Recently, President Barack Obama put forth regulations to cap salaries for executives of firms receiving "exceptional federal assistance" at $500,000. This initiative is a mistake. It is a political move to release some pent-up public anger at Wall Street and will not help pull the financial markets out of the hole they have dug for themselves. Remember, this is business, not personal.
Too often in recent days, the mood has been to punish the big corporations. "Damn them for putting America in such dire straits," we say.
While a large portion of the responsibility for the present economic downturn does fall on the poor business decisions of top execs - though let's not forget the irresponsible borrowing practices by consumers - kicking them while they are down won't help America recover. Though it may be a bitter pill to swallow, having the big corporations succeed is necessary for the rest of us to prosper.
The first step we all have to take is to put the emotions aside, stop the blame game and start taking steps to improve the economy. The hard part with this rests in the problem of government involving itself too much in the economy.
A capitalist economy is based on self-interest. While business decisions may benefit others, all economic motivations are based on profit for the individual.
In contrast to this is a democratic government. A democracy is based on acting on behalf of the people at large. Any actions seen as self-interested by government or politicians are considered immoral and corrupt.
The trouble is both democracy and a free market capitalist system are seen as inalienable rights in the US. This works provided that they each remain in their respective spheres. The conflict between one serving the public good and the other with a focus on self interest makes it very difficult for politicians to fix the economy.Ignoring popular frustrations with the 'greed' of Wall Street, a salary cap for executives could potentially hurt the economy and slow recovery.
Consider it in this light: These strict pay ceilings are for those institutions in need of "exceptional assistance," which means they are already the ones in the worst condition. These include Bank of America, Citigroup and AIG. Aside from being those closest to failure, the addition of pay caps makes top positions at these companies very unattractive.
Who would choose lesser pay at a failing institution, especially since the types of executives needed at these companies are going to be the ones in highest demand and thus able to extract the highest pay offers from other, less fragile firms?
It makes offers from those less restricted by federal aid, like Goldman Sachs, J.P. Morgan Chase and Wells Fargo, much more enticing. These companies will be able to keep or hire the top execs to turn their businesses around and bounce out of the present tough times. It's already happening, even: Bank of America's stock fell 11 percent on Feb. 4 when Obama announced the new rules while Goldman Sachs' rose 6 percent and Morgan Stanley's by 5 percent.
This shows that new restrictions are scaring away investment, which shouldn't be a surprise.
While regulation is clearly a must and oversight and restrictions should accompany such a massive government intervention as the one happening today, the Obama administration has a fine line to walk. Although it does have to appeal to an angry American public, to effectively pull these financial institutions out of their difficult situations the White House cannot inhibit the competition and balancing of supply and demand inherent in a capitalist economy.
Without a doubt, the aims of Washington are for the country's best interest and clearly they want to see these firms recover. But while acting with the best of intentions, Washington may be facilitating the collapse of the very institutions it seeks to save. Government should take action with the primary goal of getting the economy back up and running and getting its hands out as quickly as possible and not with trying to make the public feel that revenge has been exacted. Although it may hurt to see CEOs with such high salaries, just remember Tom Hagen's advice in "The Godfather;" it's just business, this isn't personal.
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