Last April, I wrote an article, "The dangers of populism," in which I decried the growing populist sentiment welling up in the form of the AIG bonus controversy. I wrote that our country was succumbing to an "out-of-control populist bonfire." How naive I was. Far from being full blown, the fire was still in the kindling stage. Now, almost a year later, we can lay claim to a fully robust bonfire.
In the wake of Scott Brown's Massachusetts special-election victory, politicians in general -- and the Obama administration in particular -- are interpreting national sentiment as veering in the direction of the populist. The Democrats are categorizing much of the Tea Party movement as angry populist syndrome (a charge I feel is somewhat untrue, although this is a debate for another day). As a result of this consensus, the politicians are advancing several populist platforms that are destructive on multiple levels.
The first doozie comes in the form of a bank liability tax, er, I mean, "Financial Crisis Responsibility Fee." This little guy is being sold as a way to limit banks from engaging in excessive risk taking, and thereby insulating the country from another financial meltdown. In typical Washington fashion, it also has a dual purpose of recouping taxpayer money lost through the TARP legislation that was used to bail out various and sundry companies around the country last year.
This is a reckless idea, given that many banks were forced to take TARP funds against their will. Furthermore - save Citigroup - these banks have repaid all their TARP money with interest and thus their net obligations to taxpayers are zero. So, why has TARP still cost money overall? Look no further than the auto companies, Fannie Mae and Freddie Mac. These are the money losers that the administration should be going after, but can't, given its decision to take control of large parts of these industries (i.e. the government probably won't be taxing itself any time soon).
Perhaps more disconcerting than the bank tax is the hullabaloo over Wall Street bonuses. On its face, the bonus figures seem obscene and, indeed, indicative of what Obama so friendly calls "greedy" and "fat-cat" bankers. In reality, however, the raw figures only tell part of the story. Bonuses are the primary vehicle for worker compensation on Wall Street, and thus base salaries are often lower for employees while bonuses make up the difference.
Similarly, the alternative must be considered. What if Wall Street did not use bonuses as a means of worker compensation? In that case, employees would simply receive higher base salaries from their firms (and in fact many firms are starting to trend toward this structure). Larger base salaries are actually more outrageous because they allow for workers to be paid the same no matter what the quality of their performance is.
Bonuses, on the other hand, are tied to contractual performance clauses, and thus bankers are being rewarded most when their banks are doing well. Therefore, bonuses make more sense as a mechanism for ensuring that employees are not receiving large paychecks while working for sinking banks that could create systemic risk down the road. Finally, it should be kept in mind that the government still finds a way to regulate bonuses without capping them. Cash bonuses on Wall Street are subject to a nearly 50 percent tax rate via the good old-fashioned income tax.
Wall Street has always endured -- and probably will into the foreseeable future -- its fair share of skepticism and disdain from Main Street America (look no further than the recent Collegian piece titled "7:23 train to Grand Central"). Unfortunately, populist ideals rarely transform themselves into coherent and productive legislation.
Last year, these policies I discussed were mostly suggestions and ideas rather than pending realities. But that was back when I described Obama as being "a sideline critic" in his attitude toward populism. Now he appears to be entering the game and preparing to lead the charge.
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