Hold­ing CEOs, Greenspan to ac­count

The Washington Times Weekly - - Commentary -

Main­stream economists claim peo­ple’s earn­ings re­flect their pro­duc­tiv­ity. That means the top ex­ec­u­tives who earn tens of mil­lions of dol­lars are worth hun­dreds of times more than the or­di­nary mor­tals who mea­sure their pay in the tens of thou­sands.

As one fi­nan­cial gi­ant af­ter an­other tum­bles into bank­ruptcy, it is get­ting hard to ac­cept the stan­dard econ­o­mist’s view of the world. Does any­one know what the top ex­ec­u­tives at Bear Stearns, Lehman Broth­ers, IndyMac, Fan­nie Mae, and Fred­die Mac and the rest did to jus­tify the tens of mil­lions of dol­lars they each pock­eted? Surely there were peo­ple who would have driven th­ese com­pa­nies into bank­ruptcy for less pay.

The de­vel­op­ments in the fi­nan­cial sec­tor over the last year have re­vealed a level of in­com­pe­tence and cor­rup­tion that ex­ceeds the strong­est charges of Wall Street’s crit­ics. Did th­ese multi-mil­lion­aires re­ally think real es­tate prices would just keep ris­ing for­ever? Did they never con­sider the pos­si­bil­ity that the hous­ing mar­ket was ex­pe­ri­enc­ing a bub­ble? Did they not know a col­laps­ing bub­ble would send mort­gage de­fault rates through the roof and lead to huge losses on mort­gage backed se­cu­ri­ties and de­riv­a­tive as­sets? Ap­par­ently, the highly paid ex­ec­u­tives at th­ese firms never con­sid­ered such pos­si­bil­i­ties. Their in­com­pe­tence drove their firms into ruin. That’s bad news for the share­hold­ers.

Un­for­tu­nately, the coun­try as a whole is also pay­ing an enor­mous price for the ex­ec­u­tives’ in­compe- tence. They were the ones that sup­plied the cap­i­tal that drove the house bub­ble. If banks did not give mortgages to peo­ple buy­ing hugely over­val­ued homes, the bub­ble could never have grown to such danger­ous pro­por­tions.

Had it not been for the in­com­pe­tence of the Wall Street crew, mil­lions of work­ers would not be wor­ried about los­ing their job due to the re­ces­sion. Mil­lions of home­own­ers would not be fear­ing fore­clo­sure. And tens of mil­lions of home­own­ers would not be see­ing their home eq­uity dis­ap­pear be­fore their eyes. As a re­sult of their greed and in­com­pe­tence the Wall Street crew has sub­jected the coun­try to the largest fi­nan­cial cri­sis since the Great De­pres­sion.

This dam­age can­not be eas­ily re­versed now, but we can still try to reap some ben­e­fits. Fed­eral Re­serve Board chair­man Alan Greenspan de­serves much of the blame. He was grossly neg­li­gent in al­low­ing both the stock and hous­ing bub­bles to grow unchecked. He de­cided to just let the bub­bles run their course, ex­pect­ing to pick up the pieces af­ter they burst.

As is now ap­par­ent, this pol­icy leads to dis­as­trous out­comes. The Fed should have done ev­ery­thing in its power to pre­vent th­ese bub­bles, es­pe­cially the hous­ing bub­ble, from grow­ing to such danger­ous lev­els.

When fam­i­lies spend $200,000 too much to buy a home at a bub­ble-in­flated price, or bor­row based on home eq­uity that dis­ap­pears in a crash, they will never be able to re­cover. Mil­lions of fam­i­lies are in this sit­u­a­tion now.

Be­yond en­sur­ing that the Fed takes its re­spon­si­bil­i­ties se­ri­ously, we also have an un­prece- dented op­por­tu­nity to rein in the ou­tra­geous pay­checks that the Wall Street ex­ec­u­tives write for them­selves.

The Wall Street banks are de­pen­dent on the Fed as they never have been be­fore. They are bor­row­ing record amounts of money from the Fed at be­low mar­ket in­ter­est rates. The Fed has also agreed to ac­cept mort­gage­backed se­cu­ri­ties of ques­tion­able qual­ity as col­lat­eral, and now even shares of stock.

Ar­guably this is good pol­icy, since the Fed does not want to see more banks col­lapse and risk a cas­cade of bank de­faults, as we had in the Great De­pres­sion. How­ever, the Fed can make some se­ri­ous de­mands as a quid pro quo for its largess. Specif­i­cally, it can in­sist on an ab­so­lute cap of $2 mil­lion in to­tal com­pen­sa­tion (that means bonuses, op­tions, perks, ev­ery­thing) for any em­ployee of the banks tak­ing ad­van­tage of the Fed’s largess.

This would be an enor­mous pay cut for the Wall Street elite, but they will have lit­tle choice. The ex­ec­u­tives of any bank that re­fuses the deal and sub­se­quently col­lapses will likely be sued by their share­hold­ers and face per­sonal li­a­bil­ity. Not many ex­ec­u­tives will wel­come this prospect.

Some ex­ec­u­tives might quit rather than take such a large cut in pay. But los­ing ex­ec­u­tives who have pushed their com­pa­nies near bank­ruptcy is no loss.

If the Fed can suc­ceed in push­ing down Wall Street pay, that could have a rip­ple ef­fect on other sec­tors. Wall Street was set­ting the pace on the way up, jus­ti­fy­ing pay­checks in the tens of mil­lions of dol­lars in other in­dus­tries as well. If Wall Street pay can be reined in, that can be an im­por­tant first step in rein­ing in ex­ces­sive pay across the board. This in turn would be a huge fac­tor in rev­ers­ing the growth of in­equal­ity over the last three decades. If that could be ac­com­plished, this cri­sis would have led to at least one very pos­i­tive de­vel­op­ment.

Dean Baker is co-di­rec­tor of the Cen­ter for Eco­nomic and Pol­icy Re­search.

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