Wednesday, January 13, 2010

The Bonuses Problem

Jonathan Macey writes about bank bonuses and politics:
"There is only one way to resolve the bonus problem. We should continue to let shareholders pay their managers whatever and however they want. But we must get out of the business of guaranteeing against failure. The bankers and the shareholders who enjoy the rewards of risk-taking should be made to act like real capitalists: They should be required to assume the risks that go along with the banks' business activities."
Maybe another way to look at the issues here would be that we should not see executive bonuses as a problem. Without government policy that protects banks and other financial corporations from failure, costly risk taking by executives will not be rewarded with bonuses because such risk taking will turn out to be unprofitable.

But, given a government policy that says a bank or financial corporation is too big to fail, otherwise costly risk taking is turned into a return or revenue that comes from Uncle Sam and the taxpayers. Costly risk taking is turned into a idea with no reality for the protected from failure banks and financial corporations. Even otherwise costly risk taking by executives becomes an opportunity to turn a "profit," and from the government-is-my-protector corporation's perspective profits from any source are worthy of reward.

It seems to me we should not think that there is a bonuses problem. Instead we should see, if we see clearly, that there is a government policy problem.

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