TAKE THAT, Wall Street: In a single day, the nation's financiers absorbed pay hits from both the Treasury Department (in the person of compensation czar Kenneth Feinberg) and the Federal Reserve. Mr. Feinberg capped the salaries of top executives of seven large bailed-out firms at $500,000, and pushed more of their stock compensation into the future. The Fed announced that it would conduct more aggressive oversight of compensation plans at bank holding companies, to make sure they do not encourage "undue" risk-taking, as Fed Chairman Ben S. Bernanke put it.
We don't doubt the political necessity of these steps, at a time when the Treasury is propping up huge companies with taxpayer dollars and the Fed is doing the same with its own balance sheet. Their actual impact is another question. Neither Mr. Feinberg's rulings nor the Fed's proposal are likely to be all that draconian in practice -- nor should they be. If government cuts compensation too much, financial companies could not recruit and retain the talent they need if they are ever to get off government support. And all Americans should want that to happen as soon as possible, not least because the job of setting corporate compensation properly belongs to private shareholders, not government officials.
More broadly, the emphasis on corporate pay strikes us as exaggerated compared to other structural causes of the crisis. No doubt certain compensation schemes warped incentives in favor of risk-taking; consistent Fed monitoring might curb them. But that problem pales in comparison to the fact that companies such as Citigroup and Bank of America became "too big to fail." As long as they were perceived to pose systemic risk, the market banked on their eventual rescue by Uncle Sam -- correctly, as it turned out.
We need a fundamental solution to this fundamental problem, but nothing stronger than the Obama administration's call for the Fed to serve as a "systemic risk" regulator has yet emerged. Mervyn King, the governor of the Bank of England, is calling for the separation of banks into tightly regulated commercial banking arms and less regulated, risk-taking -- but also non-bailout-able -- investment entities. Such a structure was enshrined in the United States until the Glass-Steagall Act was repealed in 1999. Paul Volcker, the former Fed chairman and now adviser to President Obama, has been making similar suggestions.
There would be significant obstacles to resurrecting Glass-Steagall, including drawing precise and stable boundaries between more and less risky activities. But when the idea emanates from the likes of Mr. King and Mr. Volcker, it might be worth a second hearing.