May 21, 2011
I’m writing because SO many persons I know , including myself and my family, were affected by the economic collapse of 2008, and we don’t want it to happen again. I am not a highly compensated person, but rather a now-villified public employee (Social Worker who strives to protect abused children). My modest IRA was cut in half; and my "pension" is now being railed against as unfunded--largely because it lost value as a result of investment in bogusly AAA rated bonds. I could NOT protect myself from these losses. My windowed mother depends on income from two small commercial properties that she and my father were able to acquire through decades of hard work--due to the recession, those properties are now vacant!
In reading several books and seeing documentaries like INSIDE JOB, I now understand that Wall Street greed, hyper-speculation and outrageous pay practices were a major cause of the collapse...and perverse incentives contributed to this! 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.
Thank you for considering my comment,
Connie Peterson