Three Steps to Save Wall Street
For the first time in decades, Washington is daring to tackle financial reform. It took the collapse of the whole sector and the resulting public outrage to get them started, and it will take pressure to keep them going. It’s not certain that Congress and the Obama administration will have the courage to prioritize the long-term health of our economy and the legitimate interests of the public over the self-serving demands of their friends on Wall Street.
Three steps are essential: regulating executive compensation, separating financial “casino” activities from regular banking, and creating a consumer financial protection agency.
First, CEO pay has been out of control for decades. The average CEO of a large company now makes 319 times what his average worker earns, up from a 42-to-1 ratio in 1980. Compensation at this level—especially guaranteed compensation—blinds leaders to the downside risks of their actions. Rewards based on short-term results lead to short-term thinking and long-term danger for companies and the entire economy.
The Obama administration has taken a positive step by appointing Kenneth Feinberg to review and regulate top salaries at TARP-funded companies. Some critics have chastised Feinberg for overreaching and from others for not going far enough. But after years of subsidizing CEO pay through corporate tax deductions, the least we could do is not use public funds to directly pay for outsized salaries. Passing the Income Equity Act to limit the deductibility of CEO pay would also help.
In another positive CEO-related development, there is momentum toward “say on pay”—the right of shareholders to vote on executive compensation. Over 200 say-on-pay shareholder resolutions have been filed since 2006. Twenty-six companies have taken leadership by voluntarily adopting a say-on-pay policy before it likely becomes law within the coming year.
Second, we need to relearn a lesson from the Great Depression and separate risky “casino”-style investments from regular banking activities. The Glass-Steagall Act was passed in 1933 to separate the activities of commercial and investment banks. It was dismantled by free-marketers in 1999, making possible the recent chain of events.
It’s hard to believe that anyone who lived through the recent financial crisis would oppose reversing this error, but many—both inside and outside the Obama administration—are doing just that.
If investors want to gamble on risky speculative vehicles, make loans with no reserves, or place complicated financial bets, that should be fine…as long as they are transparent about it and it’s their own money. But the bailouts of the past year have shown that it’s not just their money they are gambling with—it’s ours. We need and deserve better disclosure from our banking system, and we need it now—before the next financial crisis arrives.
Third, it’s time we created a consumer financial protection agency to look out for the interests of the end-users of financial products. While we’re looking at CEO pay and regulating the financial sector, we can’t lose sight of the people at the bottom of the pyramid.
Although many agencies could have stepped in on behalf of consumers in the run-up to the financial crisis, they didn’t. It would be both fair and wise to create an entity whose sole mandate is to protect the financial consumer, a category that includes anybody who has a home mortgage, loan, credit card or debit card.
Some, despite the financial sector’s obvious failure to regulate itself, still want government out of the picture, arguing that more federal involvement in the marketplace would hinder business.
This “get government off our back” argument ignores the many
ways in which government protects and defends business interests and,
in fact, makes commerce possible. Imagine trying to conduct business of
any kind without a system of laws, patents and regulations. Rather than
fighting against government regulation, it seems that in the wake of
the financial crisis, business, and the finance sector in particular,
we should welcome more effective regulation to provide some level of
comfort and assurance to skittish investors.
This article was distributed by Minuteman Media.