Photos
Dr. Kalinda Rose Stevenson
House votes to restrict Wall Street pay: Congress acts to end million dollar bonuses paid with bailout money
Welcome back!
The United States House of Representatives passed a bill that restricts bonuses to bank executives.
Nothing has enraged ordinary people more than the idea that the biggest banks used bailout money to pay huge bonuses to their executives.
The House voted Friday to slap restrictions on how Wall Street executives are paid after nine banks that took government bailout money rewarded thousands of their employees with bonuses topping $1 million each. House Votes
In the same year the banks were failing, and taking billions of dollars in bailout money, the banks were paying their executives million dollar bonuses.
The core of the problem is the connection between reward and risk. Safe investments tend to be low paying investments. Often, the greater the risk, the greater the profit.
One of the reasons that the economic system got so out of whack is because the biggest banks found ways to make greater profit with riskier loans after the Glass-Steagall Acts were rescinded in 1999.
The Glass-Steagall Acts were passed in 1932-33 to prevent another Great Depression.
I wrote a report, “Why Banks Went Broke Making Money: The Money-Making Magic That Triggered The Global Recession.” In this report, I explain why the ability of banks to make more and more money with risky loans that violated every standard of responsible banking practices led to the financial crisis of 2008.
The real estate boom years coincided with successful political efforts to de-regulate the banking system. Based on the idea that government regulations limited free-market capitalism, Congress passed laws to set the banks free from all kinds of restrictions about what different types of banks could do, and significantly reduced oversight of banking.
Those who believed that “the best government is no government” argued that these restrictions and regulations were impeding free market capitalism. “The most notable results of this effort to set the banks free from government regulation were the repeal of the “Glass-Steagall Acts” of 1932 and 1933, and the enactment of the “Gramm-Leach-Bliley Act” of 1999.
“Glass-Steagall” required a clear distinction between investment banks and commercial banks, to separate risky ventures from ordinary banking services. “Gramm-Leach-Bliley” removed these restrictions. This Act allowed commercial banks to engage in speculative investment banking.
With new-found freedom from all kinds of post-Great Depression era regulations, the biggest banks threw caution to the wind, and created a dazzling array of paper instruments which allowed them to make massive profits. Kalinda Rose Stevenson, Why Banks Went Broke Making Money,
Without these restrictions, the biggest banks had great incentive to engage in risky banking. The riskier the banking, the greater the potential profit.
As the banks took greater risks, their actions also had the potential to create great harm to the economy. The “mortgage meltdown” and the bank bailouts are all the direct result of increased risks by banks.
According to Barney Frank, the banks realized that they would make great profits only if they took great risks.
Rep. Barney Frank, D-Mass., who sponsored the bill, said the extra regulation is necessary to ensure bankers and traders aren’t rewarded only if they take big risks. Under the provision banning risky incentive-based pay, regulators would be given nine months to dictate precise guidelines.
If a bet goes wrong, “the company loses money and the economy may suffer, but the decision makers do not,” he said. House votes
As the banks took greater risks, their actions also had the potential to create great harm to the economy. The “mortgage meltdown” and the bank bailouts are all the direct result of increased risks by banks.
The practice that has enraged ordinary people more than anything else has been the extremely generous executive bonuses paid to bankers who were running their banks and the economy into the ground.
It’s one thing to realize that the banks have been paying millions of dollars in bonuses to executives who were making such bad banking decisions. People were angry enough about that. What turned anger into outrage is the realization that the banks were continuing to pay generous bonuses after they received government bailout money.
At its core, the financial crisis is a banking crisis, brought about by risky behavior by banks and lack of regulation by government agencies. This action by the House is an effort to change the risk to reward ratio, so that bad banking is not so rewarding to the people who made the bad banking decisions.
Dr. Kalinda Rose Stevenson
Popularity: 32% [?]
Sphere: Related ContentTags: bank bailout, banks, Barney Frank, executive bonuses, financial crisis, Glass-Steagall, House of Representatives, make money, recession, Wall Street
Related posts
Syndicate
Subscribe to this site's RSS feed.