The Story
Federal Reserve Socialism
President Obama’s relentless campaign to socialize the United States economy continued on Thursday when the Federal Reserve released a set of proposed initiatives that would give it unprecedented control over the salaries of tens of thousands of executives, traders, and bankers at publicly traded financial institutions.
The new rules would require that compensation at over 6,000 American banks be submitted to regulatory scrutiny by “the Fed”. If the Fed did not approve of a bank’s compensation plans, it could force the bank to set salaries at levels the government finds suitable.
The Fed’s declared intention is to help structure the compensation packages of high-level bank employees to reward financially smart long-term decision making and discourage excessive short-term risk-taking. For instance, the Fed claims that one cause of the financial crash was that certain bank executives were seduced into making thousands of low-quality loans in order to receive bonuses.
This is a perfect example of the government making more laws to solve a problem that it created in the first place. The housing bust (in large part responsible for the crash) was a direct result of Fed behavior: through a policy of easy money, the Fed created the unsustainable bubble that ended in a catastrophe of foreclosures and bank failures.
The more obvious role of the Fed in the crash is even acknowledged, albeit quietly, by the Fed itself. In an official Federal Reserve information release regarding the current proposals, it acknowledges that “because of the presence of the federal safety net, shareholders of a banking organization may be willing to tolerate a degree of risk that is inconsistent with the organization’s safety and soundness.”
In a free market, dangerous lending practices may eventually result in a bank failing and going out of business. Banks thus have a strong incentive to carefully balance their investments with assiduous safeguarding of their reserves. Bankers realize that if they make enough bad loans that are defaulted on, the bank will fail and they will personally suffer. This is how the incentive system works.
But when the Fed provides a safety net as a lender of last resort, this incentive structure is almost entirely undermined. Lending without the threat of bankruptcy is like playing poker knowing that when you lose, you don’t actually lose, and when you win, you get to keep all the winnings. There is a great incentive to make extremely risky bets, or, in this case, risky loans.
Why should the banks safeguard their money? They know that the taxpayer will bear the burden if they fail.
Add to this federal safety net the fact that risky loans were actually encouraged by the federal government in the form of the Community Reinvestment Act, which threatened banks with regulatory penalties if they didn’t loan to minority individuals who lacked the financial means to purchase a house and thus otherwise would not have received a loan.
An inspection of the issue, therefore, reveals that the new laws are “solutions” designed by a government for a problem it created. Government failure should not be a pretext for further government expansion, especially when the conditions that precipitated the crash (e.g., the Fed’s easy money policy, the existence of the Fed as a lender of last resort) have not been corrected.
This newest act of government intrusion is yet another in a laundry list of socialist, central-planning programs implemented under the Obama administration. The government’s naïve belief in its own ability to manage huge sections of the economy is quite inexplicable. The government can’t even manage its own finances, much less the finances of large private industries. If the government were a business, it would be insolvent.
The Fed recently implemented salary controls at banks that received significant bailout funds, but the regulations discussed in this article would cover even profitable, fully private banks. Americans should be shocked at this outrageous fact. Bureaucrats determining, through the use of administrative edicts not even subject to Congressional oversight, the salaries of individuals working at private companies is a practice that belongs in Stalin’s Russia or Mussolini’s Italy, not the United States.
President Obama’s unashamed lies concerning his belief in the free market system should no longer find a receptive audience among citizens of a nation that he has put on the fast track to economic ruin and totalitarian control.
Austin Raynor is a staff columnist for The DSJ. His views do not necessarily represent those of the entire staff.