Monday, September 8, 2008

Making future fannies and freddies think twice …

   The federal government’s takeover of Fannie Mae and Freddie Mac may do some short-term good in “reassuring financial markets,” we are told, with the result that housing credit may be loosened somewhat, meaning that fewer Americans will lose their homes in foreclosure and that more Americans will be able to buy a home over the next couple of years.
    But at what cost?  While populist politicians repeat platitudes about “making sure this doesn’t reward fat cats,” a far bigger concern is the effect that such bailouts, as well as the precedent of trying to save Bear Stearns, may have on the psychology of private executives in the financial world.  If such companies are indeed “too important to fail,” we should worry mightily that the managers of other large companies will recognize this and engage in risky behavior (often in order to give themselves short-term gains), with the knowledge that the government stands behind them.
    Here’s an idea that I first heard from George Will many years ago and that has been repeated elsewhere, including by Martin Hutchinson this summer:  Executives of bailed out companies should be treated as if they were government employees, with CEOs making at most the top federal pay (around $200K per year) and other executives making less.  Such a pay cut would make a manager think twice about putting the company at risk of a federal bailout.
   What?  You say that executives would simply resign en masse immediately rather than accept such paltry salaries?  Well, perhaps we could condition a bailout on their returning some of their big money returns over the past few years.  This would impose an unwise cautionary fear on executives, you say?  Gimme a break, it’s not often that one gets to play the populist! …

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