Let’s Wait and See on the Wall Street Pay Limitations

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I asked Dean Baker, co-director of the Center for Economic and Policy Research and one of the in-house economists for the bloggy left, for his thoughts on the White House’s new limitations on executive compensation at bailed out banks. (Times article here, full text of the new rules here.) I was pleased as punch by the announcement when it broke last night. “Finally,” I thought, “an end to these massive bonuses and ridiculous perks.”

Not so fast, says Baker. There are still some details to hammer out:

We will have to see the details of how this policy is implemented. Restricting the pay of executives at banks who are receiving taxpayer dollars to stay afloat is certainly appropriate. The real question is how widely will it be applied within a bank and how will it be determined that banks are subject to these restrictions.

In terms of how widely it is applied within banks, it is important that the pay restrictions apply to everyone, not just a small number of executives who agree to be fall guys. The point is that these banks are taking government money. We should be able to limit how much a bank pays its highest paid employees, if it is getting welfare from the government.

The other issue is how it is determined that banks are subject to these restrictions. The plan effectively grandfathers exclusions to the past basket-cases who have received large amounts of government money: AIG, Citigroup, and Bank of America. At the least, President Obama should try to persuade these banks to voluntarily accept these restrictions. Also, many banks are likely to get considerable subsidies in the future through “capital access programs.” The administration should not be shy about applying these guidelines to these banks, although the better route would be to not provide large subsidies from taxpayers to banks and shareholders. The government should simply takeover the bankrupt banks and resell them to the private sector after their books have been straightened out.

The fat cats hate this thing with a vengeance, but it looks like there is still room for improvement.

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