Bill Clinton's well-meaning 1993 campaign to tie executive pay to performance may have attracted risk-loving CEOs. Photo: World Economic Forum (flickr)

To poor countries, 2008's economic crisis must have seemed like a disease seeping from the wealthy global north. Two American thinkers have traced it to an unlikely source.

One early germ of the financial meltdown, which World Bank data show led to an unprecedented drop in foreign direct investment in the developing world and some of its slowest economic growth in a generation, may have come from a 1993 crusade against overpaid American executives, argues Daily columnist Reihan Salam.

Building on an argument by Nassim Taleb in the New York Times, Salam recalls a law championed by Bill Clinton as a way to slow rocketing executive compensation. The policy, Section 162(m), essentially capped executive salaries at publicly traded companies at $1 million annually by refusing to recognize larger salaries as a deductible business expense.

But there was an exception. Executive pay could be higher than $1 million if it were tied to performance.

Clinton's goal, reported in the New York Times in 1993, was to stop Wall Street executives from taking home "hefty amounts even when times are bad." But the effect, as shown on p. 65 of this report, was that executive compensation kept shooting up—it simply shifted from salaries to bonuses based on short-term corporate goals. This new compensation trend, in turn, helped drive out 1980s-style bankers who were "bland and predictable," as Taleb puts it, in favor of bankers who tended to be risk-loving gamblers.

Salam doesn't claim that Clinton's initiative was anything close to the only origin of the 2008 crisis. But he calls it a "cautionary example" of what can happen when you "layer new bad regulations on top of old bad regulations and call it progress."

Risk-loving gamblers, it turns out, may not be the best people to run massive corporations that can tank the global economy if they go down.

Chart by Carola Frydman and Raven E. Saks, from Historical Trends in Executive Compensation 1936-2005.

Could Wall Street's bull charge for good? Photo: iHeylen (flickr)

If Wall Street's excesses contributed to the decline of the nation's economy, could the same profit-driven environment really spawn a new generation of do-gooders?

Absolutely, says Wall Street Journal columnist David Weidner, and it's a process that's already begun, exemplified by those who seek profit by selling to poorer consumers. (I wrote about this general trend for Global Envision in "Slashing Health Care Costs, and Slashing, and Slashing", "How to Irrigate on a Shoestring", and Selling to the Poor, On Terms They Can Afford".)

Such entrepreneurs may be guided by a social conscience when they choose the products to fund and invest in and they may be willing to wait a little bit longer to turn a profit, but profit is still the end goal. "This new breed of Wall Streeter has turned the maxim 'greed is good' into 'greed can do good,'" explains Weidner.

A paragon of this model is The Acumen Fund, a non-profit venture fund that invests in business and entrepreneurial solutions to poverty. Its projects include replacing kerosene lamps with the safer and more affordable LED lamps, and pay-per-use toilets in Kenya.

Heidi Krauel, The Acumen Fund's founder, goes further "This is one of the new faces of capitalism," she says. For those just beginning to enter the world economic system, this is certainly good news.

This has been reposted from the Mercy Corps blog.

I’ll get right down to it: I was disgusted, then furious when I read this morning that an energy trader might receive a $100 million bonus this year. The headline reads “Big Bonuses Are Back on Wall St.”

Dozens of financial services companies are now partially owned by the U.S. government (who has also covered huge percentages of their losses with federal bailout money) and are still posting quarterly losses in the billions of dollars. Yet they — and other Wall Street entities — continue to dole out bonuses that very few of us can even fathom.

Wall Street claims that such exorbitant bonuses are necessary to “retain top talent.” They’d have you believe that this is some kind of meritocracy, simply market forces at work. But when taxpayer money is involved, I believe it becomes something quite different: offering a $100 million bonus to one man is blatant kleptocracy.

I did some figuring. If I work until I’m 65 years old and average a salary of $60,000 per year, I will make $2.52 million over the course of my career. In other words, it would take me almost 40 lifetimes to earn as much as this man will be handed as a one-year bonus.

My father made just over $1 million, total, working 34 years for the same company. While I realize that inflation over a few decades must be factored in, the pay discrepancy between the average American worker and Wall Street executives is monstrous — but not as monstrous as the gap between those executives and hard-working folks in developing countries:

• The average worker in Bosnia and Herzegovina earns $7,700 each year (calculated by per capita income). Assuming that worker has a career spanning 40 years, it would take him or her 325 lifetimes to make $100 million.
• Nepal is one of Asia’s poorest countries — annual per capita income is only $1,040. It would take the average Nepali worker 2,404 lifetimes to bring home the amount of money that one financial services firm wants to give a single person as bonus pay.
• In Central African Republic, where per-capita income is only $740 per year and life expectancy 44 years for a typical male, it would take someone who worked for 30 years of that short life an astonishing 4,505 lifetimes to earn the $100 million casually paid out as an annual bonus to one man.

There are no easy answers to these glaring gaps. Obviously Wall Street has not learned its lesson from helping precipitate the global economic crisis — a crisis that is making millions of people around the world, including hundreds of thousands of Mercy Corps beneficiaries, suffer more than ever. Please take this as just a bit of perspective from one person who is pretty damned angry about it all.

People protest government bailouts and exorbitant executive pay on New York City's Wall Street. Photo: Walking Off the Big Apple (flickr)

U.S. financial turmoil has been felt around the world. Photo: rednuht (flickr)

While the details of the government bail out are still to be agreed upon, what is clear is that business as usual on Wall Street has been transformed. This hasn't happened to our financial system in a long time — nearly all experts agree that change of this magnitude hasn't occurred since the Great Depression, or maybe ever.

And it's not just about the estimated $700 billion that is needed to provide some sort of stability for failing financial institutions, or the significant changes to the regulatory system that will surely result. The proposed deal also transfers an incredible amount of power to the Treasury Secretary, without the allowance of judicial review — this is unheard of in financial legislation.

This morning's report from NPR explains why it's so significant.

It’s too soon to tell exactly how the U.S. financial crisis will impact the rest of the world, but, according to a report in The New York Times, the U.S. has just lost some free-market street cred.

In extending a last-minute $85 billion lifeline to American International Group (AIG), the troubled insurer, Washington has not only turned away from decades of rhetoric about the virtues of the free market and the dangers of government intervention, but it has also probably undercut future American efforts to promote such policies abroad.”

The shock waves from the U.S.'s financial woes are already being felt around the globe, with Russia suffering from “one of the worst market falls” since 1998 and Asian stocks hitting a three-year low.

The world's poorest countries will especially feel the pain of the crisis. This week, United Nations Secretary-General Ban Ki-moon said he feared that the crisis could seriously hurt poverty-fighting efforts in developing countries. These efforts depend heavily on rich donor countries and if these countries’ capacity for funding development efforts shrinks, many will suffer. Resuming the collapsed world trade talks, Ban said, is even more important in the wake of the financial turmoil.

As of Friday, the U.S. government's nearly unprecedented bailout has stabilized the market, prompting worldwide stock rebounds, but causing skepticism that the action is only a temporary fix.

If worldwide confidence in the free market drops as The New York Times article suggests, could it hinder future world trade talks — and development efforts — to an even greater extent?