Once again the Obama administration is addressing symptoms of the financial crisis instead of the tackling the underlying problem. Wall Street’s compensation structure rewards excessive risk-taking, he says, so the government needs to regulate compensation. But regulation is always a poor substitute for market discipline. The real problem is that the market no longer works as a check on excessive risk-taking at firms that are “too big to fail.” The administration should be striving to destroy the impression that any firm is too big to fail. Its top priority should be the creation of a mechanism for resolving large failed firms instead of keeping them on life support. The administration’s compensation plan merely addresses the symptoms of that underlying problem in a way that is bound to produce unintended consequences, e.g. bankers going around the compensation limits as they have in the past by using stock options or other tools that haven’t been invented yet.

Not to mention the troubling power-grab aspect of the whole thing, as the government claims yet more authority for itself over the private sector. Russ Roberts is dead-on: Outright nationalization would be a more honest approach.