Compensation Discussions, Too Big to Fail and other Bailouts

As we roll ever forward toward a totalitarian state of central government intervention in every aspect of life in America (and the world for that matter), it may be instructive to consider the connection between the current discussions on regulating compensation and government bailouts.

To begin, there is no credible argument that can be, or ever was, proposed which suggests that price controls of any sort are beneficial to the general public. Indeed, the primary purpose/result is to benefit one group at the expense of another. The list of examples is extremely long but, as prominent examples, consider OPEC, UAW, and Tariffs. The most recent tariff on tires is simply another abuse of economics which almost every president since Andrew Jackson has used and which in part - some would say the largest part - was the cause of the schism between Northern and Southern states which led to the American revolution, aka, The Civil War.

The bottom line is that tinkering with the market mechanism leads to distortions. The argument for tinkering is always the same - the loss incurred is out-weighed by the "benefits to a greater good" which accrue. The difficulties with that argument are that in nearly all cases the benefits are not quantifiable and in all cases only a select group gains. The notion of greater good in these cases is simply a fiction.

The concept of too big to fail is so nebulous as to be nearly vacuous. The perception that banks had a backstop in the Fed (along with explicit support through deposit insurance) gave them a subsidy which has allowed them to finance their operations at preferential rates. The litany of "imprudent" bank activity since the Great Depression (e.g, S&L crisis, LatAm crisis, etc.) is too long to ignore. The management of these companies are notorious in their incompetence. The problem is that other institutions are allowed to fail but we set up the Fed for the expressed purpose of making sure liquidity is available so that a banking crisis does not happen - but it has. Not to pick on Alan Greenspan but isn't it ironic that his memoirs are entitled "The Age of Turbulence". Wasn't his mandate to maintain stability?

Therein lies the rub. All these control freaks think they can mandate a smooth reaction function, i.e., that there will be no unintended consequences to massive amounts of intervention and incessant tinkering in affairs about which most of them do not fully comprehend and the results of which, even the most learned economic scholars will readily admit, we cannot predict.

Nevertheless, we have these bloated, too-big-to-fail banks; we put a gun to their collective heads to take TARP money; we hold them to ransom before we'll let them repay the TARP; and then we say that they cannot pay their employees what they think they need to because "we" taxpayers bailed them out. (It wasn't even an elected official who wrote the check - Thanks Hank.)

So long as we bailout commercial organizations - whether Citigroup or GM - rather than letting them fail we will perpetuate mismanagement - in the case of Citi, poor financial risk management; in the case of GM, poor product mangement (why did they need to have every division produce one or more models of SUV?). If we carry this to its logical consequence there will not be a single decision that can be left to any firm - not just those that are bailed out.