Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.
The Fed's plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks' corporate boards and executives.
Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees -- from chief executives, to traders, to loan officers -- to take too much risk. Bureaucrats wouldn't set the pay of individuals, but would review and, if necessary, amend each bank's salary and bonus policies to make sure they don't create harmful incentives.
This is madness. Setting aside the horrific precedent, the plan will fail massively for three reasons:
1. Determining which compensation plans encourage risk is hard; regulators will sometimes get it backwards.
2. Financial firms will create complicated compensation packages that innovate around the regulations.
3. If the regulations are truly onerous, financial firms will just re-locate outside the U.S.
The only way to prevent excessive risk-taking is to let financial firms fail when their investments blow up. No bailouts, no subsidies, ever.