Becker and Pethkoukis Missing the Point

TW: Pethkoukis entitles his post the "Exec. Comp. the Great Distraction". The piece to which he refers by conservative economist Becker asserts the Great Recession/Credit Implosion is not attributable to obscene executive/Wall Street compensation. He may be right. But obscene compensation is a symptom of the disease within our economy not a primary cause.

The outrage over compensation is not because folks attribute the crash to the compensation but because it appears unearned, inequitable and based upon power structures which benefit those at the top of the pyramid. Because the compensation structures did not "cause" the Crash is no reason not to address the compensation structures.

From Gary Becker via Jim Pethokoukis"
"I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash. These executives bought large quantities of mortgage-backed securities and other securitized assets because they expected this to increase the average return on their assets without taking on much additional risk through the better risk management offered by derivatives, credit default swaps, and other newer types of securities. They turned out to be badly wrong, but so too were the many financial economists who had no sizable financial stake in these assets, but supported this approach to risk management.

The experience of other financial crashes also does not indicate that either the level or form of compensation of top financial executives were major factors in precipitating these crashes. Thousands of banks failed during the Great Depression, as did hundreds of American savings and loans institutions during the 1980s, without heads of these institutions in either case getting particularly high pay, or pay that was mainly in the form of bonuses and stock options. My impression is that this same conclusion applies to the Mexican bank crisis of the mid 1990s, and the Asian financial crisis at the end of the 1990s.

The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors. Financial institutions underrated the systemic risks of the more exotic assets, and apparently so too did the Fed and other regulators of financial institutions. In addition, large financial institutions may have recognized that they were “too big to fail”, and that they would be rescued by taxpayer monies if they were on the verge of bankruptcy because they took on excessively risky assets."