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Monday, September 29, 2008

Executive Compensation and the Financial Crisis

When I consider the recent financial crisis, the question that comes to mind is, "who is responsible for all of this?" With that question I mean more than to ask whose fault is it. I am not concerned with placing the blame on certain people or organizations. What I mean is who were the ones who could say I/we are the one(s) responsible for the well being of this company. It makes most sense to me that it is the executives of these companies who are responsible for the company. It is their job. And in a free market economy, if your company fails, then bummer. I am not saying that the government should do nothing in this situation, but what I do mean is that they should be the ones who bear most of the cost of their mistakes instead of making us pay for it.
Rather than creating incentives by rewarding executives with bonuses for making bad, high risk loans, there needs to be more integrity and accountability among these companies. Especially those whose failure is so "catastrophic" for the American people and economy. As Charles Tharpe (from the linked article) said, "You don't want to discourage risk, you just don't want to [give an] incentive [for] excessive risk." And that is exactly what happens when executives recieve all this compensation. In my opinoin I think that the same ones who are responsible for the decision making and well being of these companies, also need to be responsible for paying for their mistakes.


Comments:
""You don't want to discourage risk, you just don't want to [give an] incentive [for] excessive risk." And that is exactly what happens when executives recieve all this compensation. In my opinoin I think that the same ones who are responsible for the decision making and well being of these companies, also need to be responsible for paying for their mistakes."

I'm not sure why executives receiving large compensation means there will be an incentive to take excessive risk. I don't think you explain that. Perhaps this make sense.

But, let's follow that same principle of having those responsible pay for their mistakes. It seems clear that Congress, and even particular members of Congress can be pointed out, passed laws (and even applied personal pressure probably) that created incentives for both the government sponsored enterprises as well as other mortgage lenders to give too many risky mortgages. We can let the private businesses fail, but the government sponsored enterprise is just that because of the promise to have government back their bad loans. And, how can we hold Congress responsible for the bad policies and the lack of correction for those bad policies over the course of almost 2 decades?
 
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