September 21, 2009

Economic Outlook: Reforming paychecks

The $700 billion financial firm rescue package a year ago did not stop a free fall on Wall Street; instead it signaled the financial crisis was very real.

The Dow Jones industrial average lost 800 points at one point during Oct. 6, 2008, before pulling up and losing 369.88 points on that chaotic Monday. The Friday before, President George W. Bush had signed the $700 billion Troubled Asset Relief Program into law.

The history of the financial crisis is beginning to show some short-term symmetry. Oct. 6, 2009, the DJIA fell below 10,000 points for the first time in four years. As the first anniversary of that loss approaches, the DJIA, up 33 points per day on average since July, looks to break above 10,000 Friday.

The symmetry goes farther than numbers, however. U.S. Treasury Secretary Timothy Geithner has recently mentioned winding down some of the extraordinary interventions the government has created to keep the Great Recession from erupting into a full scale depression. Treasury said Friday it would close out a money market fund guarantee exactly one year after it began, a program put into place because the Reserve Primary Fund broke the buck following the collapse of Lehman Brothers.

President Barack Obama visited Federal Hall at 26 Wall Street last Monday to tell bankers to embrace serious financial reform, not fight it. Bankers, he said, should accept an obligation to the goal of wider recovery.

While wider reform is on the political agenda, the first reform issue to come into focus is the one with, arguably, the quickest impact: The question of how bonus checks at banks should be tied to the level of risk taken by bankers. European leaders of the Group of 20, scheduled to hold a G20 summit in Pittsburgh this week, will tackle that issue directly. European Union leaders reached a consensus on the matter last week, creating a continent united on a strong political message, French President Nicolas Sarkozy said.

The U.S. Federal Reserve, extending its regulatory reach under the premise that its mission is to keep banks sound, is working on its own bank compensation policy, The Wall Street Journal reported Friday. Treasury is also confronting the issue involving banks that have accepted TARP funds.

Pay must be regulated to avoid another calamity, said Peter Morici at the University of Maryland School of Business, a former chief economist at the US International Trade Commission.

While the connections are complicated, Morici said the logic is simple.

If Wall Street banks are too big fail, then they are too big to let go on with this irresponsible behavior, he said.