Yesterday my hard drive died. As did the Obama Administration's plan to cap salaries at financial firms. But they still, apparently, intend to produce strong - very, very strong - "recommendations" (still unsurprisingly fuzzy in definition) on pay at some future date. Is there a link? Certainly.

Producing policy and guarantees that sell well but offer few protections to consumers is a valuable skill set. As Dell attempt to wiggle out of a warranty with 121 days to run whilst also encouraging the purchase of a further "extended guarantee" so administrators continue to behave like a guild of financial apothecaries floating one set of prescriptions then another all in the search, it seems, for something with no adverse side effects for themselves - or the patient - but that also proves popular.

The argument that government ought to "stay out of the private sector" is a powerful and usually adequate one. However, these are regulated firms for a reason: what they decide is optimal for them is not necessarily so for society. Extreme leverage, massive sector concentration and little financial downside for managers trying to goose the stock prices of firms greasing The Key Mechanism of the Credit System make it so.

Now the latest prescription out of the White House calls for a "pay czar". Snappy title but it does well to recall that the last real Czar did not enjoy a Disney ending. Perhaps a "pay commissar" might be more appropriate for (s)he might demand that financial executives' variable pay be tied to all the primordial interests in their firm - including those of depositors and debt holders*. More elegant than a cap.

Revolution! Not only would that keep owners' and executive option holders' wilder profit fantasies in check: it could be the shake-up (or should that be shake-down?) capable of taming leverage positions, fragmenting an industry in the interests of the greater good and injecting some semblance of institutional responsibility into the credit industry.


NB: Suggestions of cost-effective data recovery services most welcome.
* Full discussion of this approach by architects of the idea in June's newsletter.

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