J. Bradford DeLong Quotes
As long as perverse compensation systems for financial executives exist, the United States financial problems will remain nearly, if not completely, intractable.
High level financial industry executives were earnings millions of dollars even if the company did poorly. In many cases annual bonuses were paid even after the firm lost money and in some cases after the firm had to be sold to stave off bankruptcy. The worst thing in 2009 and 2010 was when some of the banks paid million dollar and more bonuses while the company was getting bailout money from the taxpayers to prevent their bankruptcy.
J. Bradford DeLong, Economist and Columnist, Deputy Assistant Secretary of the Treasury for Economic Policy “The Second Great Depression”, Foreign Affairs, July August 2013
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That has been the average perception well into the 21st century.
The huge salaries paid to CEO’s in the early 21st century became a major political issue during the George W. Bush administration in the wake of the Corporate scandals like Enron and the failure of the Government to prevent these frauds. The tax deductibility of the huge salaries also attracted political attention at a time when Bush policies had created the largest deficits in the history of the world.
The President, like most Americans, was outraged at the immoral, insensitive, and incompetent behavior of the financial industry in the Meltdown of 2008. However, the President learned how dependent the economy of the entire country was dependent on having solvent banks and how vulnerable the entire nation was to major failures of the investment and regular banks. So he was faced with very poor options. The government could have nationalized the banks, but that would produce an economic system which in the long run would not be very sound. Of the banks could be allowed to fail or risk failure in which case the entire population would suffer. Or he could lend money to the banks to stabilize and strengthen them while the bank executives were paying themselves huge bonuses even though they performed so poorly. He chose the latter and Warren was typical of criticism he received from many of his supporters. Even though the banks had broken the law and forged documents and committed perjury in tens of thousands of mortgage foreclosures, the President, as a practical matter, could not even prosecute the bank officials who were responsible because there were thousands of bank and other company officials who had committed the same crime. The guilty included almost every senior officer of the major banks, and jailing all these people was deemed impractical. So, to recover the economy, justice and fairness suffered.
Greenspan and some others assumed that the shareholders and the executives who ran the financial institutions had the same vested interests. But the executives had disconnected themselves from the fate of the shareholders, by having Golden Parachutes to protect the executives even if the business failed and they were fired. And they got their bonuses immediately so by the time the authorities and the shareholders discovered that the profits the bonuses were paid for were illusory, the bonus money was safely stored in a secret offshore bank. But if things went wrong, there was always the play of getting a government bailout which would keep the executives getting their huge bonuses and keep the shareholders from losing their money as the taxpayers covered most of the losses.
Corporate CEO pay had traditionally been 5-15 times the average wage for the company. But it had changed to where in banks and financial companies the CEO pay was often 100-1000 times the average salary. This became a major political issue after the 2008 Meltdown. During the Great Recession some CEOs who had led the company to huge losses and then had to take government money to bail them out and prevent bankruptcy, took multimillion dollar salaries and huge bonuses while average salaries had gone down. There was a move for government to regulate CEO salaries. Macke argued for the position that would finally be taken.
At the time, the financial industry spent more money for lobbyists and campaign contributions than any other sector of the economy. The result is that they had extraordinary access to and influence upon members of Congress and their staffs, that more often than not, the actually drafted the language for laws, amendments and regulations and then les the strategy to pass the legislation or finalize the rule. Moreso than any other industry, they wrote their own rules. Even after the Meltdown of 2008 and the Great Recession where there was a public outcry for reform, the Dodd Frank legislation was influenced by the industry and after passage most of the rules and interpretations were written by the industry or greatly influenced by them.
Sovereign credit substitution is where the government, one way or another, assumes and guarantees the debts of private corporations. This is an elegant way of saying: “taxpayer bailouts”
The savings and loan crises became clear shortly thereafter.
James Bradford "Brad" DeLong is an economic historian who is a professor of economics at the University of California, Berkeley. DeLong served as Deputy Assistant Secretary of the U.S. Department of the Treasury in the Clinton Administration under Lawrence Summers.
