Robert Waldmann jumps into
after the jump my comment which is addressed to Salmon.
I don’t think that you’re surprised that I agree with you and disagree with Barnett.
I’d say a strong argument for the cap is the good old moral hazard in bailouts argument. If the bailout doesn’t inflict pain on bankers, they will rationally conclude that they are playing heads I win tails the US treasury loses and will rationally act to increase future expected payments from the treasury.
This argument was absolutely standard during previous bailouts (e.g. Alan Greenspan proposed bailing out NYC on terms such that no other city would ever become insolvent again). Oddly the people who raised the moral hazard argument most loudly in all other bailouts are silent now (I’m not talking about Barnett). It can’t be that they have more sympathy for rich bankers than for Democratic politicians and third world countries can it ? But is there any other way of reconciling what they said and what they are saying ?
Will banks refuse to participate, because it is not in managers interests to do so ? Look it is not in managers interests to visibly place their own interests above those of shareholders and then go bankrupt. If management refuses bailout money and the bank goes under they will have shareholder lawsuits to worry about and that means their current wealth will not be safe. But I’m sure they can count on a fair hearing from a jury of their peers (th 7th amendment says that plaintiffs have the right to demand a trial by jury if more than $25 is at stake). I’d guess that bankers who won’t work for $500,000 but whose banks might go under will quit, and good riddance.
I’d say the argument that something must be done about Wall Street compensation is less compelling. The cap is meant to be temporary. Some sort of reform of compensation should be permanent. Of course your argument that current incentives make crises more likely is, as yet, unrefuted, and you know lots of people would like to refute it.