Not a Bad Day's Work

The Federal Reserve trades government bonds -- and, more recently, other things -- primarily with a view to implementing policy. For example, it buys government bonds when it wants to expand the money supply and it sells them when it wants to contract the money supply. Its main goal is not to make a profit. But it acts with such skill that it usually does make a profit, and it's such a big operation that the profit is usually in the billions.

What happens to that profit? It goes back to the U.S. Treasury. And as the Post reports today, this year's profit is especially impressive: $45 billion, the highest amount in the bank's 96-year history.

Of course, part of the reason is that the Fed has been investing in riskier things over the last year. It's not just into humdrum U.S. government bonds anymore. So as would be true for any investor, higher risk can produce a better return. But it's still a higher risk, which might hurt the Fed (and therefore us) in future years. Still, a $45 billion return right now is pretty nice -- beats a sharp stick in the eye, as my father likes to say.

But why is Law Prof on the Loose caring about this? Faithful readers, this post is not really for you, but for that other, stranger part of my fan base, tax protestors. As you know, I am oddly fascinated with these unusual people who deny that any law actually requires payment of income tax. And recently, I have noticed that tax denial is increasingly linked to another set of strange beliefs, focused on the Federal Reserve. An increasing percentage of tax protestors also believe that there is something truly evil about the Fed -- that it's a cabal of bankers who secretly run our country (and the whole world, too) and are calling all the shots. And it's somehow responsible for the income tax -- income tax and the Fed were created at about the same time, and tax protestors somehow think that you couldn't have one without the other.

I'm not really expert on the Fed and I'm not in a position to say whether, on the whole, it is a good or a bad institution. But the tax deniers are into some truly ridiculous claims about it, the main one being that 100% of income tax revenues are used to pay interest on the national debt and therefore just go straight to the Fed. That is totally not true, as can be determined by just looking up the figures (unfortunately, looking things up is a skill many tax protestors lack): last time I checked, about 20% of income tax revenues got eaten up by debt payment, not 100% (it's probably more now, given how much extra borrowing the government is doing lately, but still a lot less than 100%), and besides, the Fed only owns a small percentage of U.S. debt anyway; most of it is in private hands.

Tax protestors also believe that the Fed is just a privately owned bank, that it charges interest on all U.S. currency, and that it is never audited. These myths are out of my realm, but a good web page on them can be found here.

Anyway, today's news story is primarily for the tax protestors. That Fed that you hate so much? It just handed $45 billion over to the U.S. Treasury. While Ben Bernanke, its CEO, pulled down a whopping salary of $199,000. Not a bad day's work.

Sign of The Times

It's been a while since I actually looked at the print edition of the New York Times (I read it online), so I don't know how long this has been going on, but today's print edition contains a huge, banner ad right across the bottom of the front page. My, how the mighty are brought low. It's been a couple of years since the Times got physically smaller, and now they're taking up some of the reduced space on the front page with a big ad.

I can't say that I really blame them. They have to survive, and they've been hit with the double whammy of the economic crisis coming on top of the crash in newspaper revenues. But what can anyone do? The fundamental problem is that people won't pay for what they can get free online. Even I, who love newspapers generally and the NY Times particularly, don't subscribe to the print edition.

Maybe it's time for them to reorganize as a nonprofit and ask for donations. I wouldn't pay to subscribe to the Times, but if the paper made a public radio-like appeal and said, "Send us $100 donation or we'll go under!" I might respond to that.

Those Bonuses

The big news is that AIG has outraged everybody by paying $165 million in bonuses to the very employees who brought the company to the brink of bankrupty, necessitating a $180 billion federal bailout.

I won't comment on the outrageousness of it -- that's clear enough, I think -- but I am surprised by the outpouring of commentary from lawyers and law professors (including one of my own colleagues, Lawrence Cunningham) who claim that AIG could have gotten out of its alleged contractual obligation to pay the bonuses.

Now, as Cunningham rightly points out, it's impossible to be sure about this issue without seeing the contracts and knowing a lot more facts. Also, contract law is not my area. But really, I am surprised at some of this commentary. You can't just throw out the names of contract doctrines that apply in rare cases. Some of the authors have suggested the defense of "impracticability." But it's not impracticable to pay the money -- AIG has the money. Yes, if AIG had gone bankrupt, things would be very different. But it didn't. And "frustration of purpose" is even more remote. The classic case for that doctrine was one where someone rented a room for the purpose of viewing a coronation, and the coronation got cancelled. Now that's frustration of purpose. Here, as far as I can tell, employees were promised bonuses for continuing to work for the company until a certain date, which they did. I can't see the doctrine's applicability. Even "change in underlying assumptions" seems a stretch.

I'm not saying that there might not be a defense. Maybe there is. There could have been some fraud involved, I suppose. But it seems to me that some of the authors are doing what we law professors criticize courts for doing sometimes -- getting caught up in the political aspect of the situation and failing to apply the law neutrally. The starting point is that if you've promised to pay money, you should do it. You can't go flailing around for a defense just because your promise to pay was kinda dumb in the first place. Maybe there is a defense, but we shouldn't go grabbing defenses that don't apply.

In fairness, some of the authors, particularly Cunningham, are perhaps more just trying to point out that one should think carefully about possible defenses than they are saying that the defenses would necessarily apply. It's hard to disagree with that. But I am highly skeptical about some of the suggested defenses.

And I definitely disagree with the suggestion that AIG should just breach the contracts, let the employees sue, and coerce them into settling for less. Remember, AIG is now effectively a U.S. government agency -- we own 80% of the company. How would we feel if any other government agency did this? If the Department of Justice, during the U.S. Attorneys scandal, had said, "yeah, we have some people we'd like to get rid of, so we've decided to stop paying their salaries. Sure, we owe them the money. But let them sue us. We figure they'll be willing to settle for half rather than fight us for years to get what we really owe them." We'd be outraged. The government in particular should honor its contracts.

Sign of the Times

Sure, I expected some of the Super Bowl ads to reference our tough economic times -- like the Budweiser ad centered around a company seeking cost-cutting measures -- but should an ad really pitch the down economy as a selling point?

Hyundai's "Assurance" ad says that if you buy a Hyundai and lose your income, you can return it with no impact on your credit rating. The fine print on the compnay website says that if you buy a Hyundai, and you make at least two of your car payments, and you're current on your payments, and you then lose your income because of involuntary unemployment or other covered causes, and it happens within a year, then you can give back the car and Hyundai will forgive up to $7,500 in negative equity on it.

Well, that's really getting me out to the dealer. I suppose it's better than nothing, but it's hardly a happy sales pitch to know that if I get fired I can walk away from all the money I poured into buying the car and keeping my payments current until I turned it in. And you also have to pay any "Additional Balance Amounts," whatever those are (the website doesn't say). Things must be getting bad if the company really thinks this is going to sell cars.

Economy Still Going Strong

OK, maybe it isn't. But I'll tell you this: my girlfriend and I went to see a movie in Georgetown yesterday (Slumdog Millionaire -- pretty good, although the love interest part is not compelling), and on the way back we stopped into Tretorn to look at some athletic shoes. Someone on M Street had offered us free hot cider and a $25-off coupon, and my girlfriend had been looking for Tretorns anyway. As we were browsing, I observed that the store had a DJ spinning vinyl records. Putting this point together with the cider and the coupon and the fact that I had never noticed this store before (although it's up a flight of stairs, not easy to spot), I decided it must be the grand opening. But no, it turned out that the spinmeister was a regular feature of the store. And it's not as though he did anything else. That was his job.

And then as we walked home, we passed an Adidas store that also had a DJ spinning records. And he didn't seem to have any other work either.

Now, I'm not a corporate mogul. I don't know what packs in the 20-something customers that these stores seemed to be aimed at. But I will say that, in a down economy, these jobs looked pretty expendable. I don't know what they're pulling down, but it has to be something.

The stock market may have hit its lowest level in 11 years, but things haven't reached the point where Tretorn and Adidas have realized that they could put a CD on the stereo and have one of the shoe sellers change it from time to time. So there must be some life in the economy yet. In a real downturn these DJs would be axed. As John Cleese pointed out to the pantomime horses when telling them that one of them would have to go, the management consultants were questioning why the bank employed a pantomime horse at all.

The Irresponsibility Prize

I know I've said this before, but now that John McCain is making it his official policy, I have to say again that I don't get why the government should take the tax dollars of responsible people like me, who live in reasonable, modest homes that we can afford, and use them to bail out people who irresponsibly bought homes they couldn't pay for.

In last night's debate, McCain said, "I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes." In other words, if you profligately bought a bigger home than you could afford, the value of which has gotten killed in the housing downturn, you'll be rescued at taxpayer expense. Meantime, there's no benefit for people like me, who responsibly live within their means. We'll have to pay our own mortgages and fund paying irresponsible people's mortgages too.

I don't get it. I'm sounding like a curmudgeonly Republican and John McCain is sounding like a profligate, big-spending, big-government Democrat. What's wrong with this picture?