This past week the Obama administration’s compensation czar,” Kenneth Feinberg, released his plan to cut the compensation of top executives at seven companies that were rescued by TARP.
It’s tempting to cheer these cuts. Feinberg’s plan reduces top executive pay by an average of 50%, yet still leaves even those facing the deepest cuts (up to 90%) with annual compensation packages many Americans would be pleased to receive over their entire working life; not a bad deal when you lead a company that taxpayers had to bail out. The Feinberg plan will not force any bank execs onto food stamps. And let’s be clear about a simple problem with our economic system; many Americans that behaved responsibly have lost wealth and jobs through absolutely no fault of their own but because of this crisis. The financial industry has a long history of crises that destroy wide swaths of jobs, businesses, and wealth.
That’s why it’s tempting to cheer these cuts.
I am just not sure cheering is the right response. I have read and heard too many commentaries from the left and the right saying that the pay cuts are a response to populist anger, not a real answer to current and future banking issues. Stuart Whately at Huffington Post points out that, “the administration may be buying time with a symbolic and cosmetic tactic.” Whatley goes on to say, “Allowing the current media hullabaloo and any populist elation to belie the intense challenge facing real efforts to comprehensively reform our broken systems.”
New York Democratic Gov. David Paterson warned that New York stands to lose as much as $1 billion in revenue under the plan.
Roy C. Smith, professor of finance at New York University and author of the upcoming (January) book “Paper Fortunes: Modern Wall Street; Where It’s Been and Where It’s Going,” writes for the Wall Street Journal that, “The crisis was caused by a combination of lax monetary policy, loose regulation across the entire financial sector, yield-chasing by institutional investors craving decent returns in a weak market and a vast global banking industry that turbocharged the whole process.”
I appreciate Smith’s reminder that regulatory and monetary policy played a major part in this crisis. I believe strongly that while populist anger will symbolically address a portion of the problem, that populist anger has not impacted the Washington political class in the least. We the People have allowed Congress to push their responsibility for this crisis off their plate – Have any members of Congress been recalled by their districts because of this crisis?
By the way, ff you’re concerned about the very tight relationship between Wall Street and Washington, you should be. Robert Reich, Former Secretary of Labor and Professor at Berkeley writes for Huff Post that, “Executives and traders on the Street have become the single biggest sources of money for Democrats as well as Republicans. And with mid-term elections looming next year, you can bet every member of Congress has a glint in his or her eye directed at the Street.”
We have a political class in this nation and we should not. Feinberg was justified in cutting banker’s salaries (whether he is permitted this power Constitutionally is another question) but until he halves Congressional salaries because of the crisis, and until the populist ire turns on Congress, this action will be just another in a long line of hypocritical efforts to play the American public as rubes.
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I actually read that Harry Smith over at CBS thinks this is a such a good idea that the compensation caps should also apply to non-TARP companies too. But only financial services companies would be subjected to Smith’s ideal.