May 24, 2011
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 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, what if they used the bank’s bond price, which measures the overall ability of the bank to repay its own debt? Another measure of bank stability is 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.
The endowment of the University where I have been teaching for 15 years has shrunk through no fault of our administrators, but as a result, the quality of education we can offer suffers. Moreover, my yearly raises since 2001 have amounted to no more than 2.8% (two and eight-tenths per cent) per year of an adequate salary, but one that is not 20% more than the median salaray for a family of our size and which in no way keeps up with inflation of food and energy costs. Why should we, who prepare the future employees of corporations which make only a handful of administrators and a few investors wealthy make the tiniest fraction of the salaries the few wealthy make, but pay, by percentage, much more in taxes? The situation is untenable in the long run and it is in the long-term interest of no one.
Thank you for considering my comment,
David Bedford