Ok, here's my idea. Tell me what you think.

We have these financial firms that got in really bad trouble. They took crazy risks and blew themselves up -- you know, subprime lending, credit default swaps, that kind of thing -- and nearly took the whole global economy down with them. And then there are these auto companies. They were so bad at making efficient cars and managing their businesses that when the recession hit, they were thrown into bankruptcy.

We had to bail them all out at the taxpayers expense to save the system overall. Taxpayers now own huge stakes in these firms -- in some cases, the whole firm. And the worst of them will be on public life support for years to come.

The executives who made all the terrible decisions that led to this got incredibly rich in the process. Most of them have many millions salted away from bonuses and other compensation received before everything blew up. It hardly seems fair.

So what do we do about it?

Let's appoint a "pay czar" at the Treasury to slash compensation for execs at the firms that needed the biggest taxpayer bailouts AIG, Bank of America, Citigroup, General Motors, GMAC, Chrysler, and Chrysler Financial.

Great idea, huh? Now that taxpayers need people to nurse these firms back to health, let's make it so that nobody will have any incentive to work for them. It's brilliant, I tell you. Brilliant!

Well, at least the plan recovers all those ill-gotten gains made by the villains who created this mess. Oh, wait I guess it actually doesn't. It affects only the money executives make now and in the future when they make big profits for these firms. But if they can't make any money for themselves, why should they stick around and make profits for their firms?

In other words, why should they stick around and help the taxpayers get their money back?

They won't.

But at least taxpayers will have the satisfaction of saying we punished the scoundrels.

I assume you realize that this isn't really my idea. But it's no joke either. Treasury announced it Thursday. This idiocy is actually happening.

Now, at the same time, some smart things about compensation are going on at the Federal Reserve. The Fed announced that it intends to put rules in place for all the banks it regulates -- all banks, effectively -- to prevent any compensation system that threatens a bank's financial stability.

That's a smart idea. It's not about slashing compensation for the sake of slashing compensation. In fact, it's not about slashing at all. It's about the way compensation is structured. After all, compensation is a matter of incentives -- and the idea is to make sure that the incentives cause bank executives to act prudently, not stupidly.

Think about it. You don't object to Warren Buffett becoming one of the richest men in the world, do you? At the same time he has made himself rich, he has helped build businesses that thrive and grow for the long-term benefit of all shareholders.

But you would object to Buffett's wealth if it came as the result of taking crazy risks that blew up his businesses -- making him rich personally, while wiping out everybody else.

So the idea is to structure compensation so that all executives are treated more like Buffett to align executives' incentives with the best interests of shareholders. At banks that may require bailouts to save the system from crisis, restructured compensation should also align executives' incentives with the best interests of the public.

You do that by thinking long term. Instead of giving executives giant cash bonuses every quarter, or even every year, pay him in company stock that he can't cash until many years in the future. That way, he can't take the money and run -- he has to wait for the company to prosper over the long term. That gives him no reason to expose the firm to risky ventures that could produce profits in the short term but disaster in the long term.

If you are a true, die-hard free market believer, you will disagree with this approach. You'll say it's not the government's business to tell people how they should be compensated, risk or no risk. I basically feel like that myself.

But not entirely. If you expect the government to stand ready to bail out big banks in order to save the system, then you must change your thinking. As soon as you expect the public to take any risk, you have to give the public a chance to reduce the risk you expect it to take. And poorly structured incentives are indeed a risk.

There are other hazards to the public interest. The banks that blew up in the credit crisis were also over-leveraged -- they took too much risk relative to the amount of capital they had to absorb losses. So again, if you expect government to save the banks when they get in trouble, then you're going to have to let the government regulate the amount of leverage they can use.

Those rules are coming next. And they won't be fun. When banks have less leverage, they have to take smaller positions, which means smaller profits.

In one sense, those limits are a solution to the "too big to fail" problem -- they effectively make big banks smaller. And that's good. But smaller profits are bad, and investors in bank stocks -- who have watched their investments explode to the upside since the credit crisis was resolved last March -- aren't focusing on those limitations yet.

They should. Today compensation, tomorrow profits. Sometime soon, the government is going to lower that boom. And the reaction in bank stocks won't be pretty.