May 19, 2011
***Companies that compensate their traders and executives based on short-term profits on paper create a systematic bias in our economy toward unsustainable bubbles and evasion of responsibility for the company and trader involved. Marking the value of an asset by its present market value for the purpose of measuring trader performance allows traders and executives to engage in a shared fantasy about those values, creating short-term profits for the company while the public bears the downside risk of rescuing markets in collapse and companies that grow 'too big to fail.' It also causes the wasteful allocation of resources, by overvaluing and consequently overproducing an asset in the short term followed often by gross waste and attrition in the long term, as has occurred to housing. Government regulators must prohibit this immediate incentive-based compensation for traders and executives based on accumulation of paper wealth, and force compensation to be held in something akin to escrow until those profits are shown to be real and enduring, not the result of a short-term bubble.***
I’m writing because my family and I were affected by the economic collapse of 2008, and we don’t want it to happen again.
Wall Street greed and outrageous pay practices were a major cause of the collapse. One way to change the incentives so they don’t collapse our economy again would be to delay the bonuses for three, five or more years. That way, we’ll know if the loans they made in year one remain good. In the bad days, bankers paid themselves on the volume of loans (mortgages) they generated, not on their quality.
Thank you for considering my comment,
Jim Steitz