May 24, 2011
I’m writing because I've been horrified to see the problems that have ensued from the 2008+ crash and recession. Friends of mine have had to give up their houses - paid for dearly in the boom, and now worth a fraction the amount. My students (I teach at a university) face very limited employment opportunities, and are saddled with debt. I was very lucky to start a job in 2008 and have so far been able to retain it and stay whole, but I fear what will happen as budget cuts continue.
Wall Street pay practices facilitated the collapse - people got rewarded for irresponsible speculative lending and investment behavior. One way to change the incentives so these financiers don’t collapse our economy again would be for regulators to use a *safety index* for incentive compensation, instead of a profit index.
Currently, most bankers receive stock options. So if they can generate more profits, the stock price goes up, and their options become more valuable.
Instead, they should use a measure of the bank's financial security. One option would be the bank’s bond price, which measures the overall ability of the bank to repay its own debt. Another would be the spread on credit default swaps (the insurance-like policies that are essentially bets, where one gambler bets with another that a particular firm will fail). The closer a bank comes to failing (such as in failing to pay of its bond debt), the bigger the spread on credit default swaps.
Thank you for considering my comment,
Eve Vogel