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Control Government Spending and Lending, not Private Sector Wages

What is the best remedy for the financial crisis which was caused by excessive government spending, credit issuance, and moral hazard? According to neoliberals Obama, Brown, and Sarkozy, who met this week at the G20 summit, the answer is to control wages.

Officials at the Group of 20 summit in the eastern U.S. city of Pittsburgh say leaders are working out the final details of a deal to limit risk-taking by large banks and control pay for their executives.

The proposed measure of telling private businesses how much they can pay employees is the latest in a line of socialist policies put forward by the administration that illegally manipulate the marketplace while failing to address underlying economic problems.

I have argued on this page that the Troubled Asset Relief Program for the banks is itself inherently and profoundly unconstitutional for several reasons. It promotes only short-term private benefit, rather than the general welfare as the Constitution commands of all federal spending. It evades the constitutional requirement of equal protection by saving some businesses and letting others that are similarly situated simply expire. And it delegates to the secretary of the Treasury the power to spend taxpayer dollars as he sees fit, in violation of the express constitutional grant of the nondelegable spending power to the Congress.

Now the federal government wants to interfere with private employment contracts already entered into — and regulate those not yet signed — in order to satisfy the perceived populist instincts of the electorate. To do so, it demands salary caps as a condition to the receipt of public assistance.

Salary caps are unconstitutional because they violate the well-grounded doctrine against unconstitutional conditions. Simply stated, the government may not condition the acceptance of a governmental benefit on the non-assertion of a constitutional liberty. The government cannot say to individual welfare recipients that they may not criticize the Congress or their welfare checks will be cut off, because the right to criticize the government is a constitutionally protected liberty. It similarly may not condition corporate welfare on the prohibition of contracts with employees above an arbitrary salary amount, because freedom of contract is protected by the Constitution as well.

To make matters worse, the Obama administration’s ‘Pay Czar’, Kenneth Feinberg, is working on establishing a formula which determines the pay for all institutions under the Federal Reserve.

Feinberg said his work could set a precedent for forthcoming pay rules from the U.S. Federal Reserve, which would impact pay at all Fed-regulated banks. Both Feinberg and the Fed are looking to set rules that discourage excessive risk-taking and that relates pay to performance.

This measure is far more intrusive than it even appears on the surface, because there are over 20,000 institutions registered with the Federal Reserve including the parent companies of insurance, real estate, and food service firms.

The ‘Pay Czar’ would be imposing a formula-based wage limit on the top 100 employees for each of these companies, resulting in pay restrictions on 2 million workers.

President Barack Obama’s “pay czar” said on Friday he was using formulas and data analysis to determine executive compensation rather than relying on pay caps.

…After Feinberg finishes his review of pay packages for the companies’ top 25 employees, he will have to approve broader compensation structures for the 75 next-highest-paid employees.

The wage controls do nothing to solve the root issues of the financial crisis which include unfettered government spending, federal mortgage subsidies, and inflation of the money supply.

Conservatives such as the House ranking member on the Financial Services Committee, Rep. Spencer Bachus, believe that we should bring real transparency to our lending institutions by auditing the Federal Reserve and reigning in excessive government credit and spending programs which undermine real wealth in the private sector. He discussed this issue in a recent interview on C-SPAN’s Newsmakers.

Democratic financial proposals also came under fire this week from the former Alaska governor, Sarah Palin.

“How can we discuss reform without addressing the government policies at the root of the problems? The root of the collapse? And how can we think that setting up the Fed as the monitor of systemic risk in the financial sector will result in meaningful reform?” she said. “The words ‘fox’ and ‘henhouse’ come to mind. The Fed’s decisions helped create the bubble. Look at the root cause of most asset bubbles, and you’ll see the Fed somewhere in the background.”

More generally, Mrs. Palin took the tack that the financial crisis occurred because government got in the way of free enterprise.

“Lack of government wasn’t the problem, government policies were the problem. The marketplace didn’t fail. It became exactly as common sense would expect it to,” she said. “The government ordered the loosening of lending standards. The Federal Reserve kept interest rates low. The government forced lending institutions to give loans to people who as I say, couldn’t afford them. Speculators spotted new investment vehicles, jumped on board and rating agencies underestimated risks. So many to be blamed on so many different levels, but the fact remains that these people were responding to a market solution created by government policies that ran contrary to common sense,” she said.

Foreign institutions led by the G20 would like nothing more than to buy Americans out from under our own feet. Further spending, bailouts, subsidies and giveaways will continue to devalue the dollar and weaken the economy. This will cheapen the value of U.S. property and allow traders using the Euro and Yen to sweep in and purchase vast chunks of our homeland.

The approach by liberal politicians to the financial crisis is completely backwards. That which needs to tightly regulated is government, not the private sector. Wage controls will not solve our problems. Auditing the Federal Reserve is the first step to real financial reform and the restoration of sound money policy.

The Federal Reserve is built on a fraud and the attendant effect on the rest of the economy is to distort normal market operations through both the supply and cost of currency. This is illegally and unconstitutionally perpetuated through legal tender laws which violate the Constitution in regards to the monetary provisions in Article 1 Sections 8 and 10, the 10th Amendment, confound the definition of a dollar, and serve to centralize power.

Jacob Hornberger – President, Future of Freedom Foundation

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