23 September 2009

Banking compensation

Paul who?

I read the Krugman piece that inspired this. I'm not sure why he's that influential after reading it. I may have to go read his work on the Bank of Japan or something. Because it doesn't seem like he understands the issues even as well as Obama does. Obama's substantive question in response to this sort of regulatory cap was "why is that we're going to regulate executive pay for Wall St bankers but not Silicon Valley entrepreneurs or NFL quarterbacks?" For some reason Krugman thinks that bankers are a special case that needs to be restrained and therefore is astonished at the President's attitude (as would be all the people who think he's a socialist).

But it would seem to me that in an industry like banking, we would want the most motivated and skilled people running it. And if you're going to start micromanaging their pay, then you won't get that, both because creative people don't like oversight and micromanagement of how they do their jobs and because motivated technical people don't like not making as much as they feel they deserve. Bankers are both.

I think it makes more sense to look at why banks didn't already have skilled motivated people who understood the risks they were undertaking and sought to avoid them in favor of massive short term profitability (but lower guaranteed long-term yields owing to high risks). Banks used to be in the long-term game and made a killing for centuries. They don't need to try to make a killing in the short term game too. So why did they decide to start? Those are more interesting questions than complaining about the facts of where they are now and exercising some sort of populist rage over the amount of money they are privately raking in whilst we bailed them out. It's too late for that. When we handed over billions of dollars, it did not come with instructions. And in the absence of such banks will simply do whatever they thought was profitable because that's what they do. As a hint, it was not, generally, loaning the money back out, the only real economic reason to hand the money over in the first place, but stashing it to make the balance sheets look prettier than the mismanaged assets they had on their books.

So chill Paul. You're not going to make much sense here. The Economist already tackled this problem months ago when we passed rules on the companies that took bailout money and decided it was counterproductive and foolish. Plus the companies were already doing most of what he wants done (claw-backs, higher base pay relative to incentive pay) such that it makes no sense to enforce it as a regulatory process. Most of economic policy is, especially when you let the undereducated rabble vote on it. You don't need to therefore make a case to the public to do it. What economists need to do is precisely what he's bothered about Obama doing, not giving into the populist rabble, and instead explaining what the problems and risks are in pursuing a given course of action.
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