The latest move by the Federal Reserve to begin regulating financial sector compensation in a misguided effort to avoid another financial crisis has very little to do with last fall’s bailout. Even though many of the bailout programs continue, there’s no real connection between the drive to control the way banks pay their employees and the bailouts.
This is a point that need to be made because we completely agree with many of our commenters who say that firms propped up by government support should not deliver huge bonuses or salaries or expensive perks to executives. They should suffer the loss of talented employees and the deterioration of their franchise. This kind of slow death is orderly and proper. It’s what should happen when companies fail. The last person left can turn out the lights.
But the new moves to restrict pay are not based on the bailout. Nothing in Paul Krugman’s argument for pay restrictions turn on the bailouts, of which he was a severe critic. If it were valid, his argument would hold even if banks had been allowed to faill and no one had been bailed out.
The current debate is instead about whether Wall Street’s compensation structure needs to be subject to close regulatory scrutiny. And that, in turn, is about whether compensation played primary role in creating our financial crisis. Krugman thinks it did. We think it didn’t. And we have the evidence that demonstrates we’re right.
We share your outrage over using taxpayer dollars to pay bankers millions. But the new debate goes far beyond the misuse of taxpayer funds.