Baseline Scenario (aka My New Favorite Blog) explains why the executive pay cap that Obama announced is less stern punishment for a misdeed and more “Your mother wants me to yell at you, so I’m going to raise my voice and you can slam your door. But we’ll meet in the kitchen later for ice cream”: 

As announced yesterday, the government will set restrictions on the pay of executives in banks that participate.  But note that, under these rules, bonuses are not restricted.  Instead, they are just deferred and paid in shares.  In other words, if there is cheap recapitalization through government-provided insurance, these executives are getting an incredibly good deal.

Think about it this way.  While the macroeconomy goes badly, the government will pay out on the insurance policy and keep the large banks in business.  Once the macroeconomy turns around, as of course it will, the banks can pay off the government and pay out massive bonuses.

We are, in effect, insuring  incompetents (i.e., the executives who got us into this mess) against both the delayed consequences of previous bungling by themselves and any future missteps they may  make.

The loud whines coming from the financial institutions once the pay cap was announced were partly because they want as much money as they can get their grubby little hands on. But it was also the door slam that precedes the yummy, yummy ice cream.

This entry was posted on Thursday, February 5th, 2009 at 11:21 pm and is filed under Economy, Society & World.You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.