Beyond a bailout, Wall Street needs new rules
Pay plans that pushed CEOs to 'roll the dice' must go.
The financial calamity that has befallen the United States quite obviously reflects Wall Street failures in leadership and risk management. But we couldn't have arrived at this crisis point without a fundamental failure of government. That failure must be owned up to and rectified in the weeks ahead, or even the planned $700 billion bailout will end up being just a band-aid.
Capitalism relies on markets to make the world go round. But as Nobel Prize-winning economist Douglass North has articulated, it's the government's responsibility to ensure a legal and institutional context that is conducive to well-functioning markets. "Rules of the game" distinguish a healthy free market from a destructively chaotic one.
The inadequacy of Wall Street's rules has now been revealed beyond argument. The full magnitude of this calamity has yet to sink in. The financial services industry was supposed to be one of the remaining sectors of US competitive advantage in a globalized economy. Instead, its malfunctioning has further jeopardized the economic security of the American people.
So as Congress considers a massive bailout intended to relieve firms of the toxic securities on their balance sheet, it must also pledge to rewrite the rules of the game. It's unacceptable to put Wall Street's recklessness on the taxpayers' tab without an ironclad guarantee that business as usual is over. But what should the new rules look like? A comprehensive answer – including the contours of the new regulatory regime that's needed – is beyond the scope and deadline of the immediate bailout. Still, a few of its essential elements are clear.