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Saturday, October 24, 2009

The Most Monumental Power Grab You Never Heard About

The pre-weekend information dump included an announcement by the Federal Reserve and Treasury Department that the federal government proposes to extend its control over pay packages beyond financial institutions which received bailout funds.

According to the press release, the government proposes to monitor and, if need be, veto pay packages at any banking institution subject to federal regulation:

Flaws in incentive compensation practices were one of many factors contributing to the financial crisis. Inappropriate bonus or other compensation practices can incent senior executives or lower level employees, such as traders or mortgage officers, to take imprudent risks that significantly and adversely affect the firm. With that in mind, the Federal Reserve's guidance and supervisory reviews cover all employees who have the ability to materially affect the risk profile of an organization, either individually, or as part of a group.
This is an earth-shattering development in the annals of government control, yet because the information was released on a Friday, it has received little press attention relative to its importance.

One can understand the bargain made where a company receives federal funds to stay in business. By accepting the funds, which must be repaid, a measure of corporate and shareholder freedom was sacrificed.

But to base government control of salaries on mere regulatory jurisdiction would give the government control over much of the economy, essentially any business involved in interstate commerce. This is the harm which many of us feared from the Trojan horse of the bailouts.

Why not regulate law professor salaries (horrors!)? After all, educational institutions are tax-exempt and thereby receive a de facto federal benefit.

Or doctors? Particularly if Obamacare passes, there will be a federal interest in making sure doctors have the right financial incentives.

Or lawyers? At least those who are admitted to practice in federal courts. There is a federal interest in making sure that the federal resources used to fund the courts are not wasted.

Or truck drivers? They use roads built with federal highway funds (with a touch of stimulus funds thrown in).

Or airline pilots, flight crews and mechanics? Their industry is regulated by the FAA, and the TSA controls security at airports.

And the list could go on and on. But as always, politics will enter into the equation. Do not expect attempts to regulate Hollywood or music industry compensation, or the speaking fees earned by former Presidents and members of Congress.

Creeping federal regulation of every aspect of the economy now is being used as a justification for federal regulation of every aspect of our lives. And the example of regulation of banking salaries sets a precedent for regulation of our personal behaviors once Obamacare passes.

This is a monumental power grab and more.

The actions of the federal government with regard to non-bailed out banks undermine a fundamental feature of our capitalist system: Individuals get to structure their own financial lives, and shareholders and boards of directors get to structure corporate financial lives.

This is using a crisis to grab power unrelated to the crisis. Don't say you haven't been warned.

Of Interest:
Caroline Glick Not Interested in Israel's Survival?

Related Posts:
A Clintonian Defense of Our Nixonian President
IRS The New Health Care Enforcer
Taxing Your Mere Existence

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  1. I have an idea. They should try to control the pay of those very overpaid Hollywood types, beginning with Oprah

  2. An excerpt from "Leading the People"

    True Believers propose solutions with the same general theme:

    - They are best qualified by superior education and intellect to provide you with a solution and to implement that solution.

    - The solution requires that we all pitch in and not be greedy. The people with the most resources will put their extra income or property into the pot.

    - There must be complete cooperation. Alternate solutions go against the community spirit, and these are elitist and illegal.

    - There will be severe penalties for non-compliance. All good people will want to comply.

    - If there are not enough resources to pay people for their work according to the solution, then those people with the appropriate knowledge and experience will contribute some of their effort for free. Whatever it takes for success.

    Memo to The People:

    "Little People, you have been left alone long enough. We are here to help you, to stop your bickering and negotiation, and give you your rightful, planned jobs in society, more equitable, more efficient, and more organized. We won't stop until we work out all of the problems and establish, once and for all, a fair society, administered by us."

    "We hope that you appreciate our dedication and sacrifice. You will soon, even if you are skeptical now."

  3. Good. Please, let them over reach everywhere.

    The American public is a lot smarter than many people give them credit for. Let's have faith in them and the immeditate future and we'll all see this little gang of lefties come to a peaceful end 3 years from now.

    In the meantime, we'll just have to bite our nails.

  4. I'll have to think more about this one, Professor, before I can say I'm with you on it.

    I'm not sure why using bank regulation as leverage to review, with veto power, bank comp plans lays the ground work for capping doctors' or lawyers' or truck drivers' pay. No doubt, such capping is theoretically possible right now but the political likelihood of its happening may be on a par with earth being visited by space aliens, IMHO.

    The banking system is unique, after all. Banks provide the lubricant -- credit -- that makes the rest of the economy work. A year ago, we experienced a genuine and serious financial panic -- not much different from the first one of our modernizing economy in 1817 but far worse in its potential consequences. We had grown used to believing that a financial "meltdown" was no longer possible, given the elaborate and extensive regulations in place, especially since the creation of the Federal Reserve, the FDIC, and so on. We were wrong. What were clearly in retrospect outrageously, dangerously risky lending and trading practices by all the big and medium-sized banks and other financial companies threatened all the rest of us with ruin.

    It has always been my contention that this panic was and is distinguishable from the current recession. It was not the recession that began at the end of 2007 that was so menacing (although it played a role in triggering the panic), it was the near-collapse of Citigroup, BofA, etc. We cannot and should not allow the circumstances that led to that panic to recur. It does no one any good to try to throw the blame on Democrats' support for Fannie Mae and CRA mortgage practices. All that contributed to the problem but was not the force motivating big banks and others to "securitize" home mortgages by the hundreds of billions in an obviously inflated housing market and thus poisoning the portfolios of every institution holding those securities. And AIG's insuring those securities worldwide to facilitate a market for them was one of the worst bets ever made by any company anywhere.

    None of this would matter to the rest of us if the result of the Wall Street gambling had been the financial ruin of a few big firms. Such was not the case -- far from it. So we have to look at what regulators can and should do to make sure it cannot happen again.

    Many years ago, I was an officer of a large money-center bank -- before there were bank holding companies, before repeal of Glass-Steagall, before anyone had heard of a hedge fund. People could make nice money then as a bank lending officer, particularly in corporate and international lending. But only a handful of top executives earned compensation that would make them truly "rich." Banking was pretty staid affair; one might even say that prudence and trust reigned above profitability, certainly above quarterly profitability. Mid- to high-level execs were almost all career employees of the same bank -- including both the Chairman/CEO and President of my bank.

    I mention this because in that world of finance -- before a myriad of government regulations were taken off -- no one considered that the banks were operating within some sort of government-run socialistic framework. We all thought of ourselves as being part of the heart and soul of free market capitalism -- and there was no shortage of left-leaning critics hurling accusations of remorseless greed at us.

    Perhaps there is another way for the Fed and the Treasury to accomplish what the pay-review process is intended to achieve. That's what I need to think about. But it's a bit early to declare the fate of the Republic sealed.

  5. Perhaps Moo-Moo Michele's 26 personal assistants' pay packages should also be regulated! Not to mention those of Nobama's numerous "czars"... they need to clean up their own "backyard" first!

  6. It seems to me that this has become a constitutional issue, not just one of greedy overreaching. Reminds me of Darth Vader replying to Lando Calrissian's objection: "I am altering our agreement. Pray I do not alter it further."