But as Jeff Madrick wrote recently in The Nation, compensation in the financial services industry is not based in reality:

[Wall Street] would add just as much to the economy through accessible and cheap financing and innovative investment vehicles at much lower levels of profits and individual compensation...Competition is supposed to wither [unearned] surpluses away. At least, that's the long-standing argument for a free market. But if this is true in other industries (and it is probably less true than is widely believed), it is clearly not so in finance. They made money not because they deserve it, but because of a special advantage they have.

In recent years, the financial services industry has become expert in what Simon Johnson calls "the politics of how you construct a multi-billion dollar opportunity so that you can get in, pull others after you, and then get out before it all collapses." Though conservatives and libertarians prefer to ignore the influence of politics when talking about the efficiency of markets, they use politics as a bludgeon whenever government "interference" is proposed.

Feinberg's compensation oversight provides an opportunity to put politics on the side of taxpayers. Feinberg will not be concerned with whether Bank of America will lose employees to a non-TARP company that is free to set its executive pay higher. But he will be concerned with whether the public believes compensation is set too high, far from a bad thing in an era of uncertainty about why Wall Street executives are compensated so well.

As Bloomberg's Ian Katz speculates today, "Kenneth Feinberg's mandate to set pay guidelines...may set a template for Wall Street compensation." Instead of compensation limits igniting a race to the bottom, as Becker fears, Feinberg might actually rein in excessive pay across the board by creating a more reasonable compensation standard. Feinberg might actually pop the compensation bubble.