Here’s just a quick example for why a pay freeze for public workers is about the stupidest policy you could put together right now. If you’re Barack Obama, you believe have engineered two signature victories through the Congress. You have a health care bill where the regulation that is key to the bill has been outsourced to state insurance regulatory shops (which is a problem), meaning that the relative effectiveness of the regulations are contingent on states allocating resources to those departments. In this time of budget cuts at the state level, that’s shaky.

Then you have a financial regulatory reform bill which is incredibly dependent on effective regulation at the federal level. There’s even a new agency, housed inside the Federal Reserve, charged with consumer financial protection. In order to stay a step ahead of the bankers and to comply with the law, this agency and the others overseeing the financial sector must hire more people (the SEC wants to hire 800 more employees to meet the requirements of Dodd-Frank), and be populated with the brightest and most incorruptible minds we can find, who know the tricks and traps that the bank lobbyists will seek as cover from the law. One of the problems we had in the past was that the regulators who weren’t captured by the finance lobby actually didn’t have the smarts to keep up with them as they ran their Wall Street casino. So you have to attract new talent which can narrow that gap.

And as Barney Frank says, by instituting this pay freeze right now, you’re hamstringing the regulatory agencies which necessarily must get beefed up if the financial reform will take.

Frank said on Thursday he would support providing exemptions to the pay freeze if regulatory agencies, including the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CTFC), can show they are needed to hire the appropriate talent.

Frank is the outgoing Financial Services panel chairman who crafted what has become known as the Dodd-Frank bill.

“I would make some exceptions if you’re talking about high level people there,” Frank said.

He also offered a way around the White House’s proposal. If the plan goes forward, Frank pointed out, federal employees’ pay will be frozen. But Frank noted, “We’re creating a number of new positions [at the SEC],” an indication that some employees frozen out could get a new, higher paying job.

These are essentially legal jobs at SEC, CFTC and CFPB. The talent is out there for these agencies, given the economic downturn, but when faced with a job that will have no salary advancement in the near term and one in the private sector that will, who do you think will win out?

The pay freeze, therefore, limits the talent pool for one of the two signature reforms passed by the Obama Presidency. It’s like setting up a lemonade stand and then mandating that a straw siphon off all the lemonade during business hours.