Hi my name is Barney Frank and I'm here to help

A letter written to the Wall Street Journal in response to an article detailing Congressman Barney Frank's efforts to pass legislation giving Congress the ability to regulate executive pay and systemic financial risks:

May 26, 2009

Dear Editor,

An article written by Deborah Solomon and Damian Paletta entitled, “U.S. Eyes Bank Pay Overhaul,” notes that House Financial Services Chairman Barney Frank is currently working on “legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic risk to the economy.” If this story is correct, I believe our federal government has reached a point of no return in its desire to dominate the lives of all Americans.

What is most remarkable about Congressman Frank’s desire to give Congress the power to “monitor compensation and to curb incentives,” besides his arrogance, is his ignorance of the mechanisms already in place to limit such behavior. The owners of a company have no incentive to overpay for leadership or to institute an incentive structure that threatens its viability. If ownership does decide to do either against their own self-interest, they will not have to worry for long because they will soon be bankrupt. Bankruptcy is the existing mechanism that limits the impact of bad decisions on the owners and the economy as a whole. If government steps in to preclude bankruptcy, then that is a failure of government and not of a market.

Congressman Frank would no doubt respond that my assertion is a wonderful theory, but has proven ineffective in practice. Our current economic predicament is evidence of “the market’s failure” to regulate itself. First of all, the phrase “market failure” is a useless expression wielded by proponents of centralized decision making to justify why they should be in charge. A market cannot fail because it has no set objective to fail to achieve; it merely results from the actions of participants. We don’t say that baseball failed if our team doesn’t win. Second of all, our financial markets have never been able to operate freely because government has always insisted that the dangers of such a system outweigh the benefits. To say that our current economic problems are the product of an under-regulated environment is ludicrous. The housing bubble, which caused our recession, was created by government action that held interest rates low and pushed banks to lend freely to risky borrowers.

I have no doubt that Congressman Frank’s intention with such legislation is to help and not harm. The problem is that Congressman Frank would substitute his and other elected official’s knowledge for those intimately involved in financial markets. Government intervention in financial markets is always done with the best of intentions, but, unfortunately, we are left to deal with the consequences and not the intentions.

Sincerely,

Michael