Stealing the Commanding Heights

The Federal Reserve recently announced that it would establish rules governing the pay of employees at essentially all bank and financial corporations in the United States. This goes well beyond just targeting CEOs at banks who received federal bailout money last year. According to the New York Times, the proposed rules would apply to 5,000 bank holding companies and state-chartered banks. And it would apply to traders, loan officers and other employees, not just top bank executives.

Ostensibly, the purpose of the rules is to reduce “systemic risk.” Allegedly, by having government regulators determine the pay of bankers, those bankers will no longer have the incentive to make risky loans to individuals and corporations.

Such a policy evades the fundamental cause of that risky behavior, namely government policies that fostered artificially cheap credit and mandated risky loans. The Fed itself is the author of these policies. It flooded the economy with cheap credit and 1% interest rates in 2003-2004, which fed the orgy of subprime borrowing. The Fed also enforced the Community Reinvestment Act that forced bankers to meet quantitative targets of loans to uncreditworthy borrowers. Moreover, Fannie Mae and Freddie Mac, two government-sponsored enterprises, guaranteed mortgages against default, thus ensuring that bankers would have no incentive to monitor credit risk.

The government’s subsidies, guarantees against default, and promiscuously cheap credit created an atmosphere in which private bankers were rewarded for taking excessive risks, and made to look like suckers if they prudently restrained themselves.

Yet the government blames the bankers for this mess and now wants to control their pay.

Over the past year we have seen Barney Frank (October 2008) call for a moratorium on Wall Street bonuses and President Obama (February 2009) call for limiting the bonuses of CEOs to $500,000. At the time, I warned that when government arrogates such a power to itself, do not assume that it will be confined to a few Wall Street executives. Now we see the Fed claim for itself the power to control the pay of tens of thousands of employees at every banking institution across the land.

Government fostered the financial crisis by violating the rights of private citizens through its reckless policy of subsidy and cheap credit. Now it proposes to “solve” the problem by further violating rights, including the right of employer and employee to voluntarily agree on the terms of employment.

The end game of this dangerous grab for power should be obvious. The government will not stop until it has taken complete control of the commanding heights of the economy. And it has already largely succeeded. With its progressive takeover of banking, government is now assuming control of the most important sector of the economy. The banks are fundamental in economic importance because their lending and capital raising decisions directly affect the growth of all other industries. Now the government, through its control of banking, will decide whether a particular company or industry is to receive credit, and succeed or fail.

Do not doubt that the government will use this power. Recently, for example, the Wall Street Journal reported that former Vice President Al Gore used his influence to steer two $500 million federal loans to cronies planning to make expensive “environmentally friendly” cars. Imagine what Al Gore or others will be able to do when the Fed controls the salaries of thousands of private bankers. To whom will they be able to direct loans, and for what type of quid pro quo?

Statist governments operate under a rule. They always seek to control the commanding heights of the economy. Statists know that if they control the key industry upon which all others depend, they can control all industries. Our government is seizing the commanding heights of our economy right before our eyes.

As Wall Street Bonuses Go, So Goes the Liberty of All of Us

[See update to this post below.]

“There will be a time for [Wall Street executives] to make profits and there will be a time for them to get bonuses. Now is not that time.” So said President Obama on January 29 to reporters (source: “The Kudlow Report,” CNBC).

So we receive President Obama’s declaration that Wall Street bonuses must be cut. According to him, now is not the time for those bonuses, although he allows that there will be a time – determined by him – when bonuses will again become acceptable.

When Obama arrogates to himself the authority to determine whether, when, and in what amount payments shall be made by an employer to an employee, do not think that such power will only be used to lighten the wallets of Wall Street executives. Such a power demanded today becomes one that will be used in the future to cut the wage or bonus that any American is paid, if doing so should please the Presidency.

If you doubt that, consider that at several times in history the American government fixed the wages of nearly all Americans. It happened during World War II and it happened again in the early 1970s. It is neither a Democratic nor a Republican issue, with the former happening under Democratic President Roosevelt and the latter under Republican President Nixon.

It needs to be said, because Americans have become so used to having their liberties encroached: a man’s ownership of his labor is parcel of the ownership of his own life. If he cannot freely contract with an employer to offer his labor at voluntary, mutually agreed upon terms, then his life is no longer his own. Instead of being a free agent offering his services at a voluntary, mutually agreed upon rate to a willing employer, he becomes a serf, whose labor and life is controlled by his lord and master.

That is the meaning of Obama’s attack on Wall Street bonuses. Attacking the private right of employer and employee to voluntarily agree on salaries and bonuses is an attack on the freedom of both parties. In calling for Wall Street executives to be treated like serfs, President Obama is setting the precedent that will make all of us serfs in the future.

Do not be fooled by the issue of government bailouts. Government had no right to hand out that money. It does not belong to government; it belongs to each one of us. Moreover, this crisis would have ended on its own without any government “rescues.” Recessions always end through the economic adjustments of all participants in the economy. It happens on its own, without a “rescue” or despite it. The current recession is no exception and will end, despite Presidents Bush and Obama’s profligate showering of trillions of dollars of taxpayer money on the problem.

However, government committing a wrong by handing out bailout money does not give it the right to compound its wrong by using that as a justification for further violating the rights of employers and employees. Government should not be handing out bailouts, nor should it be telling employers whether they can pay bonuses.

No one, including President Obama, has the right to forcefully tear apart the private employment relationship between employer and employee. When a private individual does it, it is considered fraud or theft. When the President does it, he takes on the scary personage of a dictator.

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2/4/09 UPDATE: President Obama now says companies that have been given (or forced to take) bailout money must cap the pay of their senior executives to $500,000 salary plus $500,000 bonus. For the morality of that, see above. In terms of its effect, government will get the quality of executives that it pays for. Guess who runs Wall Street now?

We could see this coming. See my October 27, 2008 post, "The Man Paying the Bill Gets to Determine Who's for Dinner."

*****

This post is re-posted. It was originally posted at www.simplycapitalism.com on February 1, 2009. Also published at www.capmag.com on February 4, 2009.

Galileo's Quick Take: Capping Pay Is Un-American

As for the denunciations of greed by John McCain, Wall Street trader Jim Cramer, and so many others, it is just so... un-American! America was founded on the principle of "life, liberty, and the pursuit of happiness." That means that each of us is free to live good, happy, and prosperous lives, to the extent of our abilities. It is no skin off anyone else's back if you or I make a lot of money. In fact, it helps other people because it means I am producing goods and services that other people want to buy.

Well, Congress wants to cap that, literally, by capping the salaries of Wall Street executives. Where does it end?