Paul Krugman jumps aboard the Wall Street pay-reform wagon.
In our opinion, he’s right about the problem–the current pay system encourages short-term risk-taking that threatens the long-term health of firms–but wrong about the solution.
As we said last week, we’re all for smarter incentives on Wall Street. But they should come from Wall Street, not Washington. And any Wall Street reform plan has to include the ability to let big, stupid firms fail.
Even as the rest of the nation continues to suffer from rising unemployment and severe hardship, Wall Street paychecks are heading back to pre-crisis levels. And the industry is deploying its political clout to block even the most minimal reforms.
According to recent reports, the Fed’s board is considering imposing new rules on financial-firm compensation, requiring that banks “claw back” bonuses in the face of losses and link pay to long-term rather than short-term performance… But the industry — supported by nearly all Republicans and some Democrats — will fight bitterly against these changes. And while the administration will support some kind of compensation reform, it’s not clear whether it will fully support the Fed’s efforts.
See Also: The Right Way To Reform Wall Street