Notes on Bernanke’s Vision of Fin Reg Reform

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12 Responses

  1. A.W. says:

    Not to mention:

    1) chasing good money after bad money.

    2) punishing responsibility with higher taxes.

    3) crippling the companies we do help with ridiculously low salary caps. If a company is in such deep trouble, you need the best possible executives. You are generally not going to get them at $500K.

    4) destroy the health care insurance industry. technically not Geitner’s thing, but shouldn’t he be telling Obama that a) his proposals on health care will have exactly that effect and b) that is lunacy in the middle of recession.

    5) raise the costs of energy. Maybe not his personal fault, but again, shouldn’t he point out how retarded this is?

    6) and judging by the stimulus itself, we will stimulate the economy now by investing in projects for 2010 and beyond, when the recession might be over already.

    And all of this has to be rushed through before anyone has a chance to read it! even the spending more than a year away!

    Oh, and let’s not forget #7: never waste a good crisis. that is the obama mantra. So in the middle of a recession we will blow out the deficit in order to get government-run health care, cap and trade and free college for everyone, or something like that.

    Btw, can you imagine what the reaction would be if Bush or his administration had said anything like that?

  2. A.W. says:

    I will apologize that between low caffine for the hour and generalized anger at the complete incompetence at 1600 Pennsylvania, i turned this into a rant on Obama/Geitner. Not that they don’t deserve what i said, but its off topic, for which I apologize.

  3. Larry Rosenthal says:

    You are quite right, A.W. History demonstrates that we obtain the highest possible performance from executives only when there is no regime of salary caps. If we have learned anything from the current recession, it is that we need unlimited compensation in order to improve the performance of the financial sector, right?

    Larry Rosenthal

    Chapman University School of Law

  4. Larry Rosenthal says:

    You are quite right, A.W. History demonstrates that we obtain the highest possible performance from executives only when there is no regime of salary caps. If we have learned anything from the current recession, it is that we need unlimited compensation in order to improve the performance of the financial sector, right?

    Larry Rosenthal

    Chapman University School of Law

  5. A.W. says:

    Larry,

    Presuming you are being sarcastic, price controls don’t work. As the Russians, Poles, Czechs, and so on. That’s history for you.

    Of course paying top dollar won’t guarantee a great executive. and paying very little won’t guarantee a bad one. But the overwhelming trend in life is the better you are the more money you make. Indeed, your entire argument makes the classical liberal mistake in overregulation: you forget that the regulated person or entity can go somewhere else. We are not talking about capping the salaries of all CEOs, etc. just the ones who get the fed money. So say Chip Carnege is a great executive who is a genuis at turning companies around. He has two companies he could go to. Company A, which is taking TARP money and thus can only pay him $500K. Or Company B, which is not in such trouble, and with no restrictions is willing to pay him $30 Million. Now in individual cases, quirks may arise. But in the overwhelming majority of cases you expect the Carneges of the world to go for company B. really, this is economics 101.

    But I love this idea. I can picture Obama discussing who should run AIG: “We need the greatest executive ever. Someone who can turn this company back from the brink, and bring it back in the red. But don’t spend very much money on it.”

    sheesh.

    Btw, i assume that as a law professor (I presume) you will recognize that your profession is greatly overvalued, too, and volunteer for a cap on your salary, too? just wonderin’.

  6. Larry Rosenthal says:

    One thing appears quite clear — an unregulated market seems to have failed to produce an “efficient” price for executives, no? Isn’t it clear that an unregulated market in executive compensation created an incentive for executives to take on excessive risk in order to generate short-term profits that seemingly justified what might otherwise appear to be excessive compensation?

    As for my profession, when law professors’ compensation creates an incentive to take on excessive risk, thereby endangering the health of the economy as a whole, I will gladly agree that regulation of law professors’ compensation is appropriate.

    Larry Rosenthal

    Chapman University School of Law

  7. Matt says:

    I hope I’m not being too nitpicky but “classic liberal mistake” sounds like you’re referring to a mistake made by a classic liberal. (See: http://en.wikipedia.org/wiki/Classical_liberalism) The word “typical” would have been more effective there. (To be sure, I think everything you said was somewhat misguided, though I’d prefer to stay on topic with the original post.)

    Anyways, a clearinghouse for credit default swaps would be nice. (http://tinyurl.com/bwfju7) It was an idea that my father had suggested while working on a congressional committee a few years back, but he was “pooh poohed” out of the room.

    I’d be interested in hearing Prof. Cunningham’s opinion on mark to market accounting (I’m not sure if he has posted about this before.) Mr. Buffet sounded sensible to me when he recently stated that he believes mark to market accounting should be suspended for regulatory purposes (not necessarily disclosure purposes.)

    Indeed, it sounds like the House is ready to address this. (See: http://tinyurl.com/c9w27k

    Cheers.

  8. A.W. says:

    Larry

    > One thing appears quite clear — an unregulated market seems to have failed to produce an “efficient” price for executives, no?

    No. For instance, you might point toward company X which failed, and paid its executive some mind-boggling sum and say, “See? Clearly he was not worth it.” And I would say, “yes, and thus his company failed. Failure is a part of the ‘evolution’ of the market. Companies try to accurately price its goods, services and pay for its employees. Those that fail to accurately assess the correct price for its those items fail. A company overpaying its executive and failing is not proof of market failure; it is the market acting as it should. That is economics 101.”

    Assuming of course, you know of no attempt to demonstrate aggregate salaries are too high, period, and not merely among failures. But bluntly the concept of “too high” is so slippery, I doubt any meaningful study could be performed. It is always going to be subjective in its core.

    And what is so clear that you can’t even dispute it is if we want the best executives to clean up this mess, we should pay more than $500K. I could picture Obama as the manager of a basketball team. “We have been losing for years. Our fan turnout is in the crapper. Ticket sales are in the basement. We need to get together a great team and turn this around. But I don’t want to pay the players more than minimum wage for any of them.” Yeah, good luck with that.

    I mean seriously, a fifth year associate at a good law firm gets paid more than $500K (at least last when I was in a law firm). Not a partner, not of counsel, an ASSOCIATE. This salary cap is a counter-productive temper tantrum. Its lunacy.

    > Isn’t it clear that an unregulated market in executive compensation created an incentive for executives to take on excessive risk in order to generate short-term profits that seemingly justified what might otherwise appear to be excessive compensation?

    Actually, it was government that created the incentives to give out and “Ninja” loans (No INcome, Job or Assets = Ninja). That caused the banking industry to have trouble, which in turn f—ed up our whole economy. Anyone who characterizes our economy as “unregulated” is living in fairy tale land. And anyone who thinks all of this was caused by evil overpaid executives, hasn’t been paying attention, or just has bought the democratic spin. Not that it was only Democrats who did this. This problem goes back to Carter, so a pox on both parties. But one party wants to grow government more than the other, so one party is interested in ignoring how government caused the problem.

    Which doesn’t let the executives off the hook. They should have known that this crash was coming, and yes profited while they could, but also had a plan ready for the collapse, too. But it’s a little bizarre to say, “well, the government has complete f—ed our economy. So this proves we need more government.” Now, I am not saying in a libertarian sense that the government has no role. Normally I prefer only the most minimal interference, but when the government creates a mess it is philosophically justified to have government fix it. But at the same time, you wonder, geez, maybe the government is so incompetent that really, all things being equal, the government should get out of the way before they make it even worse. And certainly the last 2 months have born it out. The next generation is going to be crushed by the debt we are racking up today, not to mention the problems with Social Security coming and the like. And the Obama admin hasn’t exactly filled me with confidence. To borrow someone else’s joke, “Obama is not Jesus. Jesus could build a cabinet.”

    > As for my profession, when law professors’ compensation creates an incentive to take on excessive risk

    Mmm, yeah, and how much are your students in debt right now, and how long will they have to work at what salary to pay it off? Going into a very tough job market, no less.

    Matt

    > The word “typical” would have been more effective there.

    Right, in other words I was causing confusion between the term “Classical Liberal” and the phrase classical liberal mistake. Fair enough.

  9. Larry Rosenthal says:

    There was a time when banking was simple. Banks paid depositors 3 percent, collected 5 percent on loans after verifying the borrower’s creditworthiness, and pocketed the difference. Risk was low, profits were reliable, and compensation was reasonable. Then, compensation and risk both soared, and we all know the outcome. Does A.W. really believe there is no relationship between the two? Bankers who wanted huge salaries had to produce huge profits, and that requires greater levels of risk.

    Perhaps A.W. believes that the market should correct what became a bubble in executive compensation, rather than government taking on the project. President Hoover had a similar view. The problem is that when a bubble bursts, a lot of innocent people get hit by the fallout. Some (not A.W., but some) might say, better to prevent the bubble in the first place.

    As for government causing the problem, it was not the government who came up with the risk models that underlay the current crisis. Overcompensated Ivy League genuises did that all on their own.

    Larry Rosenthal

    Chapman University School of Law

  10. A.W. says:

    Larry,

    Look, twist and turn all you want, but you cannot even dispute that if you are seeking the best possible executives, you are handicapping yourself if you refuse to pay more than a 5 year associate in a law firm, when they can always go somewhere else and get paid more an entire order of magnitude more. You can’t even deny it. So two times now you have simply ignored that point, because you are too proud to admit that my original point was spot on, and “The One” is either a demagogue exploiting our anger, or an economic illiterate. I am not sure which is worse.

    > There was a time

    When are you speaking of?

    > Does A.W. really believe there is no relationship between the two?

    The specific market for the specific defaults that sent our market in a tailspin was created by government. Deny it all you want, but it is a fact.

    > Perhaps A.W. believes that the market should correct what became a bubble in executive compensation, rather than government taking on the project. President Hoover had a similar view.

    Yes, and many competent economists say the economy was well on its way to recovery when Franklin Roosevelt took office and Roosevelt lengthened the depression by about 7 years. It is far from clear that government intervention was at all useful. Not to mention that Roosevelt created entitlements that are still to this day strangling our public fisc.

    As I said before, I am not philosophically opposed to government solving the problem if only because they created it. I just wonder if the government is competent enough to solve it, given the rank incompetence I am seeing, and if maybe we should say to the government, “you know what? You have done enough. Now back away and leave the economy alone.”

    But no, keep explaining to me why it is brilliant of the government to destroy the health care industry, raise the cost of energy, and take out massive debts that will be passed on to our children, all to fund things that have a dubious relationship to any rational theory of economic stimulus, like the NEA and numerous monuments to the Kennedys. In two months the stock market had dropped to the lowest level in over 10 years; and the unemployment is at the highest level in 20. I hope Obama sees the light and suddenly reverses course, but at this point I would settle for him doing nothing.

  11. Larry Rosenthal says:

    A.W.: You may have your “many competent economists.” I’ll take Keynes.

    Larry Rosenthal

  12. A.W. says:

    Ah, well, given your grasp of economics (believing for instance, you will buy the best CEO’s for our TARP-aided companies for an order of magnitude less than the free market is offering), I will take your faith-based argument for what it is worth.