Regulating compensation in the banking sector

I see a good case for this, but also some big things to worry about.

Today’s Wall Street Journal reports:

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

The Fed’s plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees– from chief executives, to traders, to loan officers– to take too much risk. Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.

One of the key questions for understanding the causes of our current problems is the following. Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be “yes”, insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles. Capitalism functions well when individuals are rewarded for making socially productive decisions. It is a disaster when individuals are rewarded for making socially destructive decisions. For this reason, I am quite supportive of the broad idea of the above proposal.

I would nevertheless raise an important cautionary note: whenever one introduces more regulations, one is simultaneously creating enormous pressure for those being regulated to try to take over the regulatory process. I would urge the Federal Reserve to be thinking carefully not just about details of the economically desirable incentive structure for bank managers, but also to attach equal importance to protecting the Federal Reserve itself from regulatory capture. Here are some general objectives which they might want to keep in mind.

Openness and transparency. Details of all regulations should always be extremely transparent and public, with high-profile communication of any proposed changes. I was unable to locate a public release of the specifics of the Fed’s proposal, but gather that the WSJ story was based on off-the-record statements from “people familiar with the matter”. I think one of the best disinfectants for preventing regulatory capture is to keep as bright a light as possible shining on all details of the regulatory process.

Simplicity and uniformity. The goal here is to be very clear about the basic principles we’re trying to implement and make sure they’re applied broadly, fairly, and consistently. Although the Fed is used to thinking in terms of preserving its discretion, it’s important that these regulations be implemented in a transparently uniform way.

I see this is as an important step to take. But it’s also very important for the Fed to realize they’re walking into a minefield.

35 thoughts on “Regulating compensation in the banking sector

  1. Bob_in_MA

    Yes, well said. It’s the manner of compensation that can and should be addressed.
    The amount of the pay packages should not be addressed through regulation, that should be dealt with through a progressive tax system.

  2. HZ

    Financial intermediaries live on spreads (banks) and asset value (asset managers). This is what gives the monetary policy power. So long as we rely on an all powerful central bank to control ups and downs in the economy, monetary policy will ensure that the booms and busts will recur over and over. If it weren’t subprime mortgages, lenders would still need to find some other risky borrowers to lend to. Some times we get socially beneficial results even if the lending was financially disastrous (such as the telecom boom and bust), some times the results are not so benign (as in the recent over investment in housing).

  3. Zane Davis

    “The Fed’s plan would, for the first time” is not quite clear. It implies the government is for the first time regulating salaries. There is a Minimum Wage that the government already regulates.
    I have no problem with the Owners of a company making tons of money. Bill Gates, Michael Dell, and Steve Jobs come to mind. They started and own a large amount of shares in their companies. However, a CEO, CFO, or any other C-O is an employee of the company and different than an engineer or an accountant. They should not be able to rape the company and set their own salaries and bonuses.
    Keep up the good work.

  4. Anonymous

    Find “Tanta: Mortgage Servicing for UberNerds” at CR blog and think about rules for compensating the Mortgage bussiness.

  5. dblwyo

    Jim – you point at some very important questions. Whether or not the Finance Industry can be self-regulating seems to be very settled at this point. Adult supervision comes to mind as does helmet laws and the gap between private benefit and public cost. There are, it seems to me, two major turns of the wheel that should be taken but aren’t on the table yet.
    1) What regulatory mechanisms would be efficient and effective? In the short- and long-runs? It’s always been a great puzzle to me that the Industry can design hugely complex synthetic assets yet fail of devising an appropriate design. NB: the s.t. focus was as damaging to the institutions as to society for many.
    2) What political mechanisms would result in effective regulatory frameworks? The Industry seems convinced that business will be as usual and is fighting hard to water down any regulatory reform. Arguably against its own long-term interest on several fronts (one thinks of adult supervision).
    So who’s going to step up to the challenges? The old school regulation by fiat, inspection and enforcement seems to be lacking. What about performance bonds, insurance or some other market-like mechanism? And an equivalent on the micro-level for sr. professionals and executives comp packages?

  6. Steve Kopits

    This is chasing a red herring. If anyone believes that the current crash was due to Wall Street bonuses, then they have very little clue how to fix the problem.
    First, lots of bankers lost money in the failure of Lehman and Bear Stearns, including CEO’s Fuld and Cayne. Lots of bankers lost their jobs at banks that did survive. Their losses did not prevent the melt-down.
    Second, how will this system work? Is it prospective, for new employees, or retroactive for existing ones? Will the banks abrogate existing contracts? If so, on what basis? For new hires, will the approval of the Fed be ex-post or ex-ante? What happens if an employment contract is signed and the Fed doesn’t like it? Or will there be a published guideline: For Equity Trader, Small-Cap, AMEX/NASDAQ/OTC, base pay maximum $220,000/year + max 50% bonus, bonus payable and vested over three years, with clawback pro rata annually over vesting period, vesting subject to consolidated global, corporate pre-tax operating profits of parent corporation greater for than zero on average over vesting period. Something like that?
    Will there be a blanket cartel, ie, all banks (or any govt-supported) bank will have a uniform policy, eg, the maximum pay will be the same at Goldman Sachs as at, say, Bank of America? What about SMH Capital (ever heard of them)? MetLife? Institutional sales same as retail?
    Honestly, we all know what will happen. The banks will game the system, first of all. And second, for those guys who don’t fit G-7 or G-12 government pay scales, they’ll go somewhere else and work for something that isn’t called a bank. This situation has arisen with Phibro, the oil trading arm of Citigroup. Phibro is one of the few units at Citi to make a profit, and its MD, Andy Hall, was to receive a $100 m bonus. As this was a political problem, Citi has been thinking of divesting the unit. So, to solve a political problem, the bank is looking to convert it to a ‘partnership’ (ie, ‘bonus’ will now equal ‘dividend’) or sell it–one of its few stand-out units.
    When President Obama was here on Wall Street on Monday, the reception he received at the Stock Exchange was frosty. Understandably. Virtually everyone in the audience has negotiated employment contracts, and is well aware of what pay caps as a practical matter will mean: Bank management will be forced into expensive, complicated and morally compromising dealings with key employees to keep them on. Teams of lawyers, HR personnel and division managers will have to huddle with new employees to deliver to them ‘contraband’ compensation in the form of apartments, cars, airplanes, partnerships, employment of relatives and the such to win or keep their stars.
    And, of course, the Fed is going to go along wth this, because when bank management say, “Well, we would have hired Bob, a star with a track record 20 miles long, but as you won’t allow us, you Mr. Fed manager will take the heat for torpedoing the recruitment.” And Mr. Fed manager will look away, and allow a contract to go through that in four years time will come to light and discredit the employee, the bank and the Fed.
    And this ticks off people, because they know the Fed was warned well in advance about the housing bubble and did nothing. Because FINRA and SEC were warned decades in advance about Madoff and did nothing. Because a fool could have seen that there were going to be problems with securitized assets and AIG guarantees (at least a well-educated fool with some actual expertise in finance and banking), and did nothing. Because a junior analyst could have spent half a day on oil prices and told you that prices above $80 were not consistent with economic growth, and to this day, the Fed and administration have done nothing.
    Bankers tend to treat regulators with contempt, because they are often lacking in technical expertise and fundamental competence, and more concerned with compliance than risk. Think about your view of the airline security personnel who confiscate your shampoo or shaving cream as you pass through security. Are they managing risk or enforcing compliance? It’s much the same financial community, although the stakes are much higher. Can you imagine the discussion between the CFO of AIG and the examiner regarding default guarantees? Do you think the examiner ever asked, “Mr. CFO, you appear to be booking default insurance as though the risk were actuarial, when in fact you are materially signing something which would be a loan guarantee if given by a bank. Are not your guarantees all cross-correlated? If one fails, will they not all in a string? How would you meet your obligations then?” Do you think that conversation ever took place? And if so, why didn’t the regulators do anything about it?
    So, were there excesses on Wall Street? Absolutely. Do very high single-year bonuses pose a systemic risk? No, although they do pose a corporate risk (Barings, SG and AIG come to mind). But in the end, focus on pay distracts attention from areas that really do need attention. It creates an adversarial environment where there are actually a fair amount of consensus about needed reforms. It creates smoke where we need light.

  7. Larry

    I think the issuse goes deeper than executive compensation at banks. The public company corporate structure seems to have evolved such that the owners of a company, its shareholders, no longer control the company via its board of directors. This has allowed its executive group to effectively hijack control and, in the worst case scenario, use that power to transfer the wealth of the company to themselves.

  8. spencer

    The claim that because financial executives lost money on their stock in 2008-09 means that pay was not a factor in the bubble is the most illogical argument I have heard in years.
    To accept that argument you also have to accept that they knew they would lose in 2008-09 when
    they made their decisions in earlier years.
    If you believe that I have some share in a bridge I would like to talk to you about.

  9. Mike Laird

    Regulation that reduces the incentive to take extreme banking risks is appropriate, after our recent experiences. The key questions are whether the regulations will be effective, e.g., will they have teeth like clawbacks, and whether the regulators will modify and enforce as situations change. The Fed allowed “liars loans” aka no-doc loans until mid 2008. Oops, there’s one horse that got out of the barn, when risk was obvious. The issue is what other agency has a record of effective enforcement and effective modifications as the situation changes. Its certainly not the SEC. Maybe the Comptroller or the FDIC are better regulators – I’m not sure in this area. But the Fed has a lot of catching up to do to become known as an effective regulator.

  10. Cedric Regula

    I just looked up what some professions make, lest we forget any point of reference.
    Surgeon – $200K
    Doctor – Primary Care $160K
    Lawyer – $120K
    CEO – $160K (this much average in those outside the S&P 500)
    Engineering, Sales and IT managers – around $120K
    I think the best thing that could happen is financial “Stars” leave the cushy Big 20 “banks” and start up their own hedge fund and wow us with their stuff. They can attract their own capital and prove their worth to their clients.
    Then we would have banks doing banking and money management doing that, and I think that would go a long way to solving the problems using market forces. I think the only reason mutual funds pay as much as they do is because large integrated banking is paying way too much for “Stars”. With banks government ties, low cost of funding, and subsequent huge trading volume, banks have found a gold mine, and will pay anything to exploit it. It wasn’t like this when we had Glass-Steagall.
    So all we need to do is close the public trough and make this like work again.

  11. PPM

    Seems to me that the problem is making compensation tied to risk. To do this you need compensation to be tied to future performance. One way to do this is to have salary compensation which would be like that for many professionals (not sure how that would be decided) but a second component would be stock (general stock) which could not be sold for an extended period of time (10 years). So, what would the incentive be to take this form of compensation: dividend earnings. Earnings are the employees regardless. The stock has to be general so that the employees are in the same pool as the rubes who buy shares. Employee incentive would then seem to be to keep profit high in the short term but balanced against the long-term earning potential of the company.
    With compensation tied to dividends and long term share value, managers would have an incentive to keep earnings high to keep the employees happy.
    I suspect that this is a non-starter because stock that earns does not trade rapidly. And so much of the finance industry is tied to churning stock with millisecond precision in valuation. Earning fees with every trade. Has this improved anything?
    Would the world be better or worse if we spent less time thinking about changes in the Dow and S&P indeces and more on corporate earnings?

  12. Simon van Norden

    Has anyone seen any empirical research linking incentives for risk taking to performance during the recent crisis? All I’ve seen are
    1) reasonable arguments (like those above) that incentive schemes should encourage risk-taking
    2) repeated statements that AIG had well-designed incentives (options vested only after many years), but was one of the worst behaved risk-wise.
    3) Farlenbrach and Stulz (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1439859) claiming that there was no link between CEO compensation and risk taking. Specifically,

    “Our results show that there is no evidence that banks with a better
    alignment of CEOs interests with those of their shareholders had higher stock returns during the
    crisis and some evidence that banks led by CEOs whose interests were better aligned with those of
    their shareholders had worse stock returns and a worse return on equity. Though options have been
    blamed for leading to excessive risk-taking, there is no evidence in our sample that greater
    sensitivity of CEO pay to stock volatility led to worse stock returns during the credit crisis”

  13. GK

    “they’ll go somewhere else and work for something that isn’t called a bank. ”
    Or they will merely take a banking job in Hong Kong, Singapore, or Dubai, where marginal income taxes are already lower than in New York.
    Banks, and government officials, in Hong Kong are already saying “Please regulate their pay! Please!!”.
    How anyone can think that capping the pay of a location-neutral, high-paying profession does not simply make those same jobs leave for an unregulated place, is beyond me.

  14. Anonymous

    GK: How anyone can think that capping the pay of a location-neutral, high-paying profession does not simply make those same jobs leave for an unregulated place, is beyond me.
    And I would say goodbye and good riddance. In what way have they contributed anything of value to society. They have destroyed trillions of dollars of wealth and put millions of innocent people out of work.
    When you have a segment of business that produces nothing of value but sucks out 40% of all corporate profits, you are talking about a frictional cost of doing business that far exceeds anything attributable to taxes, torts, government regulation or any other frictional effect. The financial industry is not in the business of efficiently allocating capital. They are in the business of extracting a “tax” on every transaction they can generate whether that transaction is of value or not. The very fact that their profits and salaries are so enormous and constantly increasing indicates that there is a market failure. An efficient market should drive down salaries and profits.

  15. Young Economist

    FED is going to create the speculative bubble in the economy and financial market by using too low interest rate and this bubble will be like subprime crisis. We will have bubble that is from wrong resource allocation from too low interest rate and we also will have the crisis that will cause the shock on economy and labor market.
    I think it is very wrong policy is the main reason for the higher unemployment rate and higher cost of living currently. FED support speculators on Wall Street, mainly financial institution, to push up asset price and inflation too high and then FED have very slow reaction on the speculation; therefore, we have big bubble and speculation and big crash and crisis.
    This policy still goes on by Bernanke and it will cause the bigger crash and crisis but we have the same result that is the higher unemployment. Now FED lie everyone about inflation trend and the effect of monetary policy on the welfare (lower cost of living (low inflation) and lower unemployment). The inflation is currently low due to the base effect that oil price was too high last year but the current inflation trend is too high. The monthly inflation show the growth at 6% and if we pass this October, the inflation will go to around 3-6% in the nest six months (oil price is at this level) and core inflation will move up to 2-4%. Therefore, we are going to have higher inflation than the past cycle and inflation will move up more quickly than the past cycle.
    Another FEDs lie is the monetary policy can improve the unemployment rate. Greenspan and Bernanke used too low interest rate after Tech bubble and create short term speculative economy with high property and asset prices, higher consumption but we have no real economy, no real employment and our businesses have no competitiveness. Frankly, GDP can grow but we have the worst employment in the every cycle because when we use too low interest rate, it will push up price higher and more quickly. Business can have more profit from higher margin and they have no need for new investment because there is no real demand increase. I call the Monopoly support by FED. Then, when speculators get too cheap funds from FED, they put into asset speculation, surely, it makes people believe that we had the good economy because stock prices went up, rela estate price went up. But we were just in the speculative economy that FED created.
    All FED policy that keep interest rate too low and unrealistic and the more FED try to push economy to Monopoly and Speculative economy, the more severe effect of crisis and crash will occur and surely we all know that this policy create more volatile economy and less people going to real investment that need long term return rather than short term return in financial markets. It is going to create the less real economy and the less real employment.
    I think, after this October, inflation will go up uncontrollably to 6% in six months and we will have big bubble and big crash by itself and surely, unemployment rate will move up more than anyone expects. So, FED should stop the speculation and stop lying on their policy and economic and inflation forecast.
    I think before regulating the bank, we should have the law to regulate FED and government to use monetary and fiscal policies for long term and sustaining growth rather than for speculators like this.

  16. Brian

    I have never bought the argument that our entire financial services industry will pick up and leave if they can’t have the multi-million dollar bonuses anymore. I also question the value of the activity that even results in said bonuses in the first place. The financial services industry is a facilitator of transactions. It is not a generator of wealth at the end of the day. All gains in wealth must be tied to productivity increases. Anything else is just ephemeral. You show me the net benefits from having the financial services industry we have as it is currently constituted. I don’t see improving macroeconomic performance correlated with ever more obscene levels of compensation. As a matter of fact, the economic performance of 2002-2007 was sub par at best.

  17. Bill

    How would the market regulate this if there were no implicit credit guarantee or subsidy to the banking system?
    Remember when airlines were regulated, and they were guaranteed a profit because their routes were protected and their rates were set by the CAB? Well, airline pilots were able to get the rent that the airlines captured, and in fact, became the excuse that the airlines needed to go back for another rate increase when the airlines didn’t bargain with the pilots.
    So, whenever one business is protected from competition, its employees or managers snarf up the gravy.
    Now, what you could do is the following:
    Require banks to have a letter of credit or some other credit facility in place in the event of a run. They would have to pay someone for that right for liquidity. Currently, the Fed is doing that role, but why couldn’t there be a market where Sovereign Wealth Funds (SWF) served that role? They would get a payment from the Banks for the option to draw on the money if they needed it. The banks would have to pay for this option, and the SWF would charge based on the risk of the enterprise. This is a market solution. Hell, even the IMF could get in the business of selling this option.

  18. DickF

    I am in the process of rereading Robert Bartley’s book the SEVEN FAT YEARS AND HOW TO DO IT AGAIN. On page 27 he writes:
    If anyone doubts that there has been a sea change in economic thinking since the 1970’s, remember the emergency economic meeting in August 1971. The personnel helicoptering to Camp David on Firday the 13th included Richard Nixon, John Connally, George Shultz, Peter Peterson, Paul McCracken, Authur Burns, Herbert Stein, Paul Volker, and william Safire. These were the folks who, in the swamps of the 1970s, decided that what the U.S economy needed was wage and price controls.
    At first I was amazed that the Obama administration seems to have a knack of taking the worst elements from previous administrations, here from Richard Nixon, but then I realized that the Nixon and the Obama “solutions” all grow from the same economic root (“I am now a Keynesian.” Richard Nixon to Howard K. Smith in 1971) I am still surprise that with so much evidence of the failure of these policies that they are continually recycled, but then I remember that the policies are not based on a workable economic theory but a religious belief. The a priori assumptions cannot be wrong so the failure must be attributed to someone else. I know, the greedy businessman.
    Once again the economic failures do not come from the theories of Keynes but from the reactions of his followers when the theories fail. How else can we explain the insane recycling of wage and price controls?

  19. jm

    The issues discussed above boil down, in essence, to how to design control systems that will cause financial markets to provide the outputs that society needs, without violent fluctuations of boom and bust.
    I think it would behoove those interested in these issues to study how the control systems that regulate complex chemical process plants are designed.
    Those who take the time to do that will learn that in practice all control is based on feedback loops, and that when long lags and dead times (pure delays) are present in those loops, one can get good control only if one can accurately predict the final effect of control actions. If one cannot accurately predict the effects, the only alternative to sluggish response is violent oscillation.
    It is clear from the writings of most economists that they do not understand the inherent limitations of feedback control systems. It’s implicit in their arguments that they believe the Fed and/or government can keep the economy running smoothly just by twiddling the various knobs at their disposal while observing the effects.
    But is that really so?
    Let’s do some gedanken experiments with some systems all can understand.
    If you’re standing at your kitchen sink, where the valves are inches from the faucet’s water outlet, then once all the cold water has been flushed out of the pipe from your water heater, you can adjust the water flow to your desired temperature quickly with aggressive manipulations of the valves, and compensate rapidly if there is any fluctuation in the water pressure (e.g., if you’re in home where someone flushing a toilet upsets the water pressure at your sink).
    If you’re in your shower, where the outlet is several feet from the valves, you can’t be so aggressive in your control actions, or you’ll alternately scald and freeze yourself. And in some showers, you know that when you hear the toilet in the other bathroom flush, you’d better step to the side at once, because there’s just no way you can adjust the valve quickly and precisely enough to avoid scalding — except maybe by turning the hot off so fast you freeze.
    Now imagine you have a summer getaway cabin on a mountain lake, to which you escape on a muggy August Friday evening, and soaked with sweat after unloading your car step into the shower to find the drain plugged. If the setting were sufficiently private, you might in this case decide to jury-rig an outdoor shower with a garden hose running from the shower head out the bathroom window, duck-taping a broom handle to the shower faucet handle to adjust flow and temperature. But with the very long pure delay through the hose between valves and outlet, how well would you be able to control the temperature? Would there be any way you could avoid being scalded or frozen in the toilet-flush scenario?
    Quite fundamentally, no. The system is inherently vulnerable to upsets (toilet-flush pressure bumps), and any attempt to deal with them by aggressive control actions is going to send the system into oscillation between too-hot and too-cold — the only way to get to the desired temperature is to make gradual adjustments and wait long enough for change to work its way through the hose, and if external upsets are too frequent, the system will never stabilize.
    In all too many ways, the systems we want to control in the economy have long lags and dead times and present control problems much more like those of the jury-rigged outdoor shower than those of the kitchen sink. The knob-twiddling in which the Fed and others are now engaged is more likely to result in continued oscillation between scalding and freezing than a nice warm shower.

  20. Cedric Regula

    jm,
    The way we do it with electronic servo controls is we make a Bode Plot of the system to model whether the system is stable or not. Then you crank up servo gain as high as you can before going into instability.
    Here’s how, so maybe the Fed’s economists can implement a model for the economy. Just kidding.
    (Of course this system has only one feedback loop. Also, velocity of money transactions, as a variable and unknown gain would make this problematic.)
    http://www.ctc-control.com/customer/elearning/servotut/bode.asp

  21. GNP

    So which rich OECD countries currently review compensation packages of bank employees? Presumably there is some kind of precedent.

  22. Anonymous

    DickF
    Your comment about reminds me of your remark earlier this week that confusion in economics is often a political ploy.
    You well understand that the Obama adminstration is not proposing price and wage controls. You well understand that they are not even proposing wage controls. You well understand that they are proposing controls on the incentives for risk-taking in wage contracts.
    Who did you say that you work for again?

  23. jm

    That’s right, Cedric. As I’m sure you saw, in my lay-oriented exposition, aggressiveness of control action is the equivalent of “servo gain”. It’s distressingly clear that many economists just don’t understand that a system’s time-domain response sets an absolute limit on how aggressively you can act without tipping it into instability, and that for some systems that may force you to set the servo gain so low that the best you can get is very sloppy and sluggish control.

  24. Cedric Regula

    GNP,
    They are working on it.
    “G20 statement on strengthening financial system”
    http://www.reuters.com/article/forexNews/idUSL566412820090905
    Don’t forget most OECD countries have much higher marginal tax rates than the US.
    Then here is what happened to Britain. They wasted a bunch money bailing out banks…then guess what happened? Taxes went way up for everyone! How unfair, but I guess the money has to come from somewhere.
    http://www.economist.com/opinion/displaystory.cfm?story_id=13576151

  25. kievite

    Financial industry will shrink dramatically in the coming years.
    That partially will take care about bonuses. Those guys who get used to lavish lifestyle will need to adjust. They (especially commodities traders) were by and large well-paid parasites anyway.
    For example, without high frequency trading several “top bonus” firms will be barely profitable. ETFs now eat into profits of mutual funds industry in a major way. Stocks now are generally discredited as an investment vehicle (not without major help from Goldman and company). This list can be continued.

  26. ppcm

    They are embedded issues in the topic of banks bonus that are not touched upon:
    Is there a correlation between excessive money supply and banks bonuses?
    Is there a correlation between failure of BIS capital adequacy ratios and banks bonuses?
    Is there correlation between banks supervision and banks bonuses?
    Are the shareholders inadequate judges and arbitragors why ? (analysts vs money managers? true accounts vs faked accounts? capital gains vs dividends)
    Are the board members impartial representatives ? are they fulfilling their mandates ? how and who is selecting them ?

  27. DickF

    Policies that set the pay for tens of thousands of bank employees nationwide…
    Anonymous (Simon?),
    You confuse policy with motivation. Whether wage controls are intended to hold down inflation or to curb risk-taking they are still wage controls, they are still a handfull of government bureaucrats with the hubris to believe they know more about running business than those who have spend lifetimes doing just that.
    The whole argument about executive compensation is pure class envy. If a company over-prices compensation then in a free market the company will go out of business as other more prudent companies with lower costs gain their market share. Government intervention simply overrides market discipline and you end up with a situation like the compensation of the executives at Fannie and Freddie.
    But as Fannie and Freddie prove when the government is in a contest with market forces the government always loses, but the decision-makers walk away with their compensation while we pay the price for their hubris.
    Concerning my employment, burger flippers usually know more about the real world than those lost in graphs and equations because they do not have the luxury of playing games with the lives of others. They have to actually pay bills in a constantly depreciating currency.

  28. GNP

    Thanks Cedric. Still tend to think that this initiative is largely window dressing for the indignant masses.

    So when will mortgage payments in the USA lose their tax deduction eligibility?

    And what is the USA going to do to buffer itself from future oil price shocks as opposed to continuing to encourage policies that make the next oil price shock and its negative consequences on the US economy almost inevitable?

  29. Simon van Norden

    Dickf:
    “Whether wage controls are intended to hold down inflation or to curb risk-taking they are still wage controls, …”
    Uh….no. Dude, you were talking about Nixon’s price and wage controls. They were government-imposed limits on changes in prices and wages. They applied to everyone. Now fast forward to 2009, where the govt is thinking of putting rules on a few thousand people (not hundreds of millions.) Furthermore, the rules would not limit wages, nor their rate of change. As the NYT says
    “Fed officials would give banks wide leeway in how they structure their rewards. They would not prohibit million-dollar pay packages or address issues of fairness. Rather, the rules are intended to restrict pay plans that encourage reckless behavior by rewarding only short-term gains.”
    Class envy? Check your facts.

  30. Cedric Regula

    I’m still holding out some hope that the market may just downsize the financial industry. I think they are going to have a hard time selling securitized products anytime in the foreseeable future. And the commodity regulators are after the super large trading divisions. They want to cap the volume that any one firm can trade.
    I can’t see them doing anything to hurt housing market, especially eliminating the mortgage deduction. That will be seen as making the banking system problem worse.
    CAFE increases mileage 30% by 2016. But that is probably not enough. There are 3 billion wannabe car drivers in Asia.
    The broader problem is if we ever get the current to crisis to end, the government has shot its counter cyclical spending wad. And it will be difficult to raise taxes with a weak slow growth economy.
    So vulnerabilities increase, and all the other future unfunded and underfunded liabilities come into view as well.

  31. DickF

    Simon,
    Uh….no. Dude, you were talking about Nixon’s price and wage controls. They were government-imposed limits on changes in prices and wages. They applied to everyone.
    No, you are talking specifically about Nixon’s wage and price controls I am talking about wage and price control theory in general. Whether Richard Nixon’s, Jimmy Carter’s, or Barak Obama’s they all have the same effect just at different magnitudes.
    Nixon’s wage controls did not apply to everyone. They were targeted and were different for different workers. Go back and check the implementation.

  32. DickF

    I totally misunderstood this. I thought it would require an act of congress but I have now learned that this is a power that Bernanke just wants to assume at the FED. Do we really think it is a good idea to have an unelected body determining wage rates? If this can be done at the banks can’t it be done anywhere? Why not let the FED just establish wage guidelines for all the US. We all know lawyers are paid too much. How about basketball players and entertainers? Wa-a-ay too much. Perhaps there should be caps on how much you can earn on an investment? Wow, so many good ideas – NOT!!

  33. George Galletly

    I am flabbergasted at the apparent ignorance of most of you folks posting comments about ‘Controlling the remuneration of uncontrollable financial crooks’
    I was a professional Electrical Engineer. I handled projects for the generation, transmission and distribution of Electricity in several countries around the world. My salary was reasonable but moderate.
    By what reasoning can the compensation of any financially qualified person be worth approximately 10 to 20 times a qualified Engineer, doctor, dentist, etc.
    What value have any of these crooked financial goons contributed to society ? As far as I see it, not all, in fact they have inflicted immense injury to millions of people. Far too many of them simply try every crooked method the human mind can conjure up to line their own pockets with millions, maybe billions, of proceeds which should be distributed to the investing public.
    Should they be controlled? hell yes! not only that but if I had my way they would be constrained too.
    A very indignant citizen, George

  34. Glass Voice

    “Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.”
    Better late than never, as the saying goes. It is November 19th, 2009 and banks are returning to some traditional ways of making money, fees. In the past it has been very easy to avoid banking fees in simple day to day transactions. Sadly it looks as if those days are behind us, along with free checked luggage on flights.

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