Private Gains and Public Losses

Robert Reich is a former Labor Secretary in the Clinton Administration.  

 I don't often pay a great deal of attention to  former cabinet members of any administration--who often seem to be busy laying the blame for recent economic problems they helped bring along at someone else's door. But  I think Dr. Reich makes three very good points about the recent spate of Congressional bills coming down the pike to bail out the biggest mortgage companies in America, Freddie Mac and Fannnie Mae, which together have made 5 trillion dollars in loan guarantees to  promote home buying.    

Here's Reich touches on the central problem, a problem nobody in Washington, or out in the heartland, cares much about until some major institutions like the ones above get in to trouble. Along with the private mortgage lenders like Countrywide, the "casino" attitude toward home loans has helped weaken the economy. Just what we needed when gas prices have doubled in a year, right?

 *******Anyway, here's Dr. Reich on the matter (taken from a Newsweek article)  

"Their organizations are treated as if they're giant investor-driven private sector entities as long as they're healthy. But when they start to go down the tubes they become public entities with public responsibilities, and the rest of us have to bail them out.  Herewith a modest proposal: when taxpayers insure a giant entity against loss—Freddie, Fannie, Wall Street investment banks, whatever—the entities must agree that (1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the president of the United States, and (2) the government gets 5 percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance). If and when the entities become profitable again, taxpayers are thereby compensated for the risk they've taken on.

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Here's an interesting fact: the CEO's at Fannie Mae and Freddie Mac each made around fourteen million dollars  last year.  And the two companies will need an estimated 25 billion at least to stay afloat.  Gee, I thought  pay linked with performance was one of the things that made free enterprise work better than other alternatives.    

Of course you don't have to have a doctorate in economics like Reich to figure some new regulation plan out.   You do  have to be able to stop the problem from getting so bad in the first place, otherwise why do we pay these people so much and buy their books when they leave office?   Didn't  anybody in Washington remember the Savings and Loan Fiasco in the 1980's.  That financial meltdown in commercial property occurred because President Reagan and the Congress deregulated the S & L industry and then, a few years later , someone in the next administration and new Congress tried to clean up the mess to cost the taxpayer billions?  Then the Enron case went down in the 1990's, thanks to state and federal regulators called off by political cronies of Kenneth Lay, like GW Bush.  Of course, both parties are in on this game. 

My question is, when do we elect people who don't pretend that the "rainy days" of economic downturns will somehow never happen?   With billions in public money at stake, rigorous regulation is needed.   I don't know if its possible given the revolving door between the investor class and the politicians who appoint those who are, in theory,  supposed to be watching the investors.  (Foxes in the henhouse in many cases.)

  But I think it would be valuable to ask candidates if they have a plan similar to Reich's to at least try and hold executives with fat salaries accountable for their company practices, quarter by quarter and year by year, and not just when a whole major industry goes belly up.  

 

http://robertreich.blogspot.com/