the banking system. President Obama was busy over the weekend doing just that, and if they're smart, economic conservatives -- including most Congressional Republicans -- will do everything within their power to help the President on this one.

Strange befellows

That's because if they don't, they run the risk of having the emerging populist sentiment expand into a broader discussion of executive and professional compensation levels throughout the system -- not just in investment banking and among bailed-out companies.

In other words, the American public could decide that corporate capitalism as it's been practiced over the last several decades is fundamentally unfair, and could essentially begin undoing every economic policy Republicans and econ cons hold dear. Hence, as I've noted before, Obama can serve as a "safety-valve" for the system in much the way FDR did in the 1930s. Like FDR, Obama is a popular leader with a broad coalition who can convince his followers that the system has many virtues, can be reformed and is worthy of redemption. Provided he has the support of at least selected Republican moderates, Obama should be able to implement needed reforms and keep the nation on the path to banking-system stabilization, which is the foundation for economic health.

Attempting to "blame Obama" for the AIG bonus scandal is simply not an option -- either for the economy or the Republican party. After all, having been through a Bush administration in which they saw next to zero wage gains and few other economic benefits, and then getting hit with wave after wave of layoffs and home foreclosures and the worst recession since the 1981-82 Reagan recession, it's highly unlikely the American public (who, you'll recall, voted for Obama) will suddenly veer back to the right and see the Republican Party as "the champion of the little guy." If anything, they're just likely to be reminded the AIG problem was allowed to build for seven years without so much as a question during the laissez-faire policies of President George W. Bush.

In times like these it's worth repeating that the nation, like President Obama, must remain focused on the ultimate goal. The nation appears to be nearing a public policy to deal with the financial crisis, including toxic assets. Investors should try to keep that at the forefront -- or maybe even pasted onto their computer monitors. Yes, it's about a year late, but there was another U.S. President in charge then; moreover, the new President and his team have had to deal with five times the policy problems of a typical administration, and they've barely had three months to work on them.

It's also worth repeating the wisdom of New York Times (NYT) business journalist Floyd Norris, who incisively observed, "Justice and success don't come together in the solution for the financial crisis." So unless the American people want to radically change how executives and employees are compensated and taxed in the United States into some France-esque or Sweden-eqsue system (and I don't think they do), Congress must concentrate on stabilizing the banks, implementing the toxic asset removal plan and being ready to allocate additional funds if necessary.

Later on -- after the system has been stabilized and the recovery is underway -- Congress, the President and the nation can then go about investigating and determining who or what public policies were most responsible for the financial crisis and the resulting recession. There will be plenty of blame to go around. From a public policy standpoint, now is the time to act, and then act again if need be, to prevent the recession from turning into an economic maelstrom no one wants to see.

The nation is so close to getting ahead of these problems, one can almost taste it. And the view from here still argues that if we can just keep our anger in check enough to stay focused, then the resources at our disposal, the knowledge amassed about economics and monetary policy over the decades and calm, candid analysis will enable us to get through this difficult period. And maybe sooner than we think.

Financial Editor Joseph Lazzaro is writing a book on the U.S. Presidency and the U.S. economy.
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