When you find yourself in a hole, the advice says, "Stop digging." Counterintuitive as it may seem, maybe the best advice for when the ship of state is taking on water is, "Stop bailing"
Between TARP "rescue" package for banks -- that many banks are trying to get out of -- and an AIG bailout that allows the firm to pay out $165 million in bonuses, the hook-up between the federal government and the financial sector under extreme circumstances may finally be coming to an end.
Like all toxic relationships (asset-relief based or otherwise), both sides inevitably start pointing at each other over various acts of bad faith. Some banks, finding too many strings attached to the funds, are angling to return them. This is a trend that is likely to increase.
Meanwhile, the other "partner" in the relationship is feeling equally abused.
President Obama on Monday called for Treasury to put more of a squeeze on A.I.G. to force the insurance giant to rein in the bonuses. Separately, New York Attorney General Andrew Cuomo announced that he would subpoena A.I.G. executives to grill them about bonuses. (All of this has come in response to A.I.G.'s CEO saying, in effect, "Sorry, contracts demand that these bonuses be paid. Suck it up.")
Obama got this right a few weeks ago when the issue was nationalization of the banks. Americans don't do "nationalization" too well. The church- and state-style separation of the private and public sector is more ingrained into the American psyche than most people suspect -- even for liberals.
The only way for this situation to resolve itself is for the private and public sectors to agree to some equivalent of couples therapy: The federal government is going to have to pick and choose who it has the power to directly assist -- and who it doesn't.
In this case, that means it should get out of the saving-the-banks business -- unless it comes as one whole swoop. As was suggested many months ago, Congress needs to create a banking version of the Resolution Trust Corporation, which cleaned up the savings & loans twenty years ago. Considering that mis-managed mortgages were at the heart of that crisis, why can't the same thing be done again? That takes care of the banks -- and the "family" won't feel that it's about to fail its own "stress test." Instead o good money goes after bad on one bank after another. All are taken care of at once.
Meanwhile, with a new RTC up and operating, that frees up the Treasury secretary to focus more on an issue that is far more complicated: AIG is the beast that, if it dies, could drag down the entire world economy with it. The Obama administration will get more support for bailouts if the public feels that such procedures have been narrowed to a more manageable, uh, one (darn big as it may be).