Must-read of the day: Dean Baker on progressive conditions for a bailout

By Kathy G.

(Update on the bail-out: Paul Krugman says no deal).

As they say, read the whole thing -- it's an important post. There are two points, however, that seem especially critical to me. First, there's this:

The government can set whatever conditions it wants on participating in the reverse auctions. One of the conditions it should set is that executive compensation be severely constrained at any financial firm that participates. For example, it can set an absolute limit of $2 million in total compensation for any executive at any firm that takes parts in the reverse auction.

Since participation in the auction is completely voluntary, this would make the cap voluntary. Furthermore, there need be little fear about losing good talent, because well-managed firms would not have to participate in the reverse auction.

Restraining compensation on Wall Street will be incredibly important in reversing the pattern of inequality that has developed over the last three decades. The exorbitant compensation packages on Wall Street distorted pay structures throughout the economy.

Executives at non-financial companies looked at the pay on Wall Street and used this as a basis for demanding outrageous pay packages for themselves as well. Presidents of universities often get over $1 million a year, and even top executives at private charities can often earn near $1 million a year. These salaries seem low when compared to their counterparts in the corporate world, but they are outrageous when compared to the pay checks of typical workers. If we can bring about voluntary pay restrain on Wall Street with this bailout, it will be a very big step toward reversing the pattern of inequality that has developed over the last three decades.

Here, here! There's also this:

The structure of the Fed should be changed so that all the officials with a direct say in monetary policy are appointed by the president and approved by Congress. The Fed is supposed to act in the public interest, not in the service of the financial industry. It is disturbing that the public is being represented in this debate over the restructuring of the financial industry almost entirely by top figures from the financial industry. This would be comparable to having national policy on the auto industry determined by former top officials with the United Auto Workers. It is difficult to believe that the views of Treasury Secretary Paulson and other government officials from the financial industry are not influenced by their long association with the industry.

This problem should not be worsened by giving the banking industry a direct voice in the conduct of monetary policy, by allowing it to appoint Federal Reserve district bank presidents who take part in open market committee discussions. There should be a strict separation between the conduct of open market policy, which should be done exclusively by people appointed by the president and approved by Congress and the responsibilities of the district bank presidents. The banking industry deserves no special voice in the conduct of monetary policy.

I have no idea how the politics of this thing will play out. However, I have a feeling that it's much more likely we'll see restrictions on executive compensation than it is that we'll see a Fed where the financial industry no longer plays such a dominant role.

Comments

[EZ]

I think that the structures in place to determine executive compensation are deeply flawed and create situations in which stockholders and executives have very different goals and incentives. However, do you really think the solution to this is a cap on earnings for executive at companies that: a) are probably more in need of top talent at the top than average, and b) are owned by us!!
If we cap salaries at taxpayer owned companies, won't top executives find someplace else to work? I want the best executives running taxpayer owned companies. Bringing a DMV mentality to this will not be good for the economy, will not be good for the taxpayers, and ultimately, will not help bring about true compensation reform.

[cheap insurance]

Hey, I followed on from Damien's blog. Congrats on winning post of the month, it's a clear, concise article which you've compiled with lots of thought for people's questions. (If my granny starts commenting mine, I'll know who armed her with the know-how :P )