Regulate bank pay

Published on Online Journal, by Peter Morici, Sept. 22, 2009.

Wall Street greed and irresponsibility have nearly destroyed the U.S. economy. Big bonuses for bankers encourage reckless risk taking and were a principal cause of the credit crisis and Great Recession.

Pay must be regulated to avoid another calamity …

… Writing SWAPS and selling bad bonds to unwitting investors permitted bankers to earn huge profits and bonuses. When too many mortgages failed, investors and bank shareholders took enormous losses, and taxpayers bailed out the banks.

Apart from the TARP, the Federal Reserve and FDIC permitted banks to borrow at rock bottom interest rates and enjoy big profits to rebuild their capital. Consequently, widows relying on Certificates of Deposit for income now receive much-reduced interest rates. That’s right – Ben Bernanke is taxing grandma to bail out Goldman Sachs. 

Flush with profits, the banks are up to their old tricks – again creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses, and manufacturing conditions for another crisis.

If Wall Street banks are too big fail, then they are too big to let go on with this irresponsible behavior.

French and German regulators advocate limits on bank compensation, and the Federal Reserve is considering prohibitions on compensation practices that encourage excessive risk taking. The latter is too complex to be realistic – the banks would run circles around such rules, much like lawyers creating tax shelters.

Better to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries.

Harsh for sure, but so is the pain bankers’ recklessness has imposed.

Bankers should not be allowed to pay themselves royally and put the nation at risk again. (full text).

(Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission).

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