"Bagehot, Central Banking, and the Financial Crisis"

I have argued that the degree to which we can intervene into financial markets depends, in part, on the degree to which the intervention will cause moral hazard problems in the future. My argument has been that we should intervene now, and then use regulation to prevent moral hazard problems from arising in the future. Thus, this brings up two considerations that should guide policy interventions. First, how much moral hazard will there be in the future if we intervene today (using an intervention strategy that attempts to construct incentives that limit this problem)? If the answer is that very little moral hazard is created, then intervening now is not very costly, at least not from a moral hazard perspective. If the answer is a lot, then the second consideration comes into play.

The second consideration is how much moral hazard can be reduced through changes in regulation. Even if intervening potentially creates a big moral hazard problem, if there are ways to change the regulations or the rules about how problems will be addressed in the future (with commitment) that substantially reduce moral hazard worries, then intervening now is also less costly.

The article below has more on the moral hazard problem based on a discussion of how the 125-year-old Bagehot's doctrine can be applied to today's financial crisis. One conclusion is that "The important extent of asymmetric information in this market points to a severe [moral hazard] problem."

The severe moral hazard problem is induced by a severe asymmetric information problem. Does the asymmetric information problem also limit the ability of regulators to reduce worries about moral hazard in the future? It can, and if regulators cannot help with the moral hazard problem in the future, then our ability to intervene today to solve problems is more limited. For example, this is from "Recent Developments in the Theory of Regulation," by Mark Armstrong and David Sappington, The Handbook of Industrial Organization, 2005:

This chapter has reviewed recent theoretical studies of the design of regulatory policy, focusing on studies in which the regulated firm has better information about its environment than does the regulator. The regulator’s task in such settings often is to try to induce the firm to employ its superior information in the broader social interest. One central message of this chapter is that this regulatory task can be a difficult and subtle one. The regulator’s ability to induce the firm to use its privileged information to pursue social goals depends upon a variety of factors, including the nature of the firm’s private information, the environment in which the firm operates, the regulator’s policy instruments, and his commitment powers. ... However, ... a regulator with strong commitment powers typically can ensure that consumers and the firm both gain... But when a regulator cannot make long-term commitments about how he will employ privileged information revealed by the firm, the regulator may be unable to induce the firm to employ its superior information to achieve Pareto gains. Thus, the nature of the firm’s superior knowledge, the firm’s operating technology, the regulator’s policy instruments, and his commitment powers are all of substantial importance in the design of regulatory policy. ... Another central message of this chapter is that options constitute important policy instruments for the regulator. It is through the careful structuring of options that the regulator can induce the regulated firm to employ its privileged information to further social goals. As noted above, the options generally must be designed to cede rent to the regulated firm when it reveals that it has the superior ability required to deliver greater benefits to consumers. Consequently, it is seldom costless for the regulator to induce the regulated firm to employ its privileged information in the social interest. However, the benefits of providing discretion to the regulated firm via carefully-structured options generally outweigh the associated costs, and so such discretion typically is a component of optimal regulatory policy in the presence of asymmetric information.

Here's the discussion of how the 125-year-old Bagehot's doctrine can be applied to today's financial crisis, and how it relates to the moral hazard problem:

Bagehot, central banking, and the financial crisis, by Xavier Vives, Vox EU: The present financial crisis poses two main questions: whether it is similar to past crises and how central banks should intervene to preserve the stability of the system.

The current financial turmoil seems extraordinary because it has unexpectedly affected the heart of the functioning of our sophisticated money markets. Despite the Northern Rock episode, the main contours of the current crisis seem very distant from scenes of crises past where newspapers were covered with photos of depositors queuing to withdraw their money during a panic. Yet this crisis is just a modern-market form of a traditional banking crisis.

An old-fashioned bank run happened if enough people tried to withdraw their funds from a bank; even if the bank was solvent, it might not be able to meet all the withdrawals and thus the fear of bank failure could become a self-fulfilling prophecy. In the current crisis, participants in the interbank market take the place of long queues of withdrawers. They have stopped extending credit to other banks that they suspect to have been contaminated by the subprime loans and which therefore may face solvency problems. The commercial bond market and structured investment vehicles are facing similar trouble.

Both the old and new forms of crisis have at their heart a coordination problem. In the current one, participants in the interbank market and in the commercial bond market do not renew their credit because of fear others will not either. Witness the demise of the investment bank Bear Stearns at the heart of the dealing on structured vehicles.

In reaction, central banks have intervened massively, injecting liquidity and allowing banks to access fresh cash at the discount window in exchange for collateral that includes the illiquid packages of mortgage obligations. Have central banks done the right thing or are they provoking the next wave of excessive risk taking by bailing out banks and markets? Is monetary policy the only tool available for the central bank to address the market crisis?

Bagehot’s wisdom

Bagehot advocated in 1873 that a Lender of Last Resort in a crisis should lend at a penalty rate to solvent but illiquid banks that have adequate collateral. The doctrine has been criticised as having no place in our modern interbank market, but this is wrong. Bagehot’s prescription aims to eliminate the coordination problem of investors at the base of the crisis. It is still a useful guide for action when the interbank market stalls.[1] It makes clear that discount-window lending to entities in need may be necessary in a crisis.

Bagehot's doctrine, however, is easy to state and hard to apply. It requires the central bank to distinguish between institutions that are insolvent and those that are merely illiquid. It also requires them to assess the collateral offered. Central banks, because of information limitations, are bound to make mistakes, losing face and money in the process. This doesn’t mean they should not try.

Poor collateral versus massive liquidity

The collateral should be valued under “normal circumstances”, that is, in a situation where the coordination failure of investors does not occur. This involves a judgment call in which the central bank values the illiquid assets. A central bank that only takes high quality collateral will be safe, but will have to inject much more liquidity and/or set lower interest rates to stabilise the market. This may fuel future speculative behavior. Some of this may have happened in the Greenspan era, in the aftermath of the crisis in Russia and LTCM, and after the crash of the technological bubble. The ECB and the Federal Reserve have accepted now partially illiquid collateral that the market would not. This seems appropriate and releases pressure to lower interest rates to solve the problem, something that should be done only if there are signs of deterioration in the real economy. The problem is that central banks are extending the lender of last resort facility outside the realm of traditional banks to entities, like Bear Stearns, that they do not supervise and, therefore, over which they do not have first hand information. How does the Fed know whether Bear Stearns or other similar institutions are solvent? It seems that the Fed is not following Bagehot’s doctrine here.

Finally, if banks and investors are bailed out now, why should they be careful next time? This is the moral hazard problem: help to the market that is optimal once the crisis starts has perverse effects in the incentives of market players at the investment stage. The issue is that only when the moral hazard problem is moderate does it pay to eliminate completely the coordination failure of investors with central bank help. When the moral hazard problem is severe, a certain degree of coordination failure of investors - that is, allowing some crises - is optimal to maintain discipline when investing and, amending Bagehot, some barely solvent institutions should not be helped.

Therefore, a key question to assess the future consequences of current central bank policy is whether the subprime mortgage crisis arises in the context of a moderate or a severe underlying moral hazard problem. The important extent of asymmetric information in this market points to a severe problem. Be as it may, this issue will determine whether current help will plug the hole for good, or only temporarily to make a larger one in the future. The challenge for central banks is to find the right balance between preserving current stability and imposing discipline for the future. Bagehot’s doctrine is still a reference today.

Footnotes

1 See X. Vives and J.C. Rochet (2004)”Coordination Failures and the Lender of Last Resort: Was Bagehot Right after all?” Journal of the European Economic Association (www.eeassoc.org/jeea/)

Comments

[hari]

I'd revert to my earlier view that Regulatory Oversight Regime need to be centralized under Fed and the secondary money market should also be brought under strict control in light of subprime credit crunch and the derivatives bundled by these socalled banking institutions.

Bagheot's dictum is still relevant for the maintenance of the money market solvency. But globalization and 24/7 markets have dramatically changed the hi fi markets. Moreover, international division of labour in the global credit markets has more or less left American shores. Who controls them...and under what Authority? SWFs?

Moral hazard is politically untenable for the sovereign, meaning taxpayer. It's the ultimate political responsibility of Congress to design instruments to deter future hi fi meltdown.

[hari]

I'd like to read what Brad Setzer has to say about this development, and once Paulson has presented his findings today.

[a]

"My argument has been that we should intervene now."

Intervention now does not just cause a problem of moral hazard. One first has to ask whether intervention *will work*. And *will work* has to be defined not only by achieving the stated goal, but whether for instance it will stop underlying economic problems.

For instance, I guess the Fed can stop defaults in the banking world by buying all those products that are causing problems, paying par (100) because that's what the banks need even though the instruments are worth less (100 - x). Now the immediate effect is achieved (hooray the banks are saved!), but at a cost. The Fed is now on the hook for x. Now you may say that's not a problem, but x is a huge number, perhaps as big as 1 trillion, perhaps more, we don't know.

Anyway, what have we got for that 1 trillion? Will it stop housing prices from sliding? No. The fact that the instruments are worth less than 100 is an effect, not a cause, of lower housing prices. Housing prices will continue to go down, because the ratio (housing price/income) is too big. People cannot afford housing. Will it stop a large number of people from losing their houses? No. Will it stop a recession? No. Americans are overconsuming, and they have financed it by debt. That is ending, and a recession is inevitable because the American economy is unbalanced. Americans have to get poorer; they are consuming more than they produce. Will banks start lending money like before? No they can't. Asset prices are going down. In such an environment banks need to ask for more collateral and be more careful in their loans.

So what have you got for your trillion dollars? You've saved the banking system, and that's it. Now I would suggest, most humbly, that before you spend a trillion dollars for such a limited goal, that you reflect on whether it is necessary and whether it is better spent elsewhere. Maybe the Fed does nothing and some banks go under, but are you sure the entire banking system will collapse without that trillion dollars? IMHO it seems even though you like to consider yourself a progressive economist, you are too willing to support a bailout of the financial system, even though the primary effect is to reward bankers and keep up their salaries, only because you think there are positive secondary effects for the real economy, effects which are dubious.

Now I've used one example: paying a trillion to buy up the sludge the banks are holding. Maybe you have another favorite solution, such as the federal government buying houses outright. I don't know. All of them will cost lots of money and have, IMHO, limited impact. So please, before you say, "Intervention now!", could you please consider the ontological question - whether there *exists* an intervention which will work - and stop assuming that of course there has to be one?

[Mark Thoma]

Just a couple of quick points. I never advocated purchasing at par - go back and read what I've written, so everything you write based on that assumption - quite a bit - doesn't apply.

The intervention has already helped, so yes, there is an intervention that will work. Interventions have also worked in the past.

But the mere probability that a policy might not work is not enough to say it shouldn't be implemented. I've written about this, if you go back and read older posts you will see all sorts of things about the transmission mechanism and what might go wrong along the way - for both monetary and fiscal policy - the costs and benefits of policy and how a risk management strategy fits into that framework. So the point you are bringing up (and bringing up repeatedly lately) has already received quite a bit of attention.

[Systemic Risk]

"The important extent of asymmetric information in this market points to a severe problem...When the moral hazard problem is severe, a certain degree of coordination failure of investors - that is, allowing some crises - is optimal to maintain discipline."

Randomly punishing some shadow banks (e.g., Bear), as a proxy for market discipline. Very high leverage is very dangerous to the financial system. The high leverage of hedge funds, shadow banks, and such is magnified by subsidized very low short rates. (They borrow short, and make long bets. If short borrowing is interrupted, the leverage vaporizes even large institutions overnight.) It may be prudent to tone down the leverage a bit, and/or limit subsidized short rates to certain players. The current short rate subsidy goes to a very broad base. Very high leverage using very low subsidized short rates creates high systemic risk.

[Volatile Prices]

"Anyway, what have we got for that 1 trillion? Will it stop housing prices from sliding? No."

Nor should that be the goal. Volatile prices are needed to move resources to sectors that need more, and the move resources away when the additional resources are no longer needed. We have more than enough large homes to meet demand (in most areas), and don't really need high prices to cause more to be built rapidly at this time. (There is a shortage of small homes in relation to demand, but that is a politically mediated mismatch that cannot be resolved by market forces.) The goal is to make credit available, so that new loans can be extended to purchasers at whatever price level the market currently sets. Credit for homes, other consumer items, and business expansion. Without credit, GDP is likely to fall quite a bit.

[groucho]

"please consider the ontological question - whether there *exists* an intervention which will work"

I believe a better question is "for whom?"

I now view the tripartite of the Fed, the Treasury and Wall st as "Financial Terrorists".

Warren Buffet warned us about the "financial weapons of mass destruction" being developed by wall st (with the Fed's and treasury's blessings).

With the Bear bailout we see that Buffet was correct. The Fed is so fearful of a derivatives meltdown that they're turning the PPT into a financial control system that even Lenin would have been proud to be the leader of.

[op]

let's suggest to ourselves
the regs over hazard debate
must notice a fact

hi fi is a floating crap game
not physical location wise
but market and institutional location wise

maxim to al hi fi ers

after the latest post debacle
when the new improved boundary lines
of the new improved reg ring are clear
once you got the rubes playing again
in a state of secure follery
start moving more and more
of the play
to innovative great games
outside the reg ring

moral hazard in a world like this
always exists
where private gain and unreg fronteer markets
can pop up wreck themselves threaten the real economy
and receive a "one time only "
bail out
to save the system
from itself
and innocent real economy players

cause well
it won't happen again
in this way
cause we're gonna reg it up
so it can't
civilized market like

[op]

what vexes me some

why allow this spec game in the first place

what at its best does the real economy gain by allowing these gamblers
to be our collective eyes and ears
our co ordinators of first resort

self centered gamblers
folks ..gamblers without a concious social intent
ie miracle invisible handing
with a vengence

self centered gamblers
over eyes and ears
society might otherwise provide itself

like
a more transparent
society wide
co ordinated system of credit
ie
a more fully socialized economic system
without dark private gain corners

yes bright light rents
but publically doled
perpetually challenged
and
retained provisionally
for their expediency alone
not worship-ed
as the quintessence of americanisn
the highest form
of the universal individual right
to pursue happiness

after all we ought to minimize asyymetry
not promote it

in the last analysis
are we not all
our sisters agent ??

if optimal social mechanism design
is the issue
why waste time and ingenuity
on
how can we tame
a wild spec marketeer community
enough to harness
our "real " economy safely to it

when other higher forms of social organizations
are out there in draft form

[a]

"I never advocated purchasing at par." And I never said you did, I didn't even say you advocated purchasing at all. I'm taking one example of a proposed intervention and trying to explain why it will not "work". If you are advocating purchasing at all, basically you are faced with the dilemma of who will take the loss. If you force the banks to take the loss, then certain banks will go under, and if it's the government, then even if you are not advocating par, the government gets stuck with the loss.

"The intervention has already helped..." Helped how? It is now *more* difficult to borrow USD than it has ever been on the interbank market, and it is *more* expensive than it has ever been. I'm speaking as someone who is responsible for borrowing for my activity, who sees the quotes. To a certain extent this is *because* of what the Fed has done, and not *in spite* of it. Housing prices are still going down, and lots of people are losing their houses. Not much help has arrived there. So what is your notion of "help"? That the US financial system hasn't yet imploded? Please agree that that is a pretty low bar...

I'd just mention that if Countrywide had not been bailed out in August 2007, then Wall Street would have been forced to suffer more losses earlier, and 50 Billion USD in bonuses wouldn't have been paid out in Dec 07 and Jan 08. Maybe 50 Billion doesn't seem a lot of money to you, but that's money that should have been used to recapitalize the financial system. It's gone into people's pockets, and those people are all invariably rich. Not exactly the kind of people you want to help, is it?

If Bear had been allowed to go under, then its CEO wouldn't have been able to sell his stock for 10 USD a share. That's a 60 M USD payout alone right there.

"Interventions have also worked in the past." Problems in the past were small change compared to the present mess. About the only comparable one is Japan's bubble bursting, and everyone seems to agree that the Japanese intervention didn't work. Perhaps that's a signal that some problems are too big to solve? So I'm afraid, I'm more not less worried that you think this a good justification for "intervention".

"But the mere probability that a policy might not work is not enough to say it shouldn't be implemented." Of course. Equally, the mere possibility that a policy might work is not enough to say that it should be implemented.

"and bringing up repeatedly lately..." Maybe, I write comments on lots of blogs. I think in fact that I haven't written much on this particular point in your comments. I think I have more written on the point that Americans need to get poorer and consume less, and that economists, with their tendency to want to give everyone a pony, are the reason why Americans have accumulated as much debt as they have, and why we are in the mess that we are.

One last question, while I know you're reading! Alan Blinder confessed recently he knew little about derivatives. Does that worry you at all (and what it might imply about the Fed's knowledge of how the system actually works)?

[Bruce Wilder]

My own view would be that any government intervention to support either the market for MBS or individual institutions ought to be led by a special audit.

The system needs new information on the value of mortgage paper -- individual mortgage paper.

The number of mortgages is large, but finite. Methods exist to guesstimate "fundamental" house prices. So, make a guess. And, then feed the guess back through the system to rate in some way MBS. Attach a prospectus addendum to every CDO. Let banks consolidate the SIVs and mark-to-market using the audit, where actual market prices do not exist. Let the insurance regulators review the monoline guaranty portfolios.

If the banks are going to come up majorly short of capital, then let Congress appropriate $xoo billion to some special purpose entity for the purpose of buying new bank capital. The new bank capital can be in the form of convertible preferred, redeemable at par by the bank up to some date short of the convertible date, and paying a penalty dividend rate to satisfy Bagehot, say 10%. The government entity can sell its convertible warrants at auction after the redemption date has passed, thus avoiding the specter of nationalization, but leaving clear exactly how much money went to the bank rescue.

As to regulatory reform, let the shadow banking system collapse. If there is merit in the system of securitization, then securitization can be built into the regulatory framework, after the fact. But, if we rescue the shadow banking system, reform will be hobbled by its extant interests.

The regulated banking sector will survive any crisis, and this is, as it should be. Regulation has the benefit of ensuring survival, of the system, if not every entity within it. Let the benefit of regulation be apparent.

If regulatory dodges like SIVs disappear, that's not a threat to the overall system. That's, if anything, an overall benefit. If the monolines can no longer insure CDOs -- benefit.

It is a really, really bad idea to have the government or government-sponsored entities expand buying of mortgage paper, without knowing what they are buying.

Yes, Fannie Mae's aggressive buying helped to solve the LTCM crisis. But, there was no doubt about the underlying quality of the mortgages at that time. It was pure making of a market.

Audit, first.

[The Baron]

Mark, I think I have narrowed down my main objections to the proposed solutions. It has to do with a matter of trust.

"My argument has been that we should intervene now, and then use regulation to prevent moral hazard problems from arising in the future."

Given the people currently in charge, and given the track record of these persons and the class they represent, I can find nowhere in my heart or philosophy to believe that the latter part of your statement will at all follow the former part.

I would be tremendously in favor of almost any plan if it was being presented in a structure that inherently guarantees the regulation, rather than just stating that it should also be done at some unnamed time in the future. There are ways to structure the rescue such that those guarantees are an inherent part of the way it is implemented. Several have been suggested by various members of this forum.

My fear, and I believe a not unreasonable one, is that, when there are plans that ensure both parts of the outcome, rescue and regulation, but those are being ignored, and the plans actually being pushed (Note, I am not talking necessarily about any you have advocated.) seem to be all about the rescue with the regulation left as promises for the future of doing a better job, that all of this is just a continued shell game to save the highest end of hi fi, and leave the taxpayers holding the bag. I understand that many, possibly even most, of the people advocating the immediate intervention are doing so with the best of motives and intentions, but with what is actually making it to the table being what it is, I find that empty promises seem to be the rule of the day. I am even in favor of an intervention that saves the homeowner, at great cost to the taxpayer, as long as that is effective. But, I have a distinct lack of trust. My conservative, perhaps too much so, side looks at what to me seem the most likely outcomes, and I see the vast majority of the folks set to lose their homes now, still losing their homes after the fed buys the risky investment vehicles from the major non-banks. I see the tax payers holding the bag on many unoccupied, unsellable properties, and I see the hi fi guys taking their winnings and moving on to the next game.

I am in no way in favor of doing nothing, and I most certainly do not want the economy to collapse just to 'punish' someone. My fear though, is that what is being done will not stave off the collapse, and will only result in rescuing the folks least in need of rescue, and putting regulations on folks least culpable (higher restrictions on borrowers, who really may be able to repay, but are considered 'bas risks' by rating agencies).

[ken melvin]

$1 trillion to save it, damned if we don't?

[a]

Just for the record...

"*more* expensive than it has ever been", I'm speaking in terms of spread, not in absolute terms, which has indeed come down somewhat.

Blinder ==> Yeah I know he's not part of the Fed now, but you wouldn't expect any current member to confess ignorance, and he was recently vice-chairman, so I think you can use him as a pretty good proxy for the Fed in general.

[hari]

After reading Paulsons transcript (WP) on the proposed *Blueprint* for what he calls, "safety and soundness regulatory framework" for the future, I got the impression he is NOT sure anything can happen in the short term to rectify the errors of omission and commisson by existing Agencies. Directors of the new Agencies are to be appointed by the Presdient. This I find very disturbing for an objective rule of the market place - given GOP reluctance to tinker with deregulation. Why can't these Agencies exist independent of (any) President-in-office? I'd like their professional staff to be permanent and selected on merit and competition - like we do here under ECB. If *moral hazard* is understood to also imply eventual meltdown of the financial system, it would appear more imperative to secure an independent oversight authority with competence, so the public is also assured that it's not business as usual. And notwithstanding the complexity of the oversight regime proposed by Paulson & Co, there is no gurantee that the same distress signal will occur five years down the road. I acknowledge the complexity of global hi fi markets today, and shudder at the thought of Dilbert!

If you read the transcript carefully, Paulson is also arguing for (AGs) market-based discipline. I wander if BB will buy it, now that Fed had to invest in BSs derivatives market.

[hari]

Paulson has bought Mark's first principle of intervention now - and reorganization later under the *Blueprint* when finally approved by Congress. But he's going ahead with Executive Order to implement what they've agreed with the President, so far, with regard to mortgage market.

I'd like to wait and see what Mark says about the proposed Blueprint. Paulson has covered globalization and its implication to Treasury policy framework. Wide consultation was conducted with international experts/institutions/etc.

[Spectator]

Hubris. That's the only word to use for the interventionists and central planners who think they can outsmart the regulated. This world has become too complex for anyone to understand. Just read the experts in this field like Satyajit Das for a glimpse of the con game.

There's a sound reason mistrust has crept into this market. And it's time for it to fall under it's own weight. The bailout money will serve only prevent closure, and encourage new, more risky schemes. In any game, when you exempt some participants from failure/punishment, they'd be foolish to avoid the riskiest plays. You will regulate this how exactly?

[op]

"Congress appropriate $xoo billion to some special purpose entity for the purpose of buying new bank capital"

exactly
have uncle s
buy the needed beefed up
equity buffer stake
in these errrr..."are they or
aren't they solviossos"
larry summerslide
assigned to
"the p.e.c.-er heads"
(the private equity community)

[op]

"Hubris. That's the only word to use for the interventionists and central planners who think they can outsmart the regulated"

hey pal no one got outsmarted
they got out run
run away from one admin till the next
gives you a free pass

if the track down was forever
then the regulated could stil
run but they couldn't hide ... not forever
and still hold on to their share
of the above ground wealth
at any rate

[Spectator]

Excuses are a dime a dozen. Bottom line is that regulation does not work for long, and new schemes to pillage are found - often a direct result of the regulation.

Only market failure can correct the excesses. We almost had the market punish the conmen, but bailouts have let the guilty live another day. Those in charge have the most to lose from a meltdown. The public is largely protected by FDIC. , The apologists for the system want to help the authorities cover their behinds. Can't think of a more misled group than liberal economists.

[wjd123]

I suppose this belongs to the field of social psychology. It effects the economy and should be regulated, however, I don't think politicians will act on it unless voters insist. Senator Schumer couldn't even bring himself to change the tax structure for compensating hedge-fund managers least he hurt his power to raise funds for the Democratic Party. I'm sure politicians will find a hundred conflicting studies to point to if they ever get close to doing something about CEO's compensation.

So instead of waiting for some endless battle of studies I'm going to make my recommendations right here and now with an appeal to common sense.

I think for the good of society the compensation of CEOs should be regulated.

The level of potential rewards that can be reaped by top management has reached a point where instead of spurring them on to greater productivity it endangers managements' ability to properly perform their fiduciary responsibilities. The tipping point has long been reached where the potential rewards to be reaped by top management has untoward influence on management to think first of their own interest to the detriment of the corporation they manage and the society they live in.

Much of the fiscal crisis we are experiencing can be laid at the feet of management not performing their fiduciary duty. The green light to cut corners or guarantee dubious products was given by top management because it was in their interest--the multi-millions to be made on stock options and bonuses--to do so

It's time voters asked government to step in and regulate the compensation of CEOs. Put a ceiling on how much top management can earn. There is no reason anyone needs more than a million dollars a year to be motivated to do his or her job. It's obscene for someone to claim otherwise.

Obscene pay helps turn top management into sociopaths while their example encourages others to become sociopaths. It undermines management's fiduciary responsibility and the reputation of their corporations to the detriment of workers, stockholders, and communities. It hurts the morale of the rank and file. It leads to a dysfunctional society.