Limiting Financial Executives' Compensation - Term Paper Example

Should the compensation of the executives of the big banks be limited The world economy seems to be reeling under one of the worst depressions after the Great Depression of the 1930s.While the crash of Wall Street on Black Tuesday in 1929 was the major cause of The Depression, the causes leading to the current economic crisis seem to be somewhat similar and also related to the Wall Street to some extent.Economists and financial experts the world over have assigned several factors for the current economic slowdown in the U.

S and other parts of the world. The most common among these are subprime lending, revoking of regulations separating commercial and investment banking, and a more than necessary free hand to the banking sector to decide its risk-worthiness. While the financial innovations helped the stock markets grow at a whopping pace in the 1990s and early 2000s, they also brought about a false euphoria and when the bubble burst, the current slowdown was imminent.The 1980s heralded many changes in the banking and securities exchange sectors the world over.

It was an era of deregulations and free flow of currency.Due to changes in policies related to the stock market like bond trading, invention of securitization, interest-rate swaps, and credit-default swaps, bankers could increasingly make huge profits in the stock markets in the past two -three decades. Financial services also benefitted from higher investments made in securities by the increasingly wealthy population, encouraged by the IRA and 401 (k) plan.With everyone making money, there seemed to be clout surrounding the financial experts, and the growth of private banks was considered synonymous with economic growth.

According to Simon Johnson, "the great wealth that the financial sector created and concentrated gave bankers enormous political weight-a weight not seen in the U.S. since the era of J.P. Morgan (the man)."In the same article, the chart showing the percentage of financial industry's profits as a share of U.S business profits indicates a slow increase from 5% to about 20 % from 1948 to 1988.From 1988 to 2006, the share of this sector rose to almost 40%.In contrast , the pay per worker in the financial sector as a percentage of average U.S. compensation rose from around 120% in 1948 to almost 200% in 2007, growing sharply from 1988 to 2007.

This just shows how investment bankers had an increasing say in the economy of the U.S and were highly respected and beyond questioning. Jeff Maderick writes that the government lacked foresight in the financial industry. He writes, "The few federal agencies responsible for regulating the financial community ignored the dangerously risky activities of bankers and traders; so did the Federal Reserve and the US Treasury."Before the recession set in and even during the same, the czars of the finance world have demanded ostensible compensation packages and bonus.

In 2005, the CEO of Meryll Lynch was paid a bonus of $14 million, and though the demand was turned down, had asked for a bonus of $30 million in 2008.When the federal government released $ 243 billion as emergency relief to the finance sector in 2008, $18 billion was doled out as year end bonus to employees of Wall Street, once again affirming the demi-God like position held by these financial experts.In my opinion, it is high time, these finance gurus were seen for what they really were. While they and their banks made humungous profits, the country and the common man has paid for it.

The government needs to be more vigilant and pass more regulatory orders, restraining these bankers from serving their own interests while draining the economy of billions of dollars. They might have been the blue-eyed boys, but they needed to act in a more responsible manner. If they are responsible for the current state of the economy and rising unemployment rate, they own some moral responsibility and need to voluntarily own up and take pay cuts. Just as excess of anything is bad, too much capitalism and greed has left its marks on the economy.

Instead of still keeping these investment bankers on a pedestal and doling out financial aid packages, the government needs to restrict the role and scope of private banks n the country.References1. Johnson, Simon. The Quiet Coup, the Atlantic, May 2009, accessed on 22 Nov,2009.http://www.theatlantic.com/doc/200905/imf-advice2. Madrick, Jeff. They Didn't Regulate Enough and Still Don't. Nov,2009 at the New York Review of Books. accessed on 22 Nov,2009. http://www.nybooks.com/articles/23323