The Great and Powerful Oz

Human beings aren't very good at predicting the future. Perhaps, because it is difficult, mystical powers are conferred on anyone who appears to have the knack. Just like in the Emerald City; power, prestige and great riches are lavished on the anointed (or self-anointed). Inevitably, it all ends badly. Any five-year old knows from fairy tales that these are fleeting gifts. When the inevitable happens, we are harsh to judge, banish and vilify that which was lauded just recently. As soon as he is exposed by Dorothy, the Wizard must leave the Emerald City immediately.

Why then, do we act surprised when it turns out that Alan Greenspan is no more prescient than any off us; that Wall Street executives and money managers have no crystal ball; that a succession of Treasury Secretaries have no answer for the future. We are not five-year olds. We should stop acting like them.

The answer lies in the present, not the prescient. Before anyone can act to fix a problem, it is necessary to be transparent about the symptoms. What are the assets on the balance sheets of the banks? Who will be hurt if we let the debt and equity holders of broken institutions be wiped out? There is no Wizard out there. There are only hard realities and painful choices that we have to make a society based on what resources are available and how we want to steward them for ourselves and the future. 

Our government has no more ability to create resources where there are none than the Wizard of Oz.  Look carefully behind the curtain.

Why stop at 500k- Obama needs to go further

One of the reasons that I studied finance in B school instead of getting  PhD in economics is that I thought I could be more successful applying Economic theory to smaller, tractable problems rather than trying to solve huge macro problems.

Let's look at price controls in a relatively frictionless labor market.  Results are fairly simple to graph or predict. Employees for whom the marginal product of labor is greater than the price cap, leave the regulated area of the market for the unregulated area where they will be rewarded commensurate with their contribution and employees who are less productive will stay. The regulated companies will underperform the unregulated companies and the gap will continue to get larger.

At first glance, this would be the worst possible action to take on behalf of taxpayers, because it ultimately destroys the value of our stakes in the regulated companies. ...

But, it makes perfect sense, if you also bring back indentured servitude for all of the bankers who profited for years and then expected the taxpayer to bail them out. If you restrict pay and restrict the labor market at the same time, then the owners of the regulated companies can earn monopoly profits on behalf of the taxpayer and allow us all to indulge in much more pronounced schadenfreude than  a mere cap on income of 500k.