Today, Federal Reserve Chairman Ben Bernanke appeared before the House Financial Services committee to comment on a whole host of regulatory reform issues, including the Fed’s newfound motivation to regulate compensation at financial institutions. During the hearing, Bernanke tried to drive the point home that the Fed is taking compensation reform very seriously:

As you may know, the Federal Reserve is about to issue guidance for comment on executive compensation, which will apply not only to the top five or ten executives, but way down into the organization, day-traders or anybody whose activities can affect the risk-profile of the company. And we view this as a “safety and soundness” issue.

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At least rhetorically, Bernanke is hitting all of the right notes, and if the Fed’s actions matched his words, I’d be feeling pretty good about the prospects of getting compensation at financial institutions back in line. But then, the Financial Times reported today that the U.S. bank regulators, including the Fed, plan to “take a flexible approach to interpreting global guidelines on bankers’ bonuses” that were settled on at the G-20 meeting last week:

[T]he US is sticking to its belief that one-size-fits-all requirements do not make sense. The Fed’s view is that banks – subject to supervisory review – should be able to choose how to meet the test that compensation schemes should reward risk-adjusted performance and not encourage excessive risk-taking.

So on the one hand, Bernanke sounds gung-ho about reform, but on the other, the Fed admits that it will leave the ultimate decision on compensation up to the banks themselves (unless the “supervisory review” is especially rigorous).

But can we really count on self-regulation? Remember, this comes at a time when we’re seeing short-term incentives increase in executive pay packages, and Wall Street banks return to handing out guaranteed bonuses. And according to a University of Southern California Marshall School of Business survey, “while many directors think executive pay is a problem elsewhere, an overwhelming majority say it’s not at their own firms. Eighty-six percent said their own CEO’s compensation plan was ‘effective or ‘very effective.’”

“It’s nice to see the Fed make a play at populism,” said Rep. Dennis Kucinich (D-OH). “It’s just I would suggest that it’s an ill-fitting suit.” Indeed, I still feel that most of the steps that the Fed has taken in recent weeks — from promising to regulate subprime lenders to Bernanke’s assertions on pay reform today — are meant to head off Congressional action (by providing assurances that past missteps won’t be repeated), but won’t amount to significant changes in the long-term.

During CAP’s conference yesterday on when and how to begin addressing the country’s long-term deficits, Nobel Prize-winning economist Paul Krugman explained that “this is a really bad time to enage in fiscal retrenchment; it’s a bad time on almost every dimension.”

But eventually deficits will have to be brought to some sort of sustainable level, which will require action on multiple fronts — health care reform, tax increases, and spending cuts. And according to Krugman, these are easy steps to take economically. The problem, he said during an interview with The Wonk Room, is that we have a political system in which you can’t talk about tax increases “without it being political suicide”:

If we can do health care reform that really does bend the curve downward — I hate that phrase, but — health care reform that really does limit the growth in health care cost, then what’s left is a problem that we can deal with with fairly moderate policy. Things that would be politically impossible right now, but economically aren’t hard at all.

We could probably make do with a few percentage points of GDP in revenue, which we could get partly from the sale of emissions licenses, maybe some additional taxes, find some cuts in military spending, find some way to not just bend the curve but actually bring some real efficiencies in health care. It’s not really hard to give the economic numbers and make the whole thing work.

You would end up still with the U.S. having lower taxes than almost all other OECD countries. And you’d end up with our social programs enhanced, not reduced, because we’d have universal health care coverage and some other improvements in the social safety net, and we would be good for the foreseeable future. All of this hinges on being able to actually talk about tax increases, even modest ones, without it being political suicide. It requires that you be able to talk about spending health dollars wisely and not have people start screaming about death panels.

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On his blog yesterday, Krugman referenced the “victims of politics” under the Reagan administration, who saw a surge in household debt that “can largely be attributed to financial deregulation.” When asked what the victims of politics would look like if today’s problems go unaddressed, Krugman said that inaction would lead to another economic bubble that “will just leave the eastern seaboard of the United States a smoking ruin”:

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Krugman’s point about tax increases not crippling the U.S. economy is well taken. The U.S. currently has the “fifth lowest taxes as a share of GDP among economically developed nations,” and even if we tried to balance the budget entirely on tax increases (which no one is trying to do), “the United States would still be in the bottom 10 out of 30.”