Sep 182009

This is too weird to take at face value. Obama wants to control compensation policies at banks to prevent those employees from taking too much risk. I don’t for one minute believe it.

Here’s the way the WSJ describes the Obama administration’s plan:

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

The Fed’s plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk.

For one thing, risk isn’t something that’s necessarily bad. There are good risks and there are bad risks. It’s hard to tell upfront which are which, which is why they’re called risks. The government itself encourages risky banking when it backs up student loans or housing loans. Sometimes we might consider it good for a bank to take on a risky borrower that other won’t touch. On the other hand, we might not want banks risking all their reserve capital to make risky investments.

If there are certain risks that we don’t want banks to take, the way to do that is to prohibit the behavior, not go about it by such an indirect means as employee compensation.

What if we approached safety regulation the way Obama wants to regulate banks. What if we said that instead of enacting safety standards, we’re going to review compensation policies to make sure businesses don’t reward employees who create unsafe workplaces or produce unsafe products? That’s going to give regulators a lot of work to do, but safety isn’t going to be the outcome. For one thing, it doesn’t even define what sort of safety the law requires.

Obama and his crowd may not be the brightest kids on the block, but I don’t think they’re so dumb as to think that’s the way to accomplish what they say they want to accomplish. Being a skeptical, cynical person, I suspect two things are going on here.

1. The Obamanites have no idea how to regulate bad banking behavior without undermining their own party’s programs that are designed to encourage bad banking behavior.

2. Obamanites don’t like people making their own decisions. People who do that are a threat to the role they envision for government.

So naturally, the thing to do is to take decision-making power out of people’s hands and turn it over to the government.