Barney Frank, Meet Irony

Thu, 11 Jun 2009 12:15:53 +0000

Courtesy of the Associated Press, in its coverage of President Obama's latest proposals for limiting top executive compensation at firms receiving government assistance, we discover Representative Barney Frank's left hand not knowing what his right hand is doing:

To Rep. Barney Frank, the chairman of the House Financial Services Committee, Geithner's plan doesn't go far enough.

"It is not the government's business to discourage risk taking," said Frank, D-Mass. "But neither should we allow systems which have existed up until now whereby decision-makers are handsomely rewarded if they take big risks that pay off, but suffer no penalty whatsoever if those risks result in losses to the company."

It is also not the government's business to bail out these companies, and it is the bailout that dramatically reduces the loss to the executives if they cost the company money. The moral hazard created by the bailout also compounds the asymmetry in the rewards to the executives in their next decisions to expose the company to risk.