David Brooks makes a fundamentally good point: that government must think it's really, really smart if it believes it can "fix" compensation packages on Wall St. to what they should be, without creating perverse incentives of some kind in the process. I particularly liked his citation of the cap on executive compensation several decades ago that unintentionally resulted in companies' increasing the bonuses and clustering at the cap.
But it also seems like the compensation system in the financial industry is contributing to the problem of excess risk taking and moral hazard. We ought to decide as a country whether it's in our best interest for us to subsidize the habits of Wall St. in allocating capital too riskily and then requiring public bailout funds to clean up the mess. If it is, maybe things are OK as they are. If we think folks on Wall St. are behaving too riskily, it's fairly clear that something has to be done about compensation packages that have only upside risk, and no downside risk. In the current system, the latter is borne by the public. Again, maybe that's optimal in some sense, or at least a preferred setup. But I don't think that's at all clear.
