This week, the House passed
a bill that imposes further regulations on financial firms - on executive pay
which is bad enough in itself, and to add insult to injury, on the way those
firms and employees do business. The bill is "aimed at preventing financial
firms from adopting compensation systems that encourage excessive risk-taking."
Once again, this overly broad, intrusive language coming out of Congress
raises a plethora of questions - what is "excessive" risk-taking? Who decides where to draw that line? (Perhaps another czar? Or, do we already have
one reigning over Wall Street?) And most importantly, isn't this what Wall Street players do
- take risks? Some pay off, some don't. When they pay off, people flock to try
to get a share of the rewards, and when investments fail, people pull away. Some have the foresight to see failure coming and stay away from the beginning. Isn't that's the beauty of the marketplace?
Two quotes in the
WSJ article I linked to above (here) nicely sum up the debate. First, Rep.
Spencer Bachus of Alabama "suggested the measure would allow the government to
impinge on the rights of private corporations. "Government bureaucrats
don't know what's best for America," he said." On the other side, Rep. Brad Miller of
North Carolina said, "We have found out what happens when there are no
rules, when there is no oversight, when there is no watchdog."
There you have the two side
of this debate. Each side is concerned with the broader ramifications of action
and inaction. Action in terms of this bill puts the government in the driver's
seat once again, imposing terms on private companies and interfering instead of
letting self-interested individual choices play out and determine the winners
and losers. Inaction, we are warned, is what led us to the economic crisis we
face now. So, action is urged.
But there are fundamental
flaws in this second argument. First, as to the cause of the current crisis, it's foolish and untrue to point to a lack of regulation as the cause of the crisis. A simple Google search of 'causes of the economic crisis 2008' brings up 50,100,000 hits. This is too big a topic to delve into in this post, but I think it's fair to say that government intervention through Fannie and Freddie along with individual greed and poor choices all played a part in bringing down the housing market. And, as far as I'm aware, banks, while they were greatly over-leveraged, were playing by the rules - investing in the safest market since Americans are known to pay this bill before all others - mortgages. To point the finger at banks and claim that a lack of regulation is to blame for the current situation amounts to singling out and demonizing Wall Street at worst and oversimplifying at best.
Second, it is simply a lie
to claim that there were no rules, regulations or watchdogs around, and that in
turn, their absence led to the dire economic situation we face. Securities laws
and the Securities Exchange Commission were created long ago. They already dictate
the makeup of boards of directors, including how many interested and
disinterested directors there must be on each board. Further, unlike
shareholders, boards of directors have a fiduciary responsibility to the company
and must act in the interest of the company and its shareholders. A shareholder, however, can be anyone like you and me who purchases a stock and owes no responsibility
to the company to become informed of the company's structure, liabilities or
finances at all. And unlike a director, if a shareholder becomes unhappy with
the company, they can sell their shares and cut all ties instantly without any
consequences.
It is always easy to blame
the haves for anything that goes wrong. But it is irresponsible for members of
Congress and the administration to oversimplify, spread misinformation and use the current economic climate to their
advantage to inflate government at the expense of private industry and
individual freedom. If people think a CEO's salary is disconnected to his
worth for the company, don't buy that company's stock. If they think a company
is taking unnecessary risks, don't invest in that company. Government
interference is not going to solve problems that were created by many
players, over an extended period of time, overnight. And, the ramficiations of
government continuously overstepping its boundaries like this should be
worrisome for all of us.
Filed under: economy, capitalism, free market, business concerns, investors, economic crisis, regulation, government, economics, federal government, action, government intrusion, government expansion