It looks like we are seeing an effort to do a replay of 2008 where we were told that we had to give all the money to the banks or the world would end. Today the story is that we have to bail out the airline, cruise, hotel, and restaurant industries or tens of millions of workers will lose their jobs. Well, the disaster threats were not true in 2008 and they deserve even less credence today.

The story in 2008 was that all our major banks had effectively made themselves insolvent through their own greed and bad judgement. They had made hundreds of billions of dollars worth of mortgage and mortgage related loans that suddenly went bad when the housing bubble burst. If we let the market work its magic, they would have all gone bankrupt.

The banks got the government to lend the money they needed to stay in business, at way below market interest rates, by telling everyone that if they went under, we would be looking at a second Great Depression. There was literally no one who could explain why we would be prevented from doing the same thing that got us out of the first Great Depression (spend lots of money) if the banks went under.

Our payment system would have surely been disrupted in the immediate wake of a wave of bankruptcies, but unlike in the 1930s, we have the FDIC to insure most of our deposits and keep the wheels turning. The initial downturn surely would have been somewhat worse had we gone the no bailout route, but there is no economic reason we could not have quickly lifted the economy out of a downturn with a massive stimulus following a collapse of the major banks. We held the cards and could have dictated the terms of any bailout for the banks.

Unfortunately, this argument was not heard at the time. I remember I wrote a column for the Guardian with the headline “the banks have a gun pointed to their heads and are threatening to pull the trigger.” The paper flipped the headline so that the guns were pointed to our heads.

Anyhow, we can’t let the same mistake happen twice. Congress can dictate terms of any bailout. I would suggest following the auto industry model — wipe out shareholders first. And, bailout recipients have to commit to keeping workers on the payroll with current pay and benefits.
 
There also should be strict caps on executive compensation. Let’s make it $2 million in total compensation. (That includes insurance policies, health care, pensions, etc.)  And to ensure that there are no silly mistakes, jail time for board members who sign contracts exceeding this figure. If the airlines, cruise ships etc. don’t like it, let them go elsewhere for money.
 
This sort of restriction on CEO compensation is important because it can help to counteract the crazy upward trend in CEO pay we have seen in the last four decades. There really is no countervailing downward pressure. CEOs ask their friends on corporate boards for big pay increases year after year, and the board has no reason not to give them more of the company’s money. If major corporations can be effectively run by CEOs getting one tenth the going rate, it would set a valuable precedent.
 
This is not just a question of envy. More money for those at the top means less for everyone else. And to be clear, it is not just the CEO who is vastly overpaid. If the CEO is getting $20 million, the chief financial officer and other top execs might be getting $10 million, and the third tier could be getting $2 or $3 million. The world would look very different if the CEO was getting $2 million, which would be the case if we had the same ratios of CEO to worker pay as fifty years ago.
 
One more item; we should also require a full financial disclosure from Trump and family as a condition of any bailout so we know how much money we are giving him.
 
Anyhow, we have major corporations desperately in need of government support to stay afloat. Nancy Pelosi is in a position to dictate terms and tell these companies, as well as Donald Trump and the Republican Senate, to take it or leave it.
 

The post When It Comes to Bailouts, Nancy Pelosi Is in the Drivers Seat appeared first on Center for Economic and Policy Research.



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