A couple thoughts on the compensation guidelines and the sturm and drang over the proposed programs to deal with the banks.

First, I wrote a post on the new compensation programs earlier and opined that they were largely toothless. They apply to a couple of institutions and have limited application to others. After further thought let me amend my conclusion. I think that we may well rue this day for many years to come.

What I failed to take into consideration is the precedent that was established. In one rather shrewd move, the Obama administration has established a principle that suggests that whenever government funds are at stake, the government has the right to dictate compensation within the enterprise receiving those funds. Given the reach of the federal government what would not be included?

More than a few of the blogs have been moaning about that the administration didn’t go far enough in punishing the perceived wrong doers. Suggestions have floated around that they missed the boat by not clawing back previously paid bonuses and indeed not going deeper into the compensation schemes of private companies in order to reorder the manner in which salary and bonus money is paid out. I assume that they have a broader industrial policy in mind and sincerely wish that they would lay it out for all of us. If not, then an explanation as to how they expect the public sector to limit this new power would be helpful.

As for TARP ll or whatever you want to call it, there seems to be a growing furor over the perception that it will rely to a large extent on guarantees of certain bank assets. I have argued for nationalization in previous posts and I still believe that something close to a RTC type solution may be the best. At the same time, I am reluctantly willing to concede that we may not have the resources to pull it off. Recent comments regarding the financial commitment such a solution might entail lead me to conclude that the administration, Fed and Congress may have looked at this and been appalled by what they saw.

This presumes that they know the extent of the problems. Several blogs have accused them of being derelict in this duty and to not know the extent of the problem. None of those opinions were supported by any evidence and I find it easier to believe that more rather than less work has probably been done on bracketing the issues. Conspiracy theories serve us poorly at this juncture.

Assuming that the nationalization solution would simply outstrip our financial capacity then the alternative-guaranteeing the assets has merit. Time is something that most of us can’t buy. The government can however make such a purchase and I’m coming around to the view that it may not be a bad strategy. There is little downside to delaying recognition of the true value of the banking system’s assets and much to gain fiscally by such a delay.

Yes, I know the zombie bank argument. Frankly, it may or may not hold water. The U.S. is a unique model given its enormous number of banking institutions. It may well turn out to be a hidden strength. There are a number of different solutions that may present themselves if we take our time working through the problem. The banking system is stabilized at this point and we might be well served to proceed methodically towards a resolution.

The manner in which other countries have dealt with these sorts of problems and economic theories can serve us well in working through the current malaise. At the same time, none have ever been employed in a country of this size, complexity or with an economy so large. Patience and reticence might well be the best virtues we can bring to bear right now.