Green Room

The Most Monumental Power Grab You Never Heard About

posted at 9:43 am on October 24, 2009 by

The pre-weekend information dump included an announcement by the Federal Reserve and Treasury Department that the federal government proposes to extend its control over pay packages beyond financial institutions which received bailout funds.

According to the press release, the government proposes to monitor and, if need be, veto pay packages at any banking institution subject to federal regulation:

Flaws in incentive compensation practices were one of many factors contributing to the financial crisis. Inappropriate bonus or other compensation practices can incent senior executives or lower level employees, such as traders or mortgage officers, to take imprudent risks that significantly and adversely affect the firm. With that in mind, the Federal Reserve’s guidance and supervisory reviews cover all employees who have the ability to materially affect the risk profile of an organization, either individually, or as part of a group.

This is an earth-shattering development in the annals of government control, yet because the information was released on a Friday, it has received little press attention relative to its importance.

One can understand the bargain made where a company receives federal funds to stay in business. By accepting the funds, which must be repaid, a measure of corporate and shareholder freedom was sacrificed.

But to base government control of salaries on mere regulatory jurisdiction would give the government control over much of the economy, essentially any business involved in interstate commerce. This is the harm which many of us feared from the Trojan horse of the bailouts.

Why not regulate law professor salaries (horrors!)? After all, educational institutions are tax-exempt and thereby receive a de facto federal benefit.

Or doctors? Particularly if Obamacare passes, there will be a federal interest in making sure doctors have the right financial incentives.

Or lawyers? At least those who are admitted to practice in federal courts. There is a federal interest in making sure that the federal resources used to fund the courts are not wasted.

Or truck drivers? They use roads built with federal highway funds (with a touch of stimulus funds thrown in).

Or airline pilots, flight crews and mechanics? Their industry is regulated by the FAA, and the TSA controls security at airports.

And the list could go on and on. But as always, politics will enter into the equation. Do not expect attempts to regulate Hollywood or music industry compensation, or the speaking fees earned by former Presidents and members of Congress.

Creeping federal regulation of every aspect of the economy now is being used as a justification for federal regulation of every aspect of our lives. And the example of regulation of banking salaries sets a precedent for regulation of our personal behaviors once Obamacare passes.

This is a monumental power grab and more.

The actions of the federal government with regard to non-bailed out banks undermine a fundamental feature of our capitalist system: Individuals get to structure their own financial lives, and shareholders and boards of directors get to structure corporate financial lives.

This is using a crisis to grab power unrelated to the crisis. Don’t say you haven’t been warned.

Cross-posted with updates at Legal Insurrection Blog

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According to the press release, the government proposes to monitor and, if need be, veto pay packages at any banking institution subject to federal regulation:

Minimum wage first, now a maximum wage. Bracketing society into an ever more narrow band of relatively equal mediocrity.

Are we allowed to call them socialists yet?

BadgerHawk on October 24, 2009 at 9:57 AM

So, what happens to the money a company earns but can’t pay out to employees? Since it’s corp profits, the govt gets to tax it. Do you think it’s going to be paid out to the share holders? The libs will put a cap on dividends next.

Kissmygrits on October 24, 2009 at 10:16 AM

So, what happens to the money a company earns but can’t pay out to employees?

Kissmygrits on October 24, 2009 at 10:16 AM

They’ll be forced to use it to hire extra minorities to sit around and do nothing but collect their redistributed wealth.

Daggett on October 24, 2009 at 10:46 AM

Private colleges are subject to federal law because some of its students get federal school programs a la Grove City College. The question is not what can the feds regulate but what can they not regulate.

If the feds can regulate any portion of a business, they can regulate all aspects, preempting all state law like corporation, partnership law. If the interstate commerce clause gives the feds the power to preempt state law regarding how a corporation compensates its employees and officers, what arguments can be made against how stock is issued? Or how the board is elected? If the feds win the argument on compensation, they’ve won all the arguments.

On the other hand, if those individuals who’ve had their contracts breached are so cowardly that they don’t contest it, they deserve what they got coming to them. When is somebody going to challenge these thugocrats?

casel21 on October 24, 2009 at 11:06 AM

We are simply going to have to say no, to resist.

GunRunner on October 24, 2009 at 11:43 AM

“Inappropriate bonus or other compensation practices can incent senior executives…”

“Incent”? Ah, yes, the lovely neologisms of Big Brother. Read Orwell’s “Politics and the English Language.” Orwell wasn’t a mere writer, but a prophet. This press release is about the most chilling thing I’ve read since I was safely tucked in college reading “1984″. But at the time, it was all an abstraction, a dystopian indulgence. I could shut the book and walk into the sun. The little frissons of fear I’d get were easily chased away by the “that could never happen in real life” reminders.

Not so anymore. This is a time for all free men and women to feel fear.

rrpjr on October 24, 2009 at 11:52 AM

GunRunner on October 24, 2009 at 11:43 AM

Please point out a state that has the gumballs to do so.

boomer on October 24, 2009 at 1:10 PM

Capitalism is inherently unstable and it must be replaced by something more stable. To lament that the very same men who casued this latest crisis will lose some cents on their millions, it is just ridiculous. The idea that they will go somewhere else is even more riduculous – what sane company owner or investor would want these incompetents and malcontents? Just institute these pay cuts across the board and prosecute the worst cases. Then we will see a return to a more sane economy. If they still do not comply, then nationalize the banks and expropriate the property of their managers. Now THAT would be a conservative solution rather than this capitalist-hugging nonsense!

JC Silverberg on October 24, 2009 at 1:45 PM

Then chop up the nationalized banks in smaller one-state units and sell them to responsable people.

JC Silverberg on October 24, 2009 at 1:47 PM

To lament that the very same men who casued this latest crisis will lose some cents on their millions, it is just ridiculous.

JC Silverberg on October 24, 2009 at 1:45 PM

Dodd and Frank seem to be doing just fine these days. Though if you’re referring to the bankers, not bailing them out and continuing to prop them up would have resulted in a bigger dent to their portfolios than capping their bonuses.

And you’re completely missing the point. The administration wants to cap pay at healthy banks that did not take TARP money. These banks, presumably, were not leveraged with risky investments and had nothing to do with the financial collapse.

BadgerHawk on October 24, 2009 at 7:55 PM

Yeah, I submitted this story when it broke to the HotAir tips email even. I’m surprised it wasn’t bigger news in conservadom. Good work.

kc8ukw on October 24, 2009 at 8:14 PM

He needs to go after his buddies Dodd and Schumer and Frank. They has as much if not more to do with the meltdown.

jeanie on October 24, 2009 at 9:52 PM

The banks that were too big to fail last year are still too big to fail this year thus the problem remains and the Treasury is just a few hundred billlion dollars poorer. The solution? Nationalize said TBtF banks and chop them up into manageable sized units. At smaller banks there can be a more effective management and as well as a localized risk assessment. Also the problem with ridiculously overpaid exceutives solves (at least partly) itself as small banks can afford less extravanganza. In due course these banks will start to grow again but it will take a considerable time to get back to todays level of financial agglomeration. Unless of course be ban the practice of interstate and international banking alltogehter which may or may not be the best solution but the option should atleast be on the table to put pressure on the banks to behave.

Then the next industry to be split up into smaller units should be the agricultural sector – reduce the agribusiness to family owned farms to get an increased quality of products (less hormone treatment), better treatment of animals and a sustainable rural economy. Voilà! We have a far more conservative society than today.

JC Silverberg on October 25, 2009 at 5:20 AM

“…buddies Dodd and Schumer and Frank.”

I am neither a Democrat nor am I a Republican. I am a Conservative and as such I shun both those liberal labels. And to the people who lament the loss of conservatism as a guiding ideology for the Republicans – you can comfort yourself with the thought that it never was the guiding ideology, even Reagan was just a liberal liar who increased wasteful government spending and did nothing to end abortion.

JC Silverberg on October 25, 2009 at 5:27 AM

Well, I for one think it’s time to cap & trade, i.e., cap the number of laws & regulations, and trade some politicians to say, hmmm, North Korea or Iran.

Robert17 on October 25, 2009 at 8:26 AM

“Capitalism is inherently unstable and… must be replaced by something more stable”?

How’s that? Compared to what? Replaced with what?

In my political experience, “stability” is a codeword for control, i.e., for an intolerance for the vagaries and vicissitudes of a marketplace outside the control of a superstructure of elites.

Liberal capitalism has driven the greatest period of human betterment in the history of man. It has enriched, uplifted, educated, empowered and liberated more people than all other systems combined throughout history. Its “inherent instablity”, its reflection of the human condition, is its very beauty and secret.

rrpjr on October 25, 2009 at 11:28 AM

The ones they won’t regulate without extreme disruptions are the students – they hardly want another Kent State over the issue of controlling tuition and competitive over paying for the better students.

Don L on October 26, 2009 at 5:19 AM

Gee, if one could point to a steady stream of well reasoned decisions and positive outcomes emanating from Washington (from Congress, the President, agencies, etc.) I might be a little more willing to accept the Obama administration’s underlying premise that they are smarter than the rest of us and deserve to control an ever increasing portion of our lives.

In the case of the White House – show me anything that any one in power there has ever done that advanced freedom and the pursuit of happiness of the average citizen. Much easier to point to examples of increased government control for the purpose of increasing government control.

in_awe on October 26, 2009 at 3:40 PM