In what the Wall Street Journal calls “a watershed moment for government intervention in the private sector,” the Federal Reserve announced yesterday it will regulate executive compensation at all banks so they will not have incentives to take on too much risk. Fed chairman Ben Bernanke said his purpose is “to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”
Meanwhile, the Obama administration said it would cut by half (on average) the compensation of the highest-paid people at the seven companies still on taxpayer life-support: AIG, Bank of America, Citigroup, General Motors, Chrysler, GMAC, and Chrysler Financial.
So here’s today’s puzzle: Is such government intrusion into the compensation process a good or bad thing?
Before answering, let’s remember that the taxpayers have been compelled to rescue lots of companies, banking and otherwise, over the last two years. The people’s exposure is immense. Just the other day Neil Barofsky, special inspector general for Treasury’s financial sector rescue, said enormous surprise bailout costs will befall the country in addition to the $159 billion the Congressional Budget Office projects TARP will lose. Barofsky was referring to the cost of government borrowing and the potential cost of rewarding risky behavior: “With the potential of moral hazard and ‘too big to fail,’ the government could be setting itself up for an even more dangerous crisis in the future,” he said.
