Today, the Wall Street Journal reported that the Federal Reserve is crafting a proposal to significantly step-up its regulation of Wall Street compensation practices. According to the Journal, the proposal would allow the Fed to “reject any compensation policies” it believes encourage bankers to take too much risk. The Fed “wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.”

Though the Fed’s proposal is still weeks away from being finalized, it has already provoked quite the reaction from the right-wing. Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, was asked about the policy shift on CNBC today, and claimed that the very notion of regulating Wall Street pay means “abandoning a model that’s worked for America”:

We all know there were compensation practices that created incentives for executives to take outsized risk. Having said that, why are we abandoning a model that’s worked for America? We’ve got the largest economy in the world, it’s over three times larger than the Japanese economy and we didn’t get that by government micromanaging companies and setting compensation.

Watch it:

The notion that Wall Street’s reckless compensation structures, which incentivized short-term risk taking over long term financial viability, worked well is ridiculous. And even Bachus couldn’t really bring himself to defend Wall Street, spinning off into a defense of capitalism itself, as opposed to “so-called utopian society.” But James Hamilton at Econbrowser laid out exactly how Wall Street’s perverse pay structures cause systemic problems:

Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be “yes”, insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles

As for this particular proposal from the Fed, I think it’s yet another instance of the Fed promising far too little, far too late, and expecting the last crisis to be water under the bridge so long as it vows to do better next time. As Yves Smith put it, “the ideas on the table suggest any moves will [be] directed at the most extreme practices, simply to curry the image that the Fed is Doing Something.” The Fed has already shown that many of its regulatory responsibilities get shunted down the list of priorities — or outright ignored — when times are good, so I’d prefer that something other than Fed promises be the basis for regulating Wall Street’s compensation.

Yesterday, the House of Representatives passed — by a vote of 253 to 171 — a bill reforming the Federal Family Education Loans (FFEL) program, to cut out the senseless subsidies that the federal government has been giving private loan companies to originate loans. Instead of continuing to use the banks as middle-men, which drives up the cost of the loan program, the federal government would directly lend to students, saving $87 billion.

The bill was passed over the opposition of all but six Republicans, with the GOP claiming that eliminating the subsidies was proposed so that the government could “take over a successful portion of the private sector.” Of course, it’s hard to see how the government can be taking over a program that already has federal in its title, and as the New York Times pointed out, “the loans would be handled through colleges but serviced and collected by private companies and nonprofits that stand to make a tidy profit.”

With the bill out of the House, the focus for the private lenders lobbying against the change now moves to the Senate, where “their chances look distinctly better,” because “several Republican senators have already come out against the proposals, and not all Democrats can be counted on to back it.” The private lenders reportedly have their eyes on a handful of Senate Democrats, and are banking on a few more who have already expressed doubts about the bill. The financial analysis firm Height Analytics is advising student lenders to focus on these sets of senators:

Not surprisingly, the states represented above are the epicenters of the private student lending industry. Ben Nelson, in particular, is staunchly opposed to the bill due to Nebraska being the home of the loan company Nelnet (which as the New Nebraska Network pointed out, is “infamous for manipulating the federal government’s student loan subsidies to swindle American taxpayers out of $278 million”). Nelson has flatly stated that he’s willing to continue the $87 billion subsidy boondoggle because eliminating it may result in the loss of 1,000 Nelnet jobs.

Fortunately, once a bill does emerge in the Senate, it can be passed via reconciliation (which removes the threat of a filibuster). However, it will still need the support of some of the industry’s targets if it is to ultimately become law.