In the fall of 2007, when the U.S. economy first seemed in peril, I began answering reader queries here on the Business Desk. I still do so occasionally, but this page has expanded to include posts from eminent economists, "far-flung correspondents," and a variety of voices that have intriguing and/or useful things to say about economics, broadly defined. Please feel encouraged to respond to any and all of them.
Instead of Capping Pay, Could the Government Police Banks' Risk Models?
Question: Instead of the government trying to prevent risky behavior by limiting bonuses and other compensation for the best performers in the finance industry, would it be possible for the government to review risk models that banks use?
Paul Solman: Possible? Sure. But which would you think more meddlesome? More likely to be effective?
Look, I get the problem with the government taking over big banks. Potentially, it's an administrative nightmare. But if I'm the major shareholder of a bank, I can't decide how much to pay the executives?
The data I've seen appear to be unequivocal: There's no correlation between executive pay and executive performance. And I don't believe the U.S. government would have a problem getting very competent people to run the banks it has a stake in. Or let me put it more carefully: I don't believe it would have a problem getting people at least as competent as those who DID run them. And were paid queen's ransoms for doing so.