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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

September 18, 2009 at 10:20 AM

As the Fed looks at pay, suddenly the banksters are unhappy with ‘socialism’

Top of the News: Not surprisingly, the well-heeled readers of the online Wall Street Journal vote “no” resoundingly in a poll concerning a Federal Reserve proposal to regulate the compensation for tens of thousands of the top paid bankers.

Somehow such “socialism!!” was dandy when it meant putting $700 billion into the hands of the bankers during last fall’s panic with no strings attached, not even that the banks receiving the money help unfreeze the credit markets. “Nationalization!!” of AIG was super cool when it meant taxpayers would shell out $85 billion to pay back mysterious “counterparties,” many of whom turned out to be the big banks.

And the surviving investment banks, which traditionally pay the highest scratch for executives who cook up high-risk “innovations,” rushed to become bank holding companies. That brought them under the protection of the Fed — and the guarantee that American taxpayers would bail them out no matter what. And that’s just the guarantee extended to all banks and their investors — but only after the regulators had decided to thin the competition and make the “too big to fail” institutions even bigger by letting Lehman Brothers and Washington Mutual go down.

Taxpayers might have a different opinion on whether the Fed should be involved (take the poll below). Compensation in the “financial services industry” has been a key factor in the high-risk practices that led to the crash, from the subprime bubble to exotic derivatives that even the bankers didn’t understand. They did understand being paid royally for selling this stuff.

Me, I think the Fed proposal is probably wrong-headed, but not for the same reason as the toffs. Banking regulation needs a 21st century Glass-Steagall Act, the Depression-era law that prevented commercial banks from taking on too much risk. It needs to address any major risk to the overall financial system, including too-big institutions, derivatives, the shadow banking system, etc. It would penalize systemic-risk behavior by bankers.

Second, the scandals from the late 1980s onward show the desperate need for reform to corporate governance of public companies. They need more independent boards, transparency, honest accounting, checks and balances. This is especially true as more Americans are forced to depend on the stock market for their retirement savings. A centerpiece of this reform would include tougher standards on compensation.

Finally, the tax structure should be changed, both raising rates on the high earners, such as those top bankers, and taking away loopholes that allow big companies to avoid paying any real taxes and to find shelters from the massive looting of shareholders’ wealth that is excessive executive pay.

Do this, and the Fed’s actions are unnecessary. But even the big bankers screaming the loudest wouldn’t want this kind of real reform.

The Fed Up Poll(polls)

Today’s Econ Haiku:

Life goes on, they say

Not Washington Mutual

Suicide, painful

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