..."What we have now is not a free market."...

Simon Johnson

MIT Professor and co-author of 13 Bankers

Posted: February 10, 2010 08:04 AM

Bloomberg today reports President Obama as commenting on the $17 million bonus for Jamie Dimon of JP Morgan Chase and the $9 million bonus for Lloyd Blankfein of Goldman Sachs,

I know both those guys; they are very savvy businessmen,

and

I, like most of the American people, don't begrudge people success or wealth. That is part of the free- market system.

Taken separately, these statements are undeniably true. But put them together in the context of the Bloomberg story - we have to wait until Friday for the full text of the interview - and the White House has a major public relations disaster on its hands. [UPDATE: See the complete transcript and video below.]

Does the president truly not understand that Dimon and Blankfein run banks that are regarded by policymakers and hence by credit markets as "too big to fail"?

This is the antithesis of a free-market system. Not only were their banks saved by government action in 2008-09 but the overly generous nature of this bailout (details here) means that the playing field is now massively tilted in favor of these banks. (I put this to Gerry Corrigan of Goldman and Barry Zubrow of JP Morgan when we appeared before the Senate Banking Committee last week; there was no effective rejoinder.)

Not only that, but the incentives for the people running these megabanks is now to take on reckless amounts of risk. They get the upside (for example, in these compensation packages) and - when the downside materializes - this belongs to taxpayers and everyone who loses a job. (See my testimony to the Senate Budget Committee yesterday; there was no disagreement among the witnesses or even across the aisle between Senators on this point.)

Being nice to the biggest banks will not save the midterm elections for the Democrats. The banks' campaign contributions will flow increasingly to the Republicans and against any Democrats (and there are precious few) who have fought for real reform.

The president's only political chance is to take on the too big to fail banks directly and clearly. He needs to explain where they came from (answer: the Reagan Revolution, gone wrong), how the problem became much worse during the last administration, and how - in credible detail - he will end their reign.

What we have now is not a free market. It is rather one of the most complete (and awful) instances ever of savvy businessmen capturing a state and the minds of the people who run it. Is this really what the president seeks to endorse?

* * * *

The transcript of Obama's exchange on bonuses:

Q Let's talk bonuses for a minute: Lloyd Blankfein, $9 million; Jamie Dimon, $17 million. Now, granted, those were in stock and less than what some had expected. But are those numbers okay?

THE PRESIDENT: Well, look, first of all, I know both those guys. They're very savvy businessmen. And I, like most of the American people, don't begrudge people success or wealth. That's part of the free market system. I do think that the compensation packages that we've seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.

Q Seventeen million dollars is a lot for Main Street to stomach.

THE PRESIDENT: Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don't get to the World Series either. So I'm shocked by that as well. I guess the main principle we want to promote is a simple principle of "say on pay," that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay. The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs' success and ultimately will make the performance of American businesses better.