Is Restricting Pay the Silver Bullet? November 9, 2009   Bob Eisenbeis, Chief Monetary Economist

Financial institution regulators around the world have coalesced around the idea that the way to control excessive risk taking is to restrict bankers’ pay.  In part they are responding to taxpayer ire at their having put billions of dollars of rescue funds into financial institutions, only to see those institutions pay what are viewed as outlandish bonuses and incentives to senior executives, traders, and other key employees.  That outrage is understandable.  But the key question is whether high salaries and incentive pay encouraged increased risk taking that played a significant role in causing the current financial crisis, or is...