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Tuesday, January 5, 2010

Getting in Deeper

In what the Wall Street Journal calls “a watershed moment for government intervention in the private sector,” the Federal Reserve announced in October that it will regulate executive compensation at all banks so they will not have incentives to take on too much risk.

Meanwhile, the Obama administration said it would cut by half (on average) the compensation of the highest-paid people at the seven companies still on taxpayer life support: AIG, Bank of America, Citigroup, General Motors, Chrysler, GMAC, and Chrysler Financial.

So here’s the puzzle: Is such government intrusion into the compensation process a good or bad thing?

Before answering, let’s remember that the taxpayers have been compelled to rescue lots of companies, banking and otherwise, over the last two years. The people’s exposure is immense. Neil Barofsky, special inspector general for Treasury’s financial sector rescue, says enormous surprise bailout costs will befall the country in addition to the $159 billion the Congressional Budget Office projects TARP will lose. Barofsky was referring to the cost of government borrowing and the potential cost of rewarding risky behavior.

Besides that, the Fed has been buying up billions of dollars in “toxic” (that is, worthless) mortgage-backed and other paper with money created from thin air. The new money threatens to ignite a monster price inflation when the banks begin to lend it. The impending dissipation of the people’s wealth at the hands of the Fed(eral Bureau of Counterfeiting) is another cost of the bipartisan government bailout of corporate finance. It’ll be a massive tax on the middle and working classes.

Well, then, shouldn’t the government have something to say about what goes on in those companies on the dole, executive pay in particular?

It’s tempting to say yes, but I think the best answer is no. I’m not totally comfortable with that answer, but it seems better than the alternative.

First off, we must reject the propaganda that the Treasury and the Fed are acting as the taxpayers’ agents by taking control of corporate compensation. Nothing can be further from the truth. They are the taxpayers’ adversaries and are only looking out for themselves. After all, they are the ones that exposed the taxpayers to these huge liabilities in the first place.

Moreover, it’s not really the taxpayers’ money the politicians are looking out for. In real terms, it’s now their money by virtue of legal plunder. The Bush administration tried to sell the public on the bailout by suggesting that the toxic assets (or bank shares) acquired by the government might one day be resold at a profit for the taxpayers. But if the assets do sell for more than the government paid, will taxes be cut to reflect the profit? Fat chance. Politicians tend to spend every penny they can get their hands on—and then some. It is they who would profit, not the taxpayers. They ain’t us.

Another reason to oppose government conditions on bailout money is that they are likely to make things worse. I seriously doubt whether anyone at the Fed or Treasury is qualified to design compensation packages that would encourage just the right amount of risk, not too much or too little.

A third reason to reject this government intervention is that it will serve as a justification for further intervention. Pay czar Kenneth Feinberg already says he hopes the pay scheme will become a model for the rest of Wall Street.

My final reason for saying no to the pay czar and bank regulators is that I want to make sure that such bailouts never happen again. Maybe the people will be less likely to acquiesce the next time if they see the current corporate rescue for the plunder it is.

We can’t change the past. The bailouts happened. Now we have to deal with the consequences. We should concentrate on stripping government of the power to bail out companies in the future. We should also begin to fully separate State and banking. A good start would be to abolish government deposit insurance, which only lulls depositors into a false sense of security and creates the very systemic risk the regulators say they want to avoid.

* * *

“Green jobs” are the magic words promising to bestow prosperity and environmental bliss through costless government manipulation. Do you need more reason to be skeptical? Andrew Morriss performs the debunking. Richard Fulmer adds an insight on the shortcomings of alternative energy sources.

In the mixed economy, is freedom’s glass half full or half empty? George Leef shows that this is more than a philosophical question.

Walmart inspires hisses and hosannas. Which are more deserved? Art Carden sorts it all out.

These days it’s especially popular to scapegoat anyone engaged in complex financial transactions not readily understood by laymen. Example: short sellers. They’re accused of manipulating the stock market for personal profit, so the government has its eye on them. Warren Gibson comes to the defense of this valuable yet unappreciated group.

The government’s money managers are willing to risk inflation to avoid deflation. Good idea? Steven Horwitz distinguishes good deflation from bad.

One of the great pieces of American folklore is that businessmen don’t like regulation. Bruce Yandle sets the record straight.

Here’s what our columnists have come up with this time around. Lawrence Reed declares himself a Locofoco. Donald Boudreaux won’t let Chinese currency manipulation keep him up at night. Stephen Davies demonstrates the power of historical myth. John Stossel looks at the tax system and doesn’t like what he sees. David Henderson says don’t fear the trade deficit. And Theodore Levy, encountering the claim that markets for medical care cannot work, remonstrates, “It Just Ain’t So!”

Volumes about the alleged failure of the market, a crusty old individualist, the law, and American public policy undergo scrutiny by our reviewers.

—Sheldon Richman
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  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.