I'm a Lover, Not a Fighter

Paul Krugman is one of those nonconformist souls right now:

In the grim period that followed Lehman’s failure, it seemed inconceivable
that bankers would, just a few months later, be going right back to the
practices that brought the world’s financial system to the edge of collapse. At
the very least, one might have thought, they would show some restraint for fear
of creating a public backlash.

But now that we’ve stepped back a few paces from the brink — thanks, let’s
not forget, to immense, taxpayer-financed rescue packages — the financial sector
is rapidly returning to business as usual. Even as the rest of the nation
continues to suffer from rising unemployment and severe hardship, Wall Street
paychecks are heading back to pre-crisis levels. And the industry is deploying
its political clout to block even the most minimal reforms.

The good news is that senior officials in the Obama administration and
at the Federal Reserve seem to be losing patience with the industry’s
selfishness. The bad news is that it’s not clear whether President Obama himself
is ready, even now, to take on the bankers.

Okay, then what are some solutions, Dr. Krugman?

If we really want to stop Wall Street from creating another bubble,
followed by another bust, we need to change the industry’s incentives — which
means, in particular, changing the way bankers are paid.

What’s wrong with financial-industry compensation? In a nutshell, bank
executives are lavishly rewarded if they deliver big short-term profits — but
aren’t correspondingly punished if they later suffer even bigger losses. This
encourages excessive risk-taking: some of the men most responsible for the
current crisis walked away immensely rich from the bonuses they earned in the
good years, even though the high-risk strategies that led to those bonuses
eventually decimated their companies, taking down a large part of the financial
system in the process.

Got it. So what's holding us progress in this reform?

I was startled last week when Mr. Obama, in an interview with Bloomberg
News, questioned the case for limiting financial-sector pay: “Why is it,” he
asked, “that we’re going to cap executive compensation for Wall Street bankers
but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National
Football League does, in fact, have pay caps. Tech firms don’t crash the whole
world’s operating system when they go bankrupt; quarterbacks who make too many
risky passes don’t have to be rescued with hundred-billion-dollar bailouts.
Banking is a special case — and the president is surely smart enough to know
that.

All I can think is that this was another example of something we’ve seen
before: Mr. Obama’s visceral reluctance to engage in anything that resembles
populist rhetoric. And that’s something he needs to get over.