I see that Nassim Taleb, author of The Black Swan: The Impact of the Highly Improbable, has come around to the position that I advocated two years ago:
The promise of “no more bailouts,†enshrined in last year’s Wall Street reform law, is just that — a promise. The financiers (and their lawyers) will always stay one step ahead of the regulators. No one really knows what will happen the next time a giant bank goes bust because of its misunderstanding of risk.
Instead, it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.
My preference would be that if a private institution is too big and systemically important to be allowed to fail it is too big to be allowed to exist. However, Dr. Taleb’s proposal is a reasonable second best alternative.
Unfortunately, I don’t think that it can any longer be maintained with a straight face that bailing out the banks was a sad necessity and let the chips fall where they may! The bailouts are recycled into bonuses and then into campaign contributions and lucrative billets when appointees have completed their terms of alleged government service. That’s not just a coincidence. It is the system.
The system is “out of whack.” It is like a car with the gas pedal wired to the radio volume, and the radio volume know wired to the accelerator. Pressing the gas pedal turns up the radio, and turning down the radio slows down the car. You wind up going nowhere with a headache. A study is done on the tire pressure, and the oil viscosity change is the fix for the problem.
The solution to the repeal of Glass-Steagall is not Dodd-Frank. It is Glass-Steagall (Banking Act of 1933). It is not perfect, but it seemed to work fairly well. In any case, anybody who cites the repeal of it as a cause should it being reinstated. Maybe I am missing something, but it seems fairly simple.
Stopping bonuses will not solve the problem, and it will more than likely cause more problems. The last attempt to fix salaries lead in part to today’s situation. The recent post concerning CEO pay and layoffs linked to an article that was a good summary of events that initiated the present situation. Low interest rates, Glass-Steagall, weak dollar, misguided regulations are among the additional factors.
One start might be to lift the tax rules for salaries above $1 million, and include stock options as taxable income. Raising the Fed rate (10%+) would also change the environment, and ending the various programs pumping money into the system would stop a lot of the nonsense. These would need more thought to determine the full impact.
Each paragraph in Dr. Taleb’s article could be expanded into a chapter. Due to space, the article seems somewhat incoherent, but I know the he is making. His diagnosis is good, but his prescription is not so good. He recognizes the disconnect from the actor and act, but he wants more regulations. The factors causing the disconnect need to be determined and reversed or modified.
“For the Snark was a Boojum, you see.”