Ian Bremmer makes a living measuring political risk (he has a new book out, The Fat Tail, on the importance of such measures for businesses and investors). And while his business has long focused on obviously risky places like Russia and Pakistan and Venezuela, the financial crisis has him looking more closely at the U.S. He writes, in a Curious Capitalist Worldwide Exclusive:
Both sides of Pennsylvania Avenue appear comfortable with legislation that targets income retrospectively, even in the face of a potential constitutional challenge. This willingness to set aside rule of law in response to populist anger highlights the rising political risk premium in the US. This is the sort of action is often seen in emerging markets; but populist response is increasingly becoming the modus operandi in the US at least within Congress but also with support of the administration.
Joe the TARP-funder is angry that AIG employees who are at the center of the financial meltdown and financial rescue plan are now receiving bonuses, appearing to be funded by the taxpayer. That sort of anger may be justifiable, but the knee-jerk response by the administration and the Congress to play to it is particularly risky. The administration tried to fend off Congressional action on executive compensation by releasing its own plan in the first days it was in office. Senator Chris Dodd then tried to score some quick points by hastily appending tougher restrictions to the stimulus. Now, the government is trying for a third time. But the House rushed to pass imperfect legislation, and the Senate is giving every indication that it is out for blood on the issue. Delayed and overreaching regulation may be the legacy of this Congress.
This has far reaching consequences. Banks that were strong-armed into taking TARP funds by the previous administration are now being demonized. So, they will try and return the money they received, which limits the effectiveness of the administration to expand the flow of credit. Investors can no longer make decisions on how to position themselves with relation to these institutions because without considering the willingness of the government will continuously change settled policies in response to public outcry. And the administration’s agenda-including plans to release an approach to toxic assets-gets sidelined in the process. This sort of uncertainty in the US is the textbook example of political risk.
And here, in a Curious Capitalist Non-Exclusive, is a related something Ian e-mailed to clients this morning:
in a sense, tarp recipients are becoming a policy laboratory, where issues that particular members of congress have long promoted are now being applied to a specific group of people and businesses that have been so publicly discredited that they no longer have an effective domestic lobby. public restrictions on private compensation are not a new idea in congress-but they also weren’t plausible outside of the current environment. this is similarly the case with recently passed restrictions on the ability of certain banks to hire h-1b visa holders. in short, legislation that couldn’t have passed previously can now be made into law, at least when restricted to tarp recipients–important in that this disempowered group still holds the reins on the finances needed to spur economic growth. there is a risk that similar legislation appears in foreign countries (as germany’s angela merkel recently commented favorably about the proposed congressional bonus tax legislation), dampening global economic growth…there’s also a risk that it doesn’t, and the american role in the global financial system is accordingly diminished.