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One might assume that a Libertarian would be up in arms over the Obama administration’s banker pay interventions. Indeed I would be if we lived in a free society in which bankers competed without government support – but we don’t. Let’s get into why this is so.
First, any bank that has been bailed out by TARP, the Federal Reserve, FDIC or other mechanisms for keeping the ponzi scheme called our banking system afloat have lost the right to govern their institutions independently. The government (via the taxpayer) has taken an ownership position in these entities and as such, has a right to influence all management decisions, including pay. But what about the rest of the industry? If you go to the Wall Street Journal today, you’ll see howls about government interference in free markets – as though banks operate in a free market!
Banks operate with a very special license granted by either state or the federal governments (depending on their charter) to engage in ‘fractional reserve’ banking. Not just anyone is allowed to do this – and as such the government is granting a special privilege to banks to loan money that they don’t have. Second, the Federal Reserve (for more on it, go to this post) loans money to banks on a regular basis via it’s discount window and open market operations (it does many other nefarious things to help them but I digress). Given these special privileges – which are essentially a ‘rent‘ on the rest of society – we should expect to exercise some control over their activities. Btw, it’s this monopolistic power (just try and open a bank – you can’t, the government won’t let you, they might not let just because you’d actually compete with another bank in the area!!) that allows bankers to pay themselves rapacious compensation. They’re a protected class, so really they are no different than the banks receiving other forms of government protection in principle (read as income transfer from citizens to them).
What’s really galling about all of this is it’s justification by Bernanke as a ‘risk management’ measure. How absurd! He’s taken away the downside risk for big banks – if a big one is going to fail, we’ll bail it out. In economics that’s called ‘moral hazard’ and these actions guarantee future out-sized risk taking by the big banks – it’s axiomatic. For those of you not in the business, banks already labored under great scrutiny from a risk standpoint – it’s not as though they didn’t have regulators all over them before this. Stating that reviewing their compensation practices will lessen systemic risk – it’s just too absurd to be tolerated. If Bernanke wanted to really do something about risk, maybe he’d stop giving bankers free money: interest rates are so low currently that bankers make money by falling out of bed.
