Economist says Fed rate cuts not enough
Published: Feb. 28, 2008 at 3:39 PM
Reducing the rate that banks use for overnight loans has not addressed the issue that commercial banks cannot compete with investment firms when it comes to compensating top executives, wrote Peter Morici, former chief economist at the U.S. International Trade Commission.
In comments published online at KansasCity.com, Morici said commercial bankers "are encouraged to slice, dice and puree mortgages into unintelligibly complex securities to support the high profits and compensation packages of recent years."
But, "the hard reality is that banks borrowing at 5 percent and lending at 7 percent," cannot compete with investment banking when it comes to executive compensation, Morici wrote.
"All the financial engineering in the world can't challenge that math," he said.
Compensation packages for "traditional investment banking" is not historically linked to commercial banking, yet, banks, "flush with infusions of capital from sovereign wealth funds, have not had to make necessary adjustments in their business practices," he wrote.
If Fed Chairman Ben Bernanke remains silent on the subject, Morici says, "he may have to be shown the door."
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