"I don't think our government should set caps on compensation," Timothy Geithner, treasury secretary, told a private Newsweek luncheon on May 19.
That makes it official. The Obama administration does not want to put the screws to Wall Street's lavish compensation packages. Why?
Here are some possible arguments and why they don't make sense:
1. In America, the free-market of supply and demand should determine compensation packages. While that may be true for most of the economy, we know that supply and demand broke down entirely in the financial sector. Wall Street crashed and nearly sent us into a Great Depression. It has taken trillions in bail out funds, loans, and asset guarantees from the public trough. Without that money most of the major banks would have gone under and financial salaries would have tanked. We saved their butts... and hopefully ours as well.
2. If we cap salaries we will lose talent to firms overseas and to hedge funds: So what? Let them go. These are precisely the dudes who crashed the system -- the seven figure derivative traders and the executives who gave them the green light.
3. If we cap salaries we will be left only with mediocre talent as young bright graduates enter other fields. That sounds like a great idea. It would be good to have more engineers, doctors and teachers rather than financial wizards earning outrageous salaries. We saw what the best and brightest did at the helm of our financial system. Let's try mediocre bankers.
4. There's no need to cap salaries because the Wall Street crash and more stock holder involvement will reduce compensation packages and tie them to real performance. Fat chance. As long as these institutions are too big to fail, there is no measure of real financial performance. Profits due to government largess don't signify much. Every bank will become profitable soon because they are borrowing money for free from the Fed and then lending it out at higher rates.
5. It's a bad precedent for American capitalism: Let's see: The financial community gets trillions from us to keep from going under. And then we put salary caps on the folks led us into the crash and who made hundreds of millions along the way from what turned out to be fantasy finance and phony profits. Sounds right to me.
6. It will shock our fragile financial sector and spook the stock market: Let's be straight. If this logic holds, it means that we live entirely at the mercy of Wall Street. If they don't like something, we can't do it. I refuse to accept that logic.
Geitner has to face up the fact that the wage gap between the elite and the rest of us has gotten totally out of hand. Let me repeat some outrageous numbers we churned up for my upcoming book:
In 1970, the gap between the top 100 CEOs' average pay and the pay of average workers was 45 to 1 ($296,170 to $6,542), reflecting the restraints of lingering New Deal financial controls and mores. As those controls weakened, the gap increased to 127 to 1 by 1980. As deregulation, tax cuts, and the union bashing of the Reagan era took hold, the gap jumped to 321 to 1 by 1990. In 2000, as "financial innovation" pumped up fantasy finance, the ratio of CEO pay to the average workers' pay hit an obscene level of 1,510 to 1. And then by 2006, at the height of the fantasy finance boom, it climbed to a whopping 1,723 to 1 ($50,877,450 to $29,529).
While Geithner fears a direct assault on this problem, the American public is more than ready. So what's my alternative? The President's Wage Cap: No employee of an institution receiving government bailout funds shall earn more than the president of the United States ($400,000).
Bankers can't live on that? Get a life.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What we can do about it. (Chelsea Green Publishing, June 2009)