It is becoming apparent that the ambition of the Obama administration to increase government control over what had been previously private business institutions is breathtaking in scope and virtually unlimited.
The most recent evidence comes from news that the administration, as a Wall Street Journal news article put it, wants to “change compensation practices across the financial services industry, including at companies that did not receive federal bailout money.”
A case can be made for aggressive government control of companies that took bailout money, but you would think those that didn’t take bailout money should be free to make their own decisions.
Plans are said to be still in the formative stages, but are expected to be included in an ambitious proposal for tighter government regulation of financial institutions expected to be introduced in Congress this year. The conviction at the highest levels of the administration seems to be that excessive compensation and bonuses for short-term performance were significant contributors to the financial crisis that shook the country last fall.
In February, President Obama said executive compensation practices led to a “reckless culture and a quarter-by-quarter mentality that in turn helped to wreak havoc in our financial system.” Treasury Secretary Tim Geithner told PBS’s Charlie Rose that “(w)e had a period where compensation practices just became completely unmoored from reality, defied gravity, and created incentives for risk-taking that overwhelmed all the basic checks and balances in the system.”
It is striking that government officials place so much blame on private-sector decisions and fail to acknowledge the much greater significance that government policies played in bringing on the financial crisis.
As Stanford economist John Taylor and historian Thomas Woods have documented in recent books, the most important factor in creating the meltdown was the Federal Reserve’s sustained easy money policy during several years following the 9/11 terrorist attacks, creating the impression there would always be plenty of money for ever-escalating home prices and unending money for financial institutions to lend.
The situation was exacerbated by the willingness of quasi-governmental institutions like Fannie Mae and Freddie Mac (which were eventually bailed out by the taxpayers) to purchase and securitize ever-more exotic mortgages with little effort or ability to assess their risks.
In addition, government policies designed to encourage home ownership among marginally creditworthy buyers induced banks and other lending institutions to grant mortgages to people whose ability to repay them was dubious at best.
Executive compensation practices at banks and other institutions no doubt played some part in the meltdown, but compared to government actions that created an environment that encouraged people to believe losses would be covered by the taxpayers — as eventually they have been — the role was modest.
Yet government has continued to shower taxpayer or borrowed money on the system and now wants to control private practices that are already being reformed.