Tuesday, September 22, 2009

What's Wrong With Our Financial Worlds?

Written by Paul Krugman in his NY Times editorial: Reform or Bust

  • ............
    What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses.
    This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process.

That's exactly the problem isn't it?

Isn't it so clear?

Why are the executives still being paid with totally obscene money??

  • The Federal Reserve, now awakened from its Greenspan-era slumber, understands this problem — and proposes doing something about it. According to recent reports, the Fed’s board is considering imposing new rules on financial-firm compensation, requiring that banks “claw back” bonuses in the face of losses and link pay to long-term rather than short-term performance. The Fed argues that it has the authority to do this as part of its general mandate to oversee banks’ soundness.

    But the industry — supported by nearly all Republicans and some Democrats — will fight bitterly against these changes. And while the administration will support some kind of compensation reform, it’s not clear whether it will fully support the Fed’s efforts.

    I was startled last week
when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that... ( source:
here )

1 comments:

solomon said...

The world hasn't changed but it is our conscience have.

No matter what cap you can called it, it will work in short term but not long. Simple reason is human had short memory. this is unless you enact a law to do this. But there surely a lot of lobbyist against this....

The leader we relied in banking are more self centred or greedy now (most of them, there could be a few dinosaurs surviving). Big share options and big choppers....sigh