Wall Street Bonuses Are an Outrage

Just a mere $18.4 billion in Wall Street bonuses, and suddenly the entire country is like Kansas in the 1890s, raising hell instead of corn, screaming for revenge on money power that has done us so wrong while rewarding itself so generously.

The outburst of populist rage is particularly alarming when we consider how easily such sentiments were managed just a short while ago. Americans have known about mounting inequality and king-sized Wall Street bonuses for years. But we also had an entire genre of journalism dedicated to brushing the problem off.

Recall, for example, the famous essay by David Brooks published in The Atlantic in 2001, in which he declared that, in one representative salt-of-the-earth Republican region, people had "no class resentment or class consciousness"; that complaints about the lopsided distribution of the economy's rewards were something one heard only from people in the wealthy and tasteful reaches of blue America.

Mr. Brooks's argument was powerful not so much because it captured reality, but because, by suggesting that to care about economic inequality was itself an act of snobbery, it ingeniously short-circuited the entire debate. Egalitarianism begins at home, liberal!

Others simply insisted that markets were themselves democracies, that the deeds of business were an expression of the popular will, and that entrepreneurs were leading the only kind of popular uprising that mattered. The rightful home of that uprising was, of course, Wall Street, where rebel bankers were always supposed to be fighting stodgy aristocrat bankers on behalf of the common people.

That's why it once seemed to make so much sense to talk about grandmas in small Illinois towns who were ace stock-pickers, to fantasize about the conflict between man-of-the-people millionaires and horrible, affected Ivy League millionaires, to dream of the day the Dow finally reflected the common people's intelligence and made it to 36,000.

But does it console us any longer to recall that a CEO of Merrill Lynch was once excluded from some mythic Wall Street insiders' club? Can it make any possible difference, in our current predicament, to know that Richard Fuld, who allegedly collected around $480 million from Lehman Brothers in the eight years before its bankruptcy, attended not Harvard but the University of Colorado?

No. We're populists of a more fiery sort now, and the old bromides no longer palliate.

And those who once celebrated the virtues of the common folks want nothing to do with us now. As Mr. Brooks joked in yesterday's New York Times, all the current anger really signifies nothing more than the "resentments" of middle-class Washingtonians who have suddenly found themselves in charge of the world.

Besides, our former friends had their reasons for letting the party go on. If the federal bank bailout were to involve a real crackdown on executive compensation, the Bush administration reportedly feared, it might have driven banks away from taking the deal altogether. Bankers would prefer global disaster to a pay cut, in other words, and this obscene calculation needed to be taken into account. Public outrage was apparently nothing by comparison.

Now the populist shoe is on the other foot, though, and it's the liberals' turn to hail the wisdom of the crowd. Maybe, in its fury at the millions doled out to bankers who drove their institutions into the ground, the public understands something about moral hazard that the Treasury Department doesn't. Maybe, in its rage for fairness, the public is on to something that the banking industry's remaining defenders need to acknowledge.

It is merely this: That Wall Street's compensation system isn't just aesthetically displeasing to liberal snobs. It is the very heart of the problem. According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, "It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe."

At each stage of the disaster, Mr. Black told me -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong."

The need for new compensation rules is most urgent at failed banks. This is not merely because is would make for good PR, but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks, and even, according to Mr. Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continues, it is "essential to redesign and limit executive compensation when regulating failed or failing banks."

Our leaders may not know it yet, but this showdown between rival populisms is in fact a battle over political legitimacy. Is Wall Street the rightful master of our economic fate? Or should we choose a broader form of sovereignty?

Let the conservatives' hosannas turn to sneers. The market god has failed.

Thomas Frank's column, The Tilting Yard, appears every Wednesday at OpinionJournal.com

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