Courtesy of the Associated Press, in its coverage of President Obama's latest proposals for limiting top executive compensation at firms receiving government assistance, we discover Representative Barney Frank's left hand not knowing what his right hand is doing:
To Rep. Barney Frank, the chairman of the House Financial Services Committee, Geithner's plan doesn't go far enough.
"It is not the government's business to discourage risk taking," said Frank, D-Mass. "But neither should we allow systems which have existed up until now whereby decision-makers are handsomely rewarded if they take big risks that pay off, but suffer no penalty whatsoever if those risks result in losses to the company."
It is also not the government's business to bail out these companies, and it is the bailout that dramatically reduces the loss to the executives if they cost the company money. The moral hazard created by the bailout also compounds the asymmetry in the rewards to the executives in their next decisions to expose the company to risk.
Isn't that the point of
Isn't that the point of executive compensation restrictions? Bailouts compound the moral hazard problem posed by limited liability and common compensation rules, so in order to offset the moral hazard from the bailouts we need to regulate the structure of executive pay. That way we can have the bailouts to stabilize the financial system while minimizing the problem of moral hazard.
You may disagree that bailouts are necessary, but I thought that the whole point of pay regulation was to reduce moral hazard, such as that caused by the bailouts, limited liability, and common compensation structures like stock options.
The Government's Business
There is nothing necessarily wrong with the pay restrictions in firms that accept government money -- he who pays the piper calls the tune. I just think it is a bit rich to preface the remarks by the statement, "It's not the government's business to discourage risk taking."