A Few Notes On Government Regulating Executive Pay
In the news this week is word that the government “pay czar” will be requiring certain institutions that accepted tax payer dollars for aid (but not all of them) to cut executive compensation. While I am one of the many Americans that is outraged by the billions in bonuses being distributed by these companies, I have mixed feelings on this issue.
First, I was listening to Rush Limbaugh today and Republican listeners were calling in upset that people on Wall St. were going to have their compensation “regulated”. I disagree with these callers slightly because they don’t think the government should be involved in these companies that received government bailouts. I tend to think that companies that received tax payer money should be subject to some level of restriction.
There are two main points that I wish to make with regards to this situation.
Point #1 – Not all companies that got tax dollars are subject to pay restrictions – Why?
The companies affected here are AIG, Bank of America, Citi, GM, GMAC, Chrysler, and Chrysler Financial. What about Goldman Sachs? Oh, that’s right, Goldman Sachs pretty much runs the Treasury and the Fed so they are in on making the rules.
The companies that paid back the TARP money and “smaller companies” are not going to face the same restrictions.
Point #2 – None of this would matter if we didn’t bail out companies
The major problem I have in all of this isn’t whether or not the GM CEO is having his pay regulared by the pay czar. My biggest problem is that bank executives are not having their pay regulated by the free market. For example, Goldman executives made billions before and after the “crisis”. But during the crisis they didn’t lose. So when can they lose? The answer is never. Because when they fail, the Fed is there to take care of them. This is how it is designed (read “End The Fed” by Ron Paul – review coming soon).
If we embraced failure as a crucial part of capitalism, then banks would take on less risk. They would make less money during boom times and the government wouldn’t lose money during bust times. Why is this so simple yet not applied? The answer is: corruption.
So, it’s important to stop debating the things that don’t matter (i.e. whether or not the bailed out companies should have their pay regulated). Let’s debate the things that do matter: why certain Wall St. banks are immune to any downturn and why they get special circumstances that no other industry gets. Yes, banks are important. They help commerce happen. They are not important enough, however, to fleece the American people every time the business cycle corrects.
Break up the biggest banks that are now even bigger than when they were deemed “too big to fail” and then let any bank that fails to go under. Our financial system will be stronger for it, not weaker for it.
Update: This is an interesting article that you should check out. It’s about the Goldman Sachs executive who says people need to learn to tolerate that some industries (banking) will have higher bonuses than others. I disagree. I think people need to learn the truth that banking has a special arrangement that no other industry has: a back-stop called the Fed that not only allows but encourages excessive risk. Banking = privatized gains + socailized losses.