There's a diary on the rec list right now here that is wanting to know who is responsible for taking out the limits on CEO pay in the stimulus package. Emotionally and morally, I agree with the diary writer. I really do. However, from a more realistic standpoint, I don't see how such a cap is workable. Likewise, the same argument goes for nationalization.
The problem I have with it, is that over the years, I've made one in particular observation. And it's that one observation that makes it clear how it would all go down, and it gives me quite a bit of pause and hesitation.
That point? Companies are not run for the shareholders. They are run for top management
Pretty obvious..isn't it? For a variety of reasons, public companies these days don't work the way they should. A high reliance on institutional investors who can be corrupted is the big one. Also, it's pretty easy to pull the wool over the eyes of those who stand to profit, at least in the short term, if your lies are true.
In any case. Here's how I potentially could see the game go down.
Primary Assumption:The flow of capital coming from the banks is essential for the real economy to work
This has to be said. The primary assumption, the thing that makes this problem a problem in the first place. If the financial sector didn't matter in terms of the rest of the economy, we could just let it die a normal market death. But I think that it's been made pretty clear that for a variety of reasons access to short-term capital is essential for the operations of modern business. I don't think it HAS to be that way, or that it SHOULD be that way. But it is....and that's a loop around the wrists...
The big banks turn down/repay the money loaned them at great risk in order to avoid the CEO pay limits
Even thought their banks are insolvent, remember, they're running these things for themselves. If they can squeeze a year or two of insanely high wages before the company goes under, that's good for them.
The balance on that is investor lawsuits. But they probably feel they'll cross that bridge when they come to it.
A court battle to open the books to regulators, which the Obama administration wins
The next step, is to go looking at their books to see if they are truly insolvent or not. The big banks will not agree to this. So it will go to the courts, who will say because they DID accept the money the feds had all rights to see the facts on what they were loaning about. Please note that even without CEO pay limits, THIS will become the point of contention, and will lead the big banks to act in a very shortsighted way.
The banks are insolvent
Duh. We all know this.
The Obama administration offers an aggressive offer for the toxic assets
They big banks, refuse the offer. They want +full market value for these things. They want to show big profits to make themselves big bonuses. The Obama admin balks. Talk starts towards nationalization.
The Obama administration offers an aggressive offer for bank stock.
See what's coming? The banks boards of directors nixxes the take-over bids. Nothing in it for them to accept it. They think they'll be able to make it through just fine and make themselves some more money. That's hubris for ya. Or even if they don't make it through...they'll still have more money for themselves.
Legislation mandating nationalization of insolvent banks passes congress.
Shareholders are paid the real value for what their shares are worth. Which end up being a paltry sum. Everybody runs for the doors on any investment. It's the next Black Friday, when the reality of that situation, that the entire investment/financial market is just a huge massive bubble that has no more support, and thusly will be deflated.
That's the path I see, and I actually think it's the most likely outcome. But it's going to come with a lot of pain, and I think a lot of smart people (including a lot of smart people here) are not thinking 2-3 moves ahead. Even the Obama admin, who are master policy and political chess players IMO, don't see the endgame on this. The reason for this, isn't anything in bad faith, or corruption, or even being unprepared. It's simply listening to the conventional wisdom.
Conventional Wisdom that got us into this mess: The investment markets are currently undervalued
The whole idea is that the economy can support in the long-long run being run almost completely on the concept of public investment. The reality is that public investment, increasing the demand for a stock does not increase the actual value of the stock. Low capital gains tax rates have really created a really messed up view of investment, focusing on speculation rather than actual investment.
There's also a bit of hopeful thinking in there. The reality is that in such a speculative market, it's closer to a gamble than a situation where it's a guaranteed conservative return. And a lot of innocent, well-meaning people have their future lives wrapped up in these gambles. They broke the cardinal rule, by none of their own fault.
Do not bet anything you cannot afford to lose
When you put all this together, it becomes clear that we don't really have a lot of good options here. The best possible REALISTIC result would come from giving the banks what they want, no-strings attached (so they'll accept it), and hope that it works to stabilize the financial sector. Or maybe it won't.
The long-term fix is to reward investment and penalize speculation via the tax code, and NOT vice versa, as is currently the way it works. As well to make sure that banks can't do...anything that evades regulation like this ever again.
Yup. They're probably going to get away with it. But they have the best hostage that exists. Our parents, our children and ourselves. Let's focus on not getting into the situation in the future...and focus on getting to that future in the first place.