Is Curbing Bank Pay Socialist or Capitalist?

There are two arguments for curbing pay on Wall Street. The two sides argue bankers should not receive such huge compensation because:

1. Socialist view: No individual should be allowed to earn such a disproportionate salary.
2. Capitalist view: Government intervention allows banks to be so profitable, at cost to other members of society.

Bank apologists always attack the socialist (straw man) argument. Labeling something as “socialist” is a lot easier than addressing the real issues. “Fine, that’s just fine!”, they say. “But I hope you like communism, cause we’re gonna have to cap everyone’s salary – Bill Gates, A-Rod, Britney Spears, and Steve Jobs.”

Only the capitalists’ case holds water. While using artificial “curbs” to control bank-pay is not ideal, it is preferrable to letting them bonus themselves to oblivion. If we don’t allow banks to fail, and continue to provide endless support to them, we have to at least cap their compensation.

America’s banks cannot be described as free-market enterprises by any rational person. I will outline various ways our government subsidizes bank profits, while eating their losses. I will explain why bank executives do not deserve their current level of pay, and why this view is not socialist or anti-free-market in nature, as many claim.




Gambling With Government Guarantees

American banks are currently allowed to gamble with other people’s money. They are given dirt-cheap funds by the Fed. They loan it out at a higher rate, pocketing the difference. If and when these loans go bad, they’re bailed out with even-lower interest rates, or outright cash-injections.
Banks are also not required to hold nearly enough reserves. Why? That would limit leverage and potential profits (and losses).

Would this happen in a truly free market? Of course not. Therefore there is no reason they should receive the outsized pay packages they do. Those who argue that limiting bank pay is socialism either do not understand the issues, or are biased in favor of the industry.

Benefits For All (Finance Firms)
Cheap government liquidity has been extended to entities it was never meant for: Investment-banks like Goldman Sachs, even American Express has access to the discount window, government-debt guarantees, and more. These programs were designed to shore up banks in desperate times.

American Express, for example, has borrowed an unknown amount from the discount window. They even highlight this on their investor-relations page: “Access to the Federal Reserve discount window”. Clearly having US Government backing is a major asset. It allows financial firms to offer  huge salaries and bonuses.

Why do investment banks and credit card companies deserve access to taxpayer funds? They don’t. I question whether traditional banks,which actually lend to consumers and small businesses, should have access to this dirt-cheap cash fountain. It has enabled their insane pay packages to continue. Paul Volcker recently spoke to Congress on this very topic, specifically citing Goldman Sachs:

“There’s nothing wrong with making money,” Volcker said. “But I don’t want them to make money by taking risks with the support of the taxpayer.”

At 82 years old, Volcker is sharper than any other member of Obama’s financial team. Unfortunately his role has been minimized, and some say he has been cast out for his “anti-Wall Street” views.
There are countless other ways banks benefit from government largesse. They can currently borrow at 0%, using the capital to buy treasuries earning 2-4%. Risk-free profits. And guess what the Fed’s exit strategy involves? Paying banks more riskless interest, encouraging them not to lend money. Starting to see a trend?

Prior to ~1920, when banks wanted to borrow from the government, they were required to pay a premium to market-interest rates (which they could not get, obviously). Rightly so. If banks need cash so badly, they should pay a premium for it. Taxpayers should gain something for the risk they take. Banks need to drastically slash costs, cut bonuses, dividends, payroll, etc. This has yet to happen on the scale required. Instead we’ve offered trillions in support, asking little in return.

Video: Nassim Taleb makes the Capitalist case to Congress. Richard Bookstaber makes a more socialist argument. Taleb explains the difference:



I’ve run into the same argument numerous times. They call these arguments “socialist”, say they would “put limits on private profits”. Understand this: Banks in the US are not free-market enterprises. They own shares of the Federal Reserve. They all have access to dirt-cheap capital, and powerful ones will be bailed out unfailingly. At least while guys like Greenspan and Bernanke are in power.

Lamenting Volcker’s Absence
A chairman like Paul Volcker would have handled this much better.  He recently made statements to this effect. But the era of a responsible Fed ended with him, it seems. It’s a shame that Mr. Obama’s administration has largely ignored him in favor of Summes and Geithner.

Bernanke is of a different mind. He will continue to support maximum moral-hazard, minimum reform, and total lack of transparency. Which is why we need to force change.

- Via Bearish News