TARP Watch Week 2: oversight, immediacy and golden parachutes

The Times: US banking crisis: midnight delivers the $700bn deal: half now, half later

After compromises from the White House, Democrats and Republicans, the deal will effectively give Mr Paulson $350 billion immediately to start buying toxic mortgage-related assets, while the second $350 billion will have to be approved by Congress. It includes limits on pay and severance packages for executives, strict oversight of the spending, profits for taxpayers should the plan work, power for the government to renegotiate mortgages for struggling homeowners, and a potential tax on Wall Street companies.

Obsidian Wings’ Hilzoy argues that the priority in finalising details of any bailout scheme should be “making sure that ordinary people have as much protection as possible from the economic troubles that lie ahead” rather than being too concerned about whether some executives are escaping with their golden parachutes: when we look at the huge sums involved at a level that is destabilising the world economy, executive compensation packages are a drop in the bucket.

But we shouldn’t forget about them all together:

Fifth: That said, I think there are very good reasons to include serious cuts on executive compensation in any deal that gets made. Matt Yglesias has noted one of them:

“If we limited executive pay for bailed out institutions — say by forcing executives to work on government pay scale — then firms’ managers would have a strong incentive to avoid taking taxpayer money unless it was genuinely necessary. Banks that would mere prefer to get bailed out because it would enhance their profits won’t do it if taking the bailout means a big cut in executive pay. But institutions that would actually collapse absent a bailout will take the deal because they have no choice.”

Relatedly, imposing limits on the compensation of executives whose firms are bailed out would help to lessen the problem of moral hazard. The firms that are bailed out might not have to face the full consequences of their employees’ stupid decisions, but if their executives did, that might be enough.

But there’s another reason to include serious limits on executive compensation in any bailout we pass. It’s always a good idea to try to ensure that people are behind what the government does. But there are some times when it’s absolutely crucial. Going to war is one; this is another. One thing our representatives should do is to explain, as clearly as possible, why letting the financial system collapse would be in no one’s interest. But another is putting serious limits on executive compensation in place. People simply will not support this package as long as they get to read headlines about executives at firms that we have had to bail out getting seven- or eight-figure bonuses; nor can I think of any reason why we should be expected to.

There will, undoubtedly, be much more analysis to come. Share the good stuff in comments.

Categories: culture wars, economics, ethics & philosophy, media, social justice

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