My Letter to Representative Jerrold Nadler

I wrote my representative today. I thought I'd share:

To Rep. Jerrold Nadler,

My name is Isaac Payam Ahdout. I am writing to you today to comment on the state of the economy, the role of the government, and the financial industry bailout.

Indeed the economy of the world is in distress. In the US, virtually every economic indicator, aside from money supply which is controlled by the Federal Reserve, is starkly negative.

Capitalism answers societal questions in a structured and yet sparse and decentralized fashion. How many plumbers should there be in a town? Who should be the town's plumbers? How many convenience stores should there be? Where should they be located? How many houses should there be? As Americans neither of us need a long series of lectures to tell us why questions such as these shouldn't be determined centrally – we see from history what happens when a young nation embraces the concepts of rule of law, a free market, and meritocracy.

With questions such as these being answered in a decentralized and continuous fashion by the free market, which consists of far-from-perfect human beings, we know that the free market will overshoot. Part of this comes from the vagaries and uncertainties of predicting the future. Part of this comes from human emotion: human greed and human fear. Booms and busts are natural consequences of capitalism. The booms drive creation of wealth, expansion, and improvements in the standard of living. The busts bring scarcity, clarity, and efficiency.

One lesson that the Great Depression teaches us, though, is that human beings in a free market are capable of discovering and settling on a semi-stable equilibrium far below maximum economic output and maximum employment. It takes a shock, like the Federal Reserve tightening the money supply during periods of economic distress or the onset of a world war, to change from one semi-stable output level to another.

Sir, this is indeed one of those times. Absent government intervention, I think it is clear now that the events that were unfolding in the early Fall of 2008 would have destroyed the US banking and shadow banking systems and sent the US economy spiraling in a terrible positive feedback loop towards an unsatisfactory, and that's putting it lightly, semi-stable equilibrium. Thanks to prompt action by various parts of the government, outright disaster was averted. The federal guarantees on money market funds, federal support for the commercial paper market, and the TARP legislation were all key to this triumph – indeed, it was a triumph. Our government by and large did the right things. The government continuous to do many right things now like the new economic stimulus and the TALF.

Unquestionably, it is the role of the US government to continue to monitor and react to economic developments both here and abroad and to use its full power to save the economy from a depression. It would be a real tragedy if this country, and the world, experienced a 15-25% unemployment rate for a decade. So much opportunity would be lost – for example consider how many people wouldn't pursue an education in the event of a depression that otherwise would. How would their lives be affected? How would all of our lives be affected?

What has gone on with the payouts at the bailed out AIG is most certainly a disgrace. The mistake was made when AIG was first bailed out and certain contracts it had were left as-is. The time to do something about this particular problem has passed. Introducing a law to effectively cap the pay of employees of bailed out financial firms is a waste of time, a dangerous insult to American values, and highly destructive.

The End GREED act is a waste of time because we are pointing fingers when the country should be coming together to solve its problems.

The End GREED act is an insult to American values because the government is deciding after-the-fact what the ultimate fate of a contract is. It is so very dangerous for the government to set this precedent and for people to operate going forward with the knowledge that their agreements are not binding.

The End GREED act is highly destructive. Sir, you and your colleagues who support this act are ignoring a crucial fact about employment: companies don't come attached to their employees. People have choice over where they work. If the 12-or-so bailed out banks effectively cannot pay more than a below-market rate for the labor of their employees, then they will lose their employees, starting with the ones with the greatest talent. Those employees will likely flock to firms that aren't subject to the End GREED act, like Deutsche Bank, Credit Suisse, and UBS.

I think that the passing of the End GREED act was an emotional knee-jerk reaction. Careful contemplation shows that it will not achieve anything useful, other than a warm fuzzy feeling about getting back at a particular group.

The country needs each and every one of these large financial institutions to survive and to play its proper role in the financial sector. The country needs to avert a depression. The country needs to be made whole on its past and future potential investments in these firms.

Federal Reserve Chairman Ben Bernanke recently made an analogy. He said, and I'm paraphrasing, it is like we have a careless and stupid neighbor who regularly smokes in bed. It may or may not be clear to all exactly what he has been doing. Even those who know what he is doing are reluctant or unwilling to do something about it. Surely, there should be a law of some sorts to tell this man and others like him not to smoke in bed.

Sooner or later, though, the man's house catches fire. The fire is burning very hot, and left unchecked will not only burn down the man's house, but also very quickly spread to all of the houses and decimate the town. It is clear that job #1 of every resident of this town is to put out that fire. It's counterproductive and highly costly to spend these crucial moments pointing fingers. There will be time for that. There will be time for new legislation to prevent this fire. Now is not that time.

While the economy is a complex adaptive system whereas the burning town is quite obvious to understand, the economy is really quite similar to the burning town in this respect. With the End GREED act, it is as though you are regulating the flow of water in the town while the town is continuing to burn.

The Federal Reserve, Treasury, judges across the country, congress, the states, virtually the entire government has this job as job #1: put out that fire; prevent a depression.