Executive pay has emerged, once again, as a major issue in Washington. This week Treasury and the Federal Reserve announced new regulations designed to oversee and limit executive pay at thousands of financial institutions. This is deeply ironic, because today's pay woes are the direct result of prior government intervention.

In 1993, Congress decided it would use the tax code to "improve" (i.e., reduce) executive compensation in publicly traded companies. Its vehicle was the Budget Reconciliation Act, a key provision of which became Section 162(m) of the Internal Revenue Code.

Noting that executive compensation levels had received negative "scrutiny and criticism" from the public, the new law targeted what it called "excessive employee remuneration." It did so by limiting the ability of public companies to deduct executive compensation for its top employees unless the compensation was paid out in a form that Congress found acceptable. Salary was bad. Stock options were tax favored.

Specifically, corporations were barred by law from deducting as a normal business expense any salary payments of over $1 million. Stock options, however, qualified for the corporate tax deduction without limitation. Much maligned today, stock options then were said to be "performance based" and therefore exempt from the new tax rules.

The new tax law immediately led to a tectonic shift in the way CEOs and other top U.S. executives were paid. Stock and stock options became the dominant feature of executive compensation packages.

The impetus for changing the executive compensation laws back then was exactly the same as it is today. Politicians wanted pay lower and wanted to change the executive compensation model to "fix" the risk-taking proclivities of top managers.

In 1992, the government thought that managers were too risk averse. Stock options were seen as the magic bullet for making managers act more aggressively in the shareholders' interests. Today, many in Congress are blaming U.S. executives for causing the financial crisis precisely by engaging in "excessive" risk-taking. What they fail to mention is that it was Congress's own tinkering with the tax code that led to the very compensation packages that incentivized the risk-taking.

Fed Chairman Ben Bernanke asserted this week that "compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability." Mr. Bernanke promised that the government "is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

Other government interference has made the executive compensation problem even worse. A provision in the 1992 tax law required that executives meet certain "objective" performance measures in order to qualify for incentive-based (tax deductible) pay. In the scramble to come up with objective metrics on which to base executive pay, cottage industry "executive compensation consultants" emerged as the most important architects of executive compensation plans.

The compensation consultants promised to design pay programs that did things like "drive the right behaviors" by corporate management, which meant assuming more risk to maximize shareholder value. Public companies hired droves of consultants to analyze pay schemes and design pay packages that created incentives to maximize share prices. Consultants came to be viewed as essential to boards of directors that wanted to implement appropriate—and tax qualified—performance measures.

The most successful consultants are those who can justify the biggest salary increases for the top executives of the companies that hired them. Researchers at the University of Southern California recently found that the median CEO compensation is $1.5 million in companies not using executive compensation consultants, $3 million in companies that purchase general survey data from such consultants but do not directly retain them, and $4.2 million in companies that retain consultants.

Some companies use multiple consultants. The USC study found that the more consultants a company hires, the more it pays its top executives. About one-quarter of Fortune 250 companies hire multiple compensation consultants.

Activist investor Carl Icahn summed the situation up well when he recently observed on his Web site that "the use of these compensation consultants, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not."

The government also has tried to regulate executive compensation by requiring greater disclosure of the details of compensation plans. Perversely, this too has contributed to an increase in executive pay.

How so? No self-respecting board of directors is willing to admit that their company's CEO is below average. So anytime the new disclosures indicate that an executive's pay is below average in any way, a pay increase is ordered.

Since the early 1990s, government regulation of executive compensation has encouraged greater share-price volatility and risk-taking by U.S. corporate executives and led directly to higher, rather than lower, levels of executive compensation. Nevertheless, the Obama administration is now seeking an even greater role in overseeing and regulating executive pay.

In June, Gene Sperling, a top aid to Treasury Secretary Tim Geithner, told the House Committee on Financial Services that "our goal is to help ensure that there is a much closer alignment between compensation, sound risk management and long-term value creation for firms and the economy as a whole."

This is just what the regulators told us back in 1992. Current proposals will no doubt result in even higher percentages of executive compensation coming from stock and option schemes rather than from salaries. History teaches that the most profound consequences of new compensation regulation will be unintended. It also teaches that as bad as private ordering may have worked in getting executive compensation right, the results of central planning have been even worse.

The Obama administration's pre-packaged bankruptcy plan for General Motors is a recipe for disaster. Even if President Obama were sincere in his claim that he doesn't want to run a car company, it will be impossible for him to eschew policies that distinctly benefit GM. With taxpayers on the hook for $50 billion (just for starters), the administration will do whatever it takes to demonstrate the wisdom of its intervention.

That will require, at a minimum, a positive return on the coerced investment. But to merely break even on taxpayers' 60% stake, GM will have to be worth $83 billion (60% of $83 billion is $50 billion). How and when will that ever happen? At its peak in 2000, GM's value (based on its market capitalization) stood at $60 billion. Thus, the minimum benchmark for "success" will require a 38% increase in GM's value from where it was in the heady days of 2000, when Americans were purchasing 16 million vehicles per year. U.S. demand projections for the next few years come in at around 10 million vehicles. Taxpayer ownership of GM is something we should all get used to, and the "investment" is only going to grow larger. Think Amtrak.

It should be obvious that the administration will rely on policy (tax policy, trade policy and regulations) to induce consumers to purchase GM products, to subsidize production and, indeed, to hamstring GM's competition. This will have perverse effects on Ford and other companies that find it difficult to compete against a free-spending Treasury. And all of this will happen even if the president is true to his claim that he doesn't want to run a car company. He can take a hands-off approach and tilt the playing field in GM's favor at the same time.

But the president does want to run this car company. It is central to his mission of converting the United States from a carbon-based economy to a renewables-based one. "CEObama" already fired his predecessor, promised the United Auto Workers that GM won't import small cars from its foreign plants and has vowed to turn GM into a model of green production. But the government has never been good at inducing carmakers to produce vehicles that people want to buy. If anything, government policy has encouraged auto producers to make vehicles that people don't want to buy. Fuel efficiency standards have induced producers to make costly, high-mileage vehicles over the years and sell them at no profit or at a loss because of limited demand. Accordingly, government policy is one of the reasons for GM's collapse.

The only thing that can save America from this shotgun marriage to GM is a bankruptcy judge willing to reject the administration's reorganization plan. It is possible that the judge will insist that GM raise equity from private bidders instead of taxpayers, but given this week's rubber-stamping of the administration's plan for Chrysler, don't count on it.

I abhor paternalistic industrial policy, in which decisions about who makes how much of what are made in Washington think tanks and government offices by public policy "experts" who fancy themselves social engineers. That is a dangerous and condescending worldview, which seeks to homogenize individual preferences into some Orwellian conception of the "social good" or the "national interest."

It has been suggested that I view GM's fate as a matter of national indifference. That's correct, because I have not made the mistake of conflating GM's condition with that of the U.S. auto industry. Whether or not there are so-called "national interests" in maintaining a healthy auto industry (and I'm not convinced there are), I happen to believe that health comes through an evolutionary process in which the companies that have made the right decisions survive and grow, and those that have made bad decisions contract and sometimes even disappear.

It is not only fair, but efficient and wise that the market rewards companies that make better products at better prices with higher profits and larger market shares, while the companies that make undesirable products at high cost lose profits and market share.

Some disagree with that view by saying that we need a healthy U.S. auto industry to design and build the next generation of fuel-efficient cars. Well, that industry exists -- at the moment. But its existence is threatened by a government that appears willing to tip the scales in favor of one company.

There are plenty of healthy auto producers in the United States, all of whom are facing contracting demand. The ones that are best equipped to survive the recession will emerge stronger. But we undermine the objective if Ford, Toyota, Kia, Honda, Volkswagen and all the others cannot compete on a level playing field with GM to come up with the next generation of fuel-efficient cars.

Some speak about the dangers of a "cost-obsessed management" hastily dispensing with the resources needed to make better and more innovative cars. But efficiency or cost obsession (as you dismissively call it) is the essence of competition.

And let's not pin on those of us who favor market processes the sin of "destroying the productive capacity of our largest U.S. auto manufacturer and forcing thousands of suppliers out of business." The managers of GM and the United Auto Workers did that all by themselves, by colluding in mismanagement and greed and then rationalizing their destructive behavior with the presumption that they were too big to fail and that the government would be there to clean up the mess.

Is GM really too big to fail? The question is right on point. Auto demand has plummeted in the United States over the last year. The market is contracting. Not every producer can cover its own costs and make a profit. The most efficient and worthy will survive.

Some only see only destruction in this process, but the creation will come from the greater opportunities, the greater scope for economies of scale and the greater incentive to make the right decisions that the surviving firms will face -- unless policy interferes with the process.

General Motors should have filed for Chapter 11 bankruptcy protection last fall, if not earlier. It was obvious in 2008 that GM was deep in the red, burning through cash, struggling to service debt, suffering steep sales declines, facing bleak prospects and failing to find new sources of capital.

In November, GM turned to the federal government for a bailout loan — the one final alternative to bankruptcy. After a lot of discussion and some rich debate, Congress voted against a bailout, seemingly foreclosing all options except bankruptcy. But before GM could avail itself of bankruptcy protection, President Bush took the fateful decision of circumventing Congress and diverting $15.4 billion from Trouble Asset Relief Program funds to GM (in the chummy spirit of avoiding tough news around the holidays).

That was the original sin. George W. Bush is very much complicit in the nationalization of GM and the cascade of similar interventions that may follow. Had Bush not funded GM in December (under questionable authority, no less), the company probably would have filed for bankruptcy on Jan. 1, at which point prospective buyers, both foreign and domestic, would have surfaced and made bids for spin-off assets or equity stakes in the "New GM," just as is happening now.

Of course, a bankruptcy judge, acting in an apolitical environment, would have had to determine whether GM could emerge from Chapter 11 as a going concern. That determination might have necessitated different concessions from different stakeholders. For example, the United Auto Workers union might have had to accept real pay cuts (not just revamped work rules) and the secured bondholders might not have been strong-armed into taking pennies on their investment dollars. And, certainly, taxpayer resources would not have been tapped. Sure, there would have been plant closures, dealership terminations and jobs losses, just as there are under the current nationalization plan.

But the path we've taken, regrettably, goes through an expensive, political minefield. If GM emerges from bankruptcy organized and governed by the plan created by the Obama administration, it is impossible to see how free markets will have anything to do with the U.S. auto industry henceforth. With taxpayers on the hook for $50 billion (at a minimum), the administration will do whatever it has to — including tilting the playing field with policies that induce consumers to buy GM, hamstring GM's competition or subsidize its costs — for GM to succeed. Thus, $50 billion is a sum that is more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM's behalf.

Thus, what's going to happen to Ford? With the government backing GM, will Ford's access to capital be compromised? Can it compete against an entity backed by an unrestrained national treasury? Or are there more government-sponsored bankruptcies in our future?

The downside of fiscal stimulus is that someone must pay for it. Britain is learning that lesson with the recent announcement that its triple-A credit rating could be downgraded unless government profligacy is reversed. The US is in a slightly better position, but the vast expansion of US deficit spending, the Federal Reserve's decision to monetise federal debt, and the trillions of dollars of unfunded liabilities in social security and Medicare, pose a danger to those who have put their trust in US sovereign debt.

There is little doubt that a bubble exits in the market for US government debt. As interest rates rise, which they must once the economy begins to recover and the Fed shrinks its balance sheet by selling assets, Treasury securities will tumble.

Although there is little risk that the US government will default on its obligations, there is a much better chance that the cost of financing massive new debt over the next decade will put a further burden on the federal budget as rates rise.

If Congress pressures the Fed to keep long-term rates down, to help fund the deficit spending, markets would bid up nominal interest rates to reflect the higher expected inflation. The Fed's announcement that it will buy long-term government bonds — under its policy of "quantitative easing" — puts a question mark on its commitment to price stability in the face of a prolonged recession.

After the 2001 recession, the Fed kept interest rates too low for too long. Cheap credit was gobbled up by the housing market, which was fuelled by government-sponsored enterprises designed to foster widespread US homeownership.

It is essential for US economic growth and stability that the Fed does not succumb to political pressure to peg long-term interest rates and to help finance fiscal deficits through the printing press. US public debt now stands at about US$7 trillion, or nearly 47 per cent of GDP. That figure is expected to rise to 77 per cent by 2013. If intergovernmental debt is included (for example, the IOUs in the Social Security Trust Fund), US gross national debt is about US$11 trillion today and will be more than double that in a decade. If the projected deficits in social security and Medicare are included, the total explicit and implicit US sovereign debt far exceeds 100 per cent of GDP today and will continue to mushroom in the future — unless fundamental reform occurs.

No wonder China, as the largest holder of US Treasury securities, is starting to worry about the wisdom of accumulating nearly US$800 billion in US government debt. It is ironic that one of the unintended consequences of China's development strategy has been to help promote excessive US government spending. Conversations around China have now shifted from discussing "capitalism with Chinese characteristics" to puzzling over "socialism with American characteristics".

Eventually, China would benefit from more open capital markets and a floating exchange rate, along with market-determined interest rates and a more independent central bank aimed at long-term price stability. The official accumulation of dollar reserves could then end — and, with it, the indirect policy of promoting US government growth. That would be good news for future stability and prosperity in both China and the US.

Well, if you did, you could have purchased them through any stockbroker. But if you chose not to buy them, you are out of luck because the U.S. government is buying them for you, whether you want them or not.

One could be picky and ask where the Constitution gives the president the right to serve as our personal stockbroker - ah, it doesn't - but constitutional niceties are not much of a concern within the Washington establishment.

After frittering away 4 billion "bailout" taxpayer dollars to "save the company," Chrysler just announced it was going into bankruptcy. Not the normal Chapter 11 bankruptcy, but a "managed bankruptcy" that will require at least another 8 billion in taxpayer dollars, while, at the same time, turning 55 percent of the ownership of the company over to the United Auto Workers (whose contracts and work practices helped destroy Chrysler) and 35 percent of the equity to Fiat motors of Italy (a company that is contributing no cash - hmmm). U.S. and Canadian taxpayers are putting up a lot of cash but only get to share the remaining 10 percent ownership.

This proposed Chrysler deal raises a whole series of questions that taxpayers, creditors, existing shareholders and those who believe in the Constitution should find troubling. Why should taxpayers believe another $8 billion will be enough, since all of the previous forecasts about how much Chrysler would need were dead wrong? Why should Fiat be given such a large ownership share merely on the promise to bring small-car technology - and not cash - to Chrysler? (It should be noted that Fiat historically has been far from the best-run car company. In 2003 and 2004, it had to be bailed out by GM - yes, GM - which eventually lost $2 billion on the deal, leading, in part, to its own problems.)

Why is it proposed that the secured creditors - those with specific pledged assets - are treated no better than the general creditors, in violation of their contractual rights? Why are the cash creditors treated worse than the pension creditors? Should not the taxpayers who are forced to put at least $12 billion into the company have a superior claim to future earnings before the UAW or Fiat?

Why should one believe the directors the Obama administration appoints to the board of Chrysler will have the necessary expertise and not be more beholden to the Obama administration and the Democratic Congress than to the American taxpayer?

The evening before the announcement of the proposed Chrysler deal, President Obama said during his news conference that he and his administration had no interest in running the banks and the auto companies - which was reassuring. But the actions of the administration have been totally contrary.

Normal bankruptcy law, under Chapter 11, enables companies which appear to have a viable future to reorganize and reduce their debt and operating burdens by paying the creditors something above salvage value and rewriting labor contracts. This is done through the courts and requires no involvement of the executive or legislative branches of government - and is blessed by explicit mention in the Constitution.

If a business, even after reorganization, will still not be viable without a subsidy, why should a taxpayer get stuck with the tab? After all, there are plenty of competitive, well-managed and solvent banks, insurance companies, auto companies, etc., to pick up the slack for those that are not viable and to provide for consumers' wants, needs and desires.

Over the past century, three basic economic models have been tried: socialism, where the government owns the means of production and where there are almost no property rights; fascism or state capitalism, where the means of production are owned by private parties but where the government controls the actions of the companies, including who is named to run them, and where private property rights are severely limited; and finally, capitalism, where the means of production are privately owned and property rights are strongly protected.

Over time, only one of these systems has been compatible with continued economic growth, opportunity and liberty - and that system is capitalism.

Capitalism is a self-correcting economic system and only gets in sustained trouble as a result of faulty government policies, such as excessive or erratic monetary growth, which causes "bubbles"; inflation or deflation; and/or destructive tax, spending or regulatory policies.

Politicians in Washington coercing citizens to buy into companies they wish not to, and politicians picking boards of directors and managers of companies are doing more than merely flirting with socialism and fascism.

Financial-institution bailout policy in the United States is implemented through three agencies: the Federal Deposit Insurance Corporation, the Federal Reserve, and the Treasury Department. The need for orderly financial dealings, particularly in times of crisis, would dictate a consistent approach by these agencies based on cumulative experience, ensuring that officials devote public resources only where there is a well-defined, transparent, and verifiable policy justification for a bailout. Yet the bailouts over the past year do not reflect a well-defined, transparent, and verifiable policy justification. Even in the cases where a standard has been articulated, the agencies have not demonstrated that they can successfully implement that standard in practice.

Beyond the inconsistencies and implementation problems, financial-institution bailout policy has been unwieldy, inequitable, extremely costly, disruptive, and lacking in transparency and oversight. The policy response of bailouts and maintenance of the status quo has been precisely the wrong response, as it has led to retaining many of the mega-financial institutions that pose systemic risk, thus planting the seeds for future crises.

This present crisis has demonstrated that undertaking bailouts of troubled institutions, which involves structuring transactions that attempt to transform the institution into a viable one, while simultaneously projecting the reaction of investors and markets, is a process for which government is ill-suited. These bailout powers should be revoked. Financial angst still hangs over the system as the underlying imbalances that led to the crisis have not been reconciled. The ultimate answer is to place troubled institutions into receivership or the relevant form of bankruptcy—including many of the institutions that have already been bailed out.

Is the U.S. drifting toward socialism?

Even using only the narrowest meaning of the word — government ownership of business — the answer is clearly yes.

Last year, the Bush administration trampled private property rights by expropriating 80 percent of AIG, Fannie Mae and Freddie Mac without shareholder approval. As should have been expected, that scared stockholders away from other financial stocks, depleting the banks' cushion of high-quality capital. "Capital injections" from TARP (thinly disguised debt) greatly aggravated that exodus of private capital. So did Treasury Secretary Timothy Geithner's frightening "stress test" threats to wipe out shareholders by converting government's preferred stock to common.

Like other flirtations with socialism, the Troubled Asset Relief Program has been an unmitigated disaster. Public capital simply displaced private capital, leaving taxpayers holding the bag. The expression "socialize the losses and privatize the gains" is only half right; both shareholders and taxpayers were losers.

Having learned nothing from the bank bailout fiasco, some have actually proposed to turn taxpayers into involuntary shareholders in General Motors and Chrysler. Britain nationalized their legacy auto companies for decades, wasting billions in a futile effort to save brands that ended up being owned by companies in India (Jaguar) and China (Rover).

Politics and economics mix badly, like oil and water. Those with the most political clout get subsidized or bailed out, while taxpayers bear the costs and risks. In less than a year, the government's contingent debt alone — all those loans, securities and deposits guaranteed by the Federal Reserve, Treasury and FDIC — has increased by more than $3 trillion. If things go awry, guess who pays?

During the presidential campaign, Joe the Plumber became famous for criticizing as "socialist" Mr. Obama's plan to hand out $400 checks to those earning less than $75,000, while raising tax rates and curbing deductions for those earning more than $250,000. Trying to redistribute income through the tax system is what Karl Marx called "vulgar socialism." It doesn't work. When the government takes money from those who earn it and gives it to those who didn't, that discourages both of them from earning more.

Compulsory health insurance isn't necessarily socialism either, but it is compulsion — an intrusion into personal freedom and choice. I eschew Medicare in favor of a health savings account, but suspect that Obama's central planners would rather not leave me that option. Unlike free markets, where the consumer is king, centrally planned economies favor the simplicity of one-size-fits-all uniformity.

An occasional nasty recession is no excuse for runaway federal spending. Even welfare state economies like Sweden have experienced worse recessions than the U.S. Purer socialist economies like Maoist China, or North Korea and Cuba today, avoid booms by keeping the economy in perpetual depression.

The more we drift toward a socialist/fascist state, with the government grabbing a larger share of our dwindling GDP, the more we allow government bureaucrats to decide who shall produce what for whom. Such power is inherently corrupting. The results are always bad.

The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation's money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.

Federal policy is damaging the economy's prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can't lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

Heavy-handed federal intervention into the management of companies from banks to auto makers will also delay recovery. And misguided efforts to help distressed homeowners by permitting courts to rewrite the terms of mortgages will cause banks to limit mortgage lending, which will prevent housing from contributing to the recovery.

The unrelenting anger across the country over bailouts of corporations and households that made unwise and even irresponsible financial decisions is influencing federal policy. Punitive measures, like forcing companies receiving federal dollars to cancel employee events, will increase uncertainty over where the government will strike next in its effort to deflect public outrage. Instead of more bailouts, we need a clear and consistent path to fundamental reform of our financial system.

One could argue that $500,000 is too much, given that the president only makes $400,000 a year in a job with more responsibility and a larger budget than any other job in the world. Since there were plenty of would-be takers for that job, and some were arguably even qualified, why should we pay anyone more?

Many people who rely on the taxpayers, both in the United States and elsewhere, make far more than the president of the United States (see the accompanying table). The highest paid public employees in the United States for the most part are football coaches at universities. The argument made for these multimillion-dollar salaries is that a winning football team brings lots of revenue into the school and causes the alumni to give more.

But if it is proper for a football coach to be paid millions of dollars a year, why is it not proper for a corporate executive, who might bring in 100 or even a 1,000 times as much revenue and profit, to be paid millions? If the taxpayer-supported universities were not allowed to pay high salaries to their coaches, all the best coaches would undoubtedly flock to the private schools.

The president's executive order, setting a ceiling on salaries, was limited to only some companies, but not all, who will receive bailouts, but not ones that for the most part have already received bailouts. How is this fair? If the goal is to stop excess and increase fairness, should not lobbyists (both registered and unregistered) have their compensation limited? After all, their job is to convince politicians to spend more taxpayer dollars to benefit some particular company, union or nonprofit organization. Why should they be compensated with millions of indirect, but ultimately, taxpayer dollars, as was former Sen. Tom Daschle with his $5 million haul, because they know people who can dispense favors?

If companies that received bailouts in the form of government loans or ownership have to restrict pay for their executives, should not companies that are primarily government contractors also have pay restrictions? Why should an executive working for a private firm with a government contract receive more than an executive directly employed by the government doing the equivalent work? The answer is the private firm is usually much more efficient, with higher technical skills. But it is easy to see the slippery slope that government-mandated pay caps can lead to.

Take General Electric, one of the largest government contractors for decades. It also owns NBC, the news division of which (particularly its MSNBC channel) had been the most slavishly pro-Obama network. GE has also received more than a $100 billion bailout (guarantees for its financial services' division), and its CEO, Jeffrey Immelt, has been named by President Obama to his Economic Recovery Advisory Board. I am willing to bet the rules on pay caps are so written they do not apply to Mr. Immelt and his MSNBC Obama cheerleaders, particularly Chris Matthews and Keith Olbermann - who are paid many millions. Hmmm, anyone see conflict of interest in all of this?

Most of us believe some people are paid too much and others too little. In the accompanying table, the head of the European Central Bank, which has the responsibility for the euro, is paid a lot less than the head of the Bank of Italy (who would appear to have little to do since Italy stopped issuing its own currency and adopted the euro some time ago). Why is the prime minister of Singapore paid so much more than the prime ministers of large European countries and the U.S. president?

There are pay inequities in private business. But over the long run, companies that overpay or underpay make themselves less competitive, and the better-managed companies tend to win. Governments, being monopolies, are likelier to set compensation on the basis of political power rather than skill level or productivity. One might be outraged at the apparent excess compensation of some of those on Wall Street, but when government starts setting private sector salaries you can bet that, over time, the best and the brightest will leave for greener pastures in the United States or some other country.

Constitutional scholars like Judge Andrew Napolitano argue it is unconstitutional for the government to put caps on some private sector salaries. The problem is that once government stops being the referee of the economic game and decides to field players of its own or give some players advantages that others do not have, the whole system begins to break down. Those who are pushing for more government involvement with, and control over, the economy are ignoring two centuries of disastrous socialist experiments and 2,000 years of failed attempts to impose price and wage controls.

Yet he also complained that many banks (having finally come to their senses) have tightened lax lending standards. He insisted, "We must get credit flowing again to businesses and families."

Before spending yet another $2 trillion to fix something, it might help to find out what's broken.

Last October, the Minneapolis Fed published Facts and Myths about the Financial Crisis of 2008 by V.V. Chari, Lawrence Christiano and Patrick J. Kehoe. Bank lending had not declined, they showed, nor had sales of nonfinancial commercial paper. Besides, 80 percent of nonfinancial corporate borrowing is done outside the banking system, they noted, such as selling bonds and commercial paper.

Bank lending was 5.7 percent higher in December than a year earlier, and roughly flat from September to January (surprisingly strong for a falling quarter with rising credit risks). And the areas commonly pointed to for signs of a credit squeeze last fall (such as high interest rates on loans between banks) don't look troublesome today. On the contrary, healthy companies have been raising billions by selling long-term bonds at low interest rates.

So why does Geithner suggest that cuts in bank lending caused the recession (rather than, say, the squeeze on profits from too much debt) and that increased bank lending (rather than bond sales) is the cure?

The new Treasury plan continues to put most of the emphasis on pushing banks to make more loans to over-indebted consumers, homeowners and firms. Unlike last year, however, Geithner now believes, "Our policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital. When government investment is necessary, it should be replaced with private capital as soon as possible."

That's a laudable goal - but contradictory. In reality, government capital replaces ("crowds out") private capital, leaving taxpayers holding a bigger and bigger bag. Call that nationalization by default.

Under the new and old TARP schemes, the mere threat of incremental nationalization of banks and insurance companies will always "supplant and discourage private capital." You could watch it happening while Geithner spoke - as investors rudely pushed bank stocks down sharply. (An "ultra short" exchange-trade fund that bets heavily against financial stocks (SKF) was up 15 percent by the end of his talk and 18 percent at closing.)

This is nothing new. As I observed on this page last fall ("Why Bailouts Scare Stocks," Sept. 18), Treasury plans to "help" financial institutions always scare away private investors.

In mid-January, for example, Bank of America stock fell from $10.50 to $5.10 in three days on news that "the bank is close to getting billions in additional aid from the government." Then President Obama's inauguration shared The Wall Street Journal's front page with the headline: "Banks Hit by Nationalization Fears: Financials Plunge as US Considers New Rescue Options."

Nationalization fears began last September with the virtual expropriation of Fannie Mae, Freddie Mac and AIG. Shareholders were swiftly wiped out, with no vote on the bad deal.

The federal assault on financial stocks escalated in October, when Congress converted TARP by whim into a "Capital Purchase Program" (CPP) - a scheme for incremental nationalization of select banks, via Treasury purchases of preferred stock with warrants. Investors soon realized that CPP is simply a time-release dose of the same poison deliberately used to punish shareholders in Fannie, Freddie and AIG.

Neel Kashkari, Treasury's TARP czar, described this plan as "purchasing equity in healthy banks around the country." But from the perspective of common shareholders, Treasury's purchase of senior preferred shares is no different from the banks taking on more debt.

TARP-afflicted firms will have to pay dividends to the Treasury for its preferred shares before any remaining crumbs fall to common shareholders. Treasury will be first to get any dividends or capital gains if the firm does well, and first to get repaid in the event of bankruptcy.

Once a bank or insurance company gets in bed with the government, the property rights of that company's stockholders become uniquely insecure. When the government jumps into the cockpit, smart stockholders bail out.

And depressed stock prices deflate the banks' capital cushion, regardless of Treasury investments - making them more likely to fail and therefore less likely to lend. In other words, government "help" achieves the opposite of Geithner's declared goal.

"Our work will be guided by the lessons of the last few months," says Geithner. But he never learned those lessons. On the contrary, he continues to emphasize how sternly "conditions placed on banks" will be enforced, while naively expecting private investors to risk money in enterprises under intensely politicized control.

Companies as valuable as Bank of America and AIG need stockholder support, not taxpayer support. If Secretary Geithner really hopes to get stockholders back in, the government will have to get out.

His latest outburst of "populist rage" is directed at an $18.4 billion figure he does not understand. That figure, he observes, has "the entire country ... screaming for revenge on money power that has done us so wrong while rewarding itself so generously."

Meanwhile, the self-described populist activist Jim Hightower wrote, "Despite their historically disastrous year in 2008, Wall Street investment bankers awarded themselves a total of $18.4 billion in bonuses--the sixth-largest payout on record!"

Viewing outrage as an adequate substitute for knowledge, reporters and politicians alternated between being ignorantly angry and angrily ignorant. "Anger as Wall St. Bosses Feather Nests," ran a recent The Washington Post headline. Sen. Chris Dodd, D-Conn., head of the Banking Committee, vowed to use "every possible legal means to recoup the $18.4 billion in Wall Street bonuses," saying, "This infuriates the American people and rightly so."

President Obama expressed fury over the $18.4 billion figure he calls "the height of irresponsibility. It is shameful. And part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility. ... There will be time for them to make profits, and there will be time for them to get bonuses. Now's not that time."

Not to be outdone, Vice President Biden said, "I'd like to throw these guys in the brig."

All of this populist rage toward Wall Street bosses and banks provided a handy excuse for the Obama administration's quixotic crusade to cap salaries. What nobody bothered to notice, however, was that the $18.4 billion figure had nothing to do with top executives, or with banks or insurance companies.

As it turns out, New York State Comptroller Thomas P. DiNapoli's famed $18.4 billion estimate was actually based on "forecasts subject to revision" derived from "personal income tax withholding collections and industry revenue and expense data."

Furthermore, the resulting figures for bonuses were not paid by "Wall Street" as most people understand that phrase. In fact, the figure excludes commercial banks and insurance companies in New York state, but includes industries involved in the "Securities, Commodity Contracts, and Other Financial Investments and Related Activities."

The bonuses refer to Category 523 within the Commerce Department's North American Industry Classification System (NAICS.) Officially, establishments that fall into NAICS 523 are "primarily engaged" in one of the following:

"(1) underwriting securities issues and/or making markets for securities and commodities; (2) acting as agents (i.e., brokers) between buyers and sellers of securities and commodities; (3) providing securities and commodity exchange services; and (4) providing other services, such as managing portfolios of assets; providing investment advice; and trust, fiduciary, and custody services."

In 2002, NAICS' Category 523 included 72,338 firms, with a total of 832,144 employees earning a total of $103.4 billion. Another 312,845 people in these fields were self-employed.

A big share of that $103.4 billion 2002 payroll, reportedly as much as half, routinely includes an annual bonus. New York's 9,716 firms in this group surely accounted for a huge share of the revenue, and therefore of the bonuses, which are often paid in stock, not cash.

Investment banking and securities dealing accounted for only 31.6% of this huge group's 2007 revenues of $461.1 billion and likely a smaller percentage in 2008. Over 25% of Category 523 receipts come from portfolio managers. The remaining revenue was generated from a diverse mix of commodity and bond traders, stock exchange employees, mutual funds, trusts and investment advisers, as well as hedge fund managers who have been known to collect more than $1 billion apiece in bonuses.

Commercial banks, however, are not included in this bogus bonus statistic. Aside from the fact that many banks, like Bank of America and Wells Fargo, are far from Wall Street, commercial banks are in a completely separate NAICS category (522110). Insurance companies such as AIG are also outside of NAICS 523.

How did so many journalists and politicians, including the president of the United States, deceive themselves into imagining that top executives at a handful of big banks could possibly have "paid themselves" billions of dollars in year-end bonuses?

After all, it has been widely reported that no bonus was paid last year to top executives of JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley, etc.

The CEOs of at least seven other financial firms did not collect a bonus because each was fired. Martin J. Sullivan left AIG in July 2008. By Sept. 19, the AIG stock that was to be his golden parachute had dropped to $173,000. The former CEO of Freddie Mac "walked away with" stock valued at $130,000 at that time--worth even less today.

So, all of the outrage is not really about Wall Street bonuses at all, but about an outrageous statistic in a one-page report none of these raging populists bothered to examine.

To use this ridiculously irrelevant estimate to attack the character of American business leaders is the height of irresponsibility. It is shameful. Anyone who does this sort of thing ought to show some restraint and some sense of responsibility.

He's pressing the bailed-out auto companies to make "greener" cars that Americans don't show much interest in buying, and some of his supporters want to forbid the companies and their executives from raising questions about global warming and stricter emissions standards.

He's also ordering that religious groups which get government funding not discriminate on the basis of religion in hiring.

In each case, the government is using its money to impose rules on private organizations, whether businesses or churches or charities.

For decades, opponents of big government have warned that government funding would mean government control. That insight, of course, is part of our folk wisdom: "He who pays the piper calls the tune."

The laws sounded reasonable enough: Any college, or business, or hospital, or nonprofit agency that is a recipient of federal funds must abide by certain federal regulations. After all, it was reasoned, the federal government has a responsibility to monitor how taxpayers' money is being spent.

So firms that did business with the government became subject to affirmative-action regulations, health and safety regulations, medical cost-containment rules and drug-free workplace requirements.

Colleges that eagerly took the carrot of federal funding soon faced myriad reporting requirements, especially to document compliance with anti-discrimination rules. Members of Congress who had a good idea about how colleges should be run added amendments to appropriations bills: Any college receiving federal funds shall do thus and so.

But soon it came to pass that almost every company in America was doing some business with the feds and every college was receiving federal aid. It became almost impossible to escape the tentacles of Leviathan.

Conservatives used to complain about such big-government intrusions, and liberals brushed the complaints aside. Government funding of everything under the sun was not only a way of redistributing wealth, the liberals thought, it was a way of bringing everyone under the control of progressive, fair-minded bureaucrats in Washington.

But then the conservatives started winning elections – in 1980, and 1994, and 2000 – and they started attaching their own strings to the federal money.

The government forbade arts agencies funded by the National Endowment for the Arts to present any "obscene" art. Under pressure from the federal drug czar, Stanford University fired an instructor who said he carried drugs in his backpack on campus.

The Supreme Court ruled that the federal government could prohibit federally funded family-planning clinics from giving their clients advice about abortion.

Then liberals started to worry about big government. They fretted that the federal government was censoring, stifling, restricting – as indeed it was, and had been for decades. Only now it was conservatives doing the censoring and restricting.

Duke University law professor Walter Dellinger warned that such rules were "especially alarming in light of the growing role of government as subsidizer, landlord, employer and patron of the arts."

Dellinger is right. But the way to solve the problem he raises is to reduce the government's role in society. Surely we can't expect taxpayers just to hand over $3 trillion a year to various agencies and interests without regulating how the money is spent.

Their representatives in Congress and the administration think that those who are subsidizing the businesses or the museums or the clinics have a right to say just what they will and will not pay for.

Now the liberals are back in charge, and using federal money to impose their own rules. They've repealed rules limiting access to abortion and imposed rules limiting executive compensation and restricting the freedom of religious organizations to make hiring decisions on the basis of religion.

Red or blue, liberal or conservative, it's still the case that government money comes with strings attached. He who pays the piper calls the tune.

Freedom and diversity would be better protected if private organizations were allowed to set their own rules, even if they get government funding. Religious organizations should be able to actually practice their faith. Businesses should be able to make their own decisions about salaries, product development and other concerns.

But the Supreme Court has ruled that the federal government has the power to impose conditions on those who accept its funds. So churches, charities, colleges and businesses that want to follow their own conscience or judgment will have to refuse government money, which always comes with strings attached.