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Business and FinReg

Justin Fox asks an important question: What should the business community want from financial reform? And why aren't we hearing from them?

Take, for example, the by now well-documented phenomenon (it began in the 1980s) of financial workers making substantially more money than those with similar skills and educational backgrounds in other industries. For a while it was possible to contend with a straight face that this was okay because all those brilliant, highly paid financial sector workers were doing such a great job of allocating capital and making the rest of the economy run smoothly. You can't really say that anymore, and we're back to the argument — made by a few economists in the early 1990s but then largely abandoned — that by draining talented workers from the real economy the financial sector's high pay is actually a drag on long-run economic growth.

So while the rest of the business world needs a financial sector that's healthy enough to extend credit, it also ought to favor a regulatory structure that keeps the financiers from getting too big for their britches. Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles. That's where leverage limits come in, and restrictions (like the "Volcker rule" that's kinda/sorta included in the Dodd bill) that try to wall off riskier financial activities from those deemed so essential that they're backed up by government guarantees.

When will we hear nonfinancial business leaders making these arguments? Well, maybe never, and not just because of the conflicted nature of the big business groups. A frothy and powerful financial sector is probably bad news for business as a whole, but it's generally good news for top executives. The spectacular boom in CEO pay that began in the early 1990s has been very much a Wall-Street-driven phenomenon. So it's not really in the short-term interest of individual corporate executives to crack down on the financial sector.

That last point is an important one: What's good for businesses and what's good for CEOs are sometimes very different things. CEOs are more conservative than most of the population, they're more annoyed with government because they tend to deal with the regulatory state, and they're less in need of help than many of their workers. But they're the ones who speak for business in this country. It's an interesting contrast with the labor community, which sees itself as speaking more directly for workers and has been a staunch friend of both health and financial reform.

By Ezra Klein  |  March 17, 2010; 8:40 AM ET
Categories:  Financial Regulation  
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We only hate bankers.

New York Times Co. CEO Janet Robinson got roughly $4.9 million in compensation in
2009 while at the same time downsizing and possible layoffs. It's OK to make the big bux if you shill for the Democrats.

Oprah Winfrey, Sports Stars and Actors are also exempt from the liberal outrage. It seems capitalism is OK if you are an artist.

Posted by: WrongfulDeath | March 17, 2010 9:16 AM | Report abuse

The agency problem has been around for a long time. But all the private efforts to align CEO interests with those of shareholders or of their enterprise as a whole have to pass through -- guess who -- the CEOs.

Posted by: paul314 | March 17, 2010 9:45 AM | Report abuse

Who are you arguing with, WrongfulDeath? I wasn't around yesterday. Were there lots of people on here arguing that financial salaries are too high, but that other highly paid people are correctly compensated?

Personally, I think sports stars, Hollywood actors and TV personalities all make too much money. On the other hand, I think the gulf between CEO and employee salaries is a bigger problem (even at the Times!) because it influences the CEO's business decisions. I also think that high salaries in the financial sector is a problem because it drains talant from other equally or more important sectors and, in part, incentivizes risky behavior in the financial sector.

So who are you angry with again?

Posted by: MosBen | March 17, 2010 9:51 AM | Report abuse

Maybe they used to care because it cost them money. The company I work for raised the employee contribution for health insurance from $2400 to $4400 a year (for the preferred provider plan - family). The company has now capped their contribution so future increases in cost will fall on the employee.

Posted by: luko | March 17, 2010 10:06 AM | Report abuse

ooops wrong topic sorry!

I'm all confused. Going back to bed now.

Posted by: luko | March 17, 2010 10:08 AM | Report abuse

"Explicit restrictions on pay tend not to work, so the real goal should be to rein in financial-sector profits, especially the phantom profits that come from inflating speculative bubbles."

Actually this is completely wrong. If you're really serious about limiting the damage, you keep these 'enterprises' small from the get-go. This has two advantages: first, you avoid situations similar to AIG (i.e. 'too big to fail') and second, none of them become so large that they can game the regulatory agencies and Congress through their excessive power and influence.

Posted by: leoklein | March 17, 2010 10:25 AM | Report abuse

I've been thinking for a long time that corporate mergers should be rare and rarely necessary. Aside from reducing competition (which interaction seems universally commended), mergers make corporate leadership believe themselves more powerful and deserving of more bennies. And it creates more companies nearing the too big / too important to fail status.

With respect to pay scales for top corporate scions, consider that every $1 million in pay for executives is equal to 20+ $30k jobs with 18k of benefits. That for the same nominal 40-hours. So we think that some's sweat is more valuable, more important than others'; that's clear. But how much more?

It isn't a given that huge pay equals huge (scalar) performance. Nor is it demonstrated that a clever executive manager is truly worth the salt to hire that person. Given the total "off-the-rails" performance of both financial and manufacturing executives in the U. S. over the past 20 years, we should think seriously about doing what is possible through regulation and perhaps a tax-structured discouragement of extreme "bonus" compensation.

Posted by: Jazzman7 | March 17, 2010 11:59 AM | Report abuse

FinReg SchminReg.....

Random thoughts:

1. I dont think this is going to do anything to stop the next financial crisis, because capitalism itself is prone to crises from time to time, there's no magical legislation to fence in greed, especially once America's famous short term memory forgets the last crisis.

2. I'll bet my lunch money here against anyone else's that this bill doesnt get 60 Senate votes, regardless

3. Having said that, it wont be the worst thing in the world to have a vote on this bill and have the Republicans be foolish enough to be seen politically as standing on the side of foolishness by banks. I'm for Republicans being seen as the protectors of Wall Street's gangsterism.

Posted by: zeppelin003 | March 17, 2010 1:18 PM | Report abuse

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