Fed Shows Backbone, but Obama Cowers Before Banks

Reining in pay is good politics, good economics: Krugman
By Jason Farago,  Newser Staff
Posted Sep 21, 2009 8:48 AM CDT
Ben Bernanke arrives for a G20 summit at the Treasury in Westminster, London, Saturday Sept. 5, 2009.   (AP Photo/Dominic Lipinski, Pool)
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(Newser) – Just as the recession wanes and the financial system shows signs of the health, banks are returning to their worst habits, says Paul Krugman. Not only are paychecks soaring to pre-Lehman levels, but the financial sector is using its muscle to block "even the most minimal reforms." While the Fed knows what needs to be done most—"change the industry’s incentives—which means, in particular, changing the way bankers are paid"—President Obama is showing a disturbing lack of backbone, writes the New York Times columnist.

The Fed, "now awakened from its Greenspan-era slumber," is considering using its oversight authority to impose clawback rules and other pay regulations that link compensation to long-term, not short-term performance. That's good politics as well as good economics, but Obama has been waffling. He seems to have a "visceral reluctance to engage in anything that resembles populist rhetoric," Krugman writes. "And that’s something he needs to get over."