Talk about a hullabaloo. Pay packages at Wall Street firms from Morgan Stanley (NYSE: MS ) to JPMorgan Chase (NYSE: JPM ) have repeatedly come under fire, as the government and Main Street grasp at straws in their search for the root cause of the financial crisis.
So far, Obama's pay czar has tried to put restrictions on how much TARP-taking institutions could pay their top people -- a move which only inspired big banks like Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , and Wells Fargo (NYSE: WFC ) to make plans to pay back their TARP funds. Goldman Sachs (NYSE: GS ) , bowing to public pressure, announced that its top executives would be paid in all-stock bonuses this year.
But the problem isn't how much bankers get paid -- that's simply a result of the obscene amounts of money that bankers are able to bring in for their respective firms. Reduce banker bonuses, and you'll simply end up with more profitable Wall Street firms. Investors in the banks might be overjoyed at this thought, but the broader economic good is hardly served by simply shifting payouts from the people who produce the massive profits, to the people who own the company reaping those massive profits.
Instead, we should focus on keeping the whole of Wall Street in line -- making sure that these firms are acting ethically and not creating financial time bombs that will put the entire economy at risk. In the lead-up to the financial crisis, we saw giant firms taking on extreme levels of leverage, scary and little-understood securities being concocted in back corners of the finance world, and non-banking activities putting major banks at risk of failure. It's understandable that huge paychecks based on these kinds of activities would inspire ire.
As seems to be the case so often in government, though, the treatment for the problems we're facing has been aimed mainly at symptoms -- such as bonuses -- rather than the root cause. After all, if Wall Street is making big money while working with and contributing to a functional and growing U.S. economy, I have no problem at all with fat paychecks.
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