Chattering Class Diaries

The bankers’ compensation proposal made by US Special Master for Executive

Compensation Kenneth Feinberg and backed by US President Obama has come

under fire for being ill advised.  I quite agree with all those who believe that

this would only make way for a two tiered system of “ill paid” and presumably

ill staffed government owned institutions vs a “sky is the limit remunerated” and

presumably talent studded privately owned institutions operating with little

control. 

 

I am also not comfortable with Mervin King of Bank of England’s prescription

(Ref 1) for the banking industry to be split into a utility like regulated banks

(presumably manned by the “ill paid” bankers), which would be bailed out by

the government in the event of a catastrophe, and a lightly, if at all, regulated

bank making bets with investors’ money (presumably run by the “sky is the

limit” bankers) that would not be bailed out in the event of a market failure. 

 

After all, the financial world is interconnected.  Despite controls, the “utility

bankers” will most certainly be attracted to the siren calls of higher return

offered by the “casino bankers” as a moth does to light.  To help the hapless

“utility bankers” the latter will no doubt find creative ways to ease the flow of

the former’s insured deposits towards the latter.  Thus, in the event of the

occasional and inevitable failure of the “casino banks”, it would be impossible

to insulate the “utility banks” from the failure of the “casino banks”.  Maybe

with strict regulation damage could be controlled, but there will always be some

major “utility bank” player who somehow had managed to find a loophole.

 

I am also not convinced that reforming the remuneration system, so that pay is

staggered over time to reflect the effects of unforeseen financial events, or

setting aside adequate reserves as cushion for financial cataclysms, would in

themselves be effective tools to ensure the integrity of the global financial

system.  After all, the “financial wizzes” of this world are smart enough to

design some product that would ensure that those staggered remunerations are

paid out in cash at, well argued but in essence arbitrarily set, “net” present value. 

These wizzes should also be smart enough to devise esoteric “instruments” for

shoring up capital.

 

As a result of all this, I am convinced that there will be no solution unless we go

to the root of the problem, and that is to provide less fodder for the “casino

bankers” to play with.  As the fodder is provided by the overabundance of

credit, if we can manage to shrink credit, finance would certainly become less

“interesting” but more in line with reality. 

 

I contend that changing our mindset to enable us to seek that is what should be

attempted, however quixotic it may sound.  In that sense, I believe that

French President Sarkozy certainly pointed in the right direction, when he

convened a Commission on the Measurement of Economic Performance and

Social Progress to consider “additional information [which] might be required

for the production of more relevant indicators or social progress” (Ref 2). 

 

Such a world would alas be less glamorous, and as Financial Times’ Martin

Wolf asks, “Do we want that?” (Ref 3) – I think we should. 

 

 

References:

 

1.        Speech by Mervin King Governor of The Bank of England to Scottish

Business Organisations, Edinburgh on Tuesday 20 October 2009

 

2.        Joseph E Stiglitz, Amartya Sen and Jean-Paul Fitoussi ed., Report by the

Commission on the Measurement of Economic Performance and Social

Progress

 

3.        Martin Wolf, “Why curbing finance is hard to do”, Financial Times, 22

October 2009