Philip Stephens writes about the ghosts of sterling crises past in the FT this morning. I only have one observation, as I pass through London on my way from New York to Davos for the World Economic Forum.

It is this: when sterling was at its peak of around $2.10 to the pound and the UK house price and economic booms were at their height, I found it rather frightening to return to my home country bearing my weak dollars.

This week, it is quite gratifying to be long the dollar. My instant measure of currency purchasing power, like The Economist’s Big Mac index, is the price of a Starbucks double tall cappucino, which costs $4.06 in New York City, including tax.

You can get the same drink in London for ₤2.14. At sterling’s height, this meant it was more expensive in London than New York. With sterling at $1.40 or so, my morning coffee in London costs the equivalent $2.99.

Quite a bargain.

Without wishing to harp on about John Thain’s last-straw decision to accelerate bonus payments at Merrill Lynch, seemingly to get them in under the wire before the new bosses at Bank of America could cavil, it symbolises a huge clash of consciousness.

On one side are politicians, government regulators, commercial bankers such as those at Bank of America and the general public, most of whom are now outraged at the lavish rewards on Wall Street over the past decade. On the other side stand the investment bankers themselves, who would naturally prefer the system to continue much as before.

Any suggestion that Wall Street should curb bonuses was met, before the financial crisis, with two arguments from those at investment banks who were vested in the system:

First, they said there was little alternative but to pay top performers enormous rewards because they were like star football players who could simply leave and get even greater rewards elsewhere if the company did not pay up.

Second, they said that the system of paying out half of all revenues annually in bonuses was deeply entrenched in the partnership culture of Wall Street and was accepted by shareholders, who had done well by investing in these banks.

I think the Merrill Lynch incident is an indication that investment bank chief executives, although they have largely sacrificed their own bonuses for 2008, essentially believe that nothing much will change. They think they will have no alternative but to keep paying up.

I happen to think they are wrong. One reason for this is that I do not think governments are going to stand for it. There is growing indignation at Wall Street firms simultaneously taking taxpayers’ money and continuing to pay billions to their employees.

More powerfully, in the long term, I think the market has changed. Floyd Norris points this morning to an interesting study of high pay on Wall Street, and how it hit peaks in the 1920s and recently. It declined sharply in the 1930s because of falling demand for elite financial skills and, as Floyd points out, there were periods in the post-war years when bankers were not well rewarded at all.

During these periods, of course, the firms in question were partnerships that simply could not pay out a lot to their partners because there was not much money to do it with. But the same effect is likely to kick in at public companies too, exacerbated by the greater public scrutiny of the Wall Street system.

Not only is the bonus pool likely to shrink as a proportion of revenues, but those revenues are also going to be under pressure. That dual effect will have a painful impact on bonuses. Mr Thain’s downfall is one small indication of this.

I note that Michael Lewis agrees with me about my assessment of his recent anthology of pieces about financial crises. He too thinks it was deceptively marketed by the publisher, and feels ashamed.

Here is what I wrote:

The innocent bookstore browser might assume from this that Lewis is, well, the author. Not so, as the words “edited by” in small type on the front cover reveal to those looking closely. In fact, this is an anthology of journalism on bubbles and busts, past and present.

Here is his own assessment, on The Atlantic’s new business site:

Lewis: I get letters from people who are very angry – who bought this book and it turned out not to be written by me. You know, they bought it because of the way the publisher marketed it, because they thought it was a real book.

Atlantic: It must be said: The words “edited by” are in extremely small print, and the words “Michael Lewis” are in extremely large print.

Lewis: Well the only reason the words Michael Lewis aren’t in even bigger print, and “edited by” is there at all, is because I protested to the publisher. I was part of this deceitful project. But the deceitful project was for a good cause. I don’t get a nickel. But I still feel a little badly about it.

OK, Michael, you are forgiven. I look forward to the actual book you are now writing about the financial crisis.

Reputations get shredded fast in a financial crisis, but the speed of John Thain’s descent from hero to zero is extraordinarily rapid.

In mid-October, he seemed like the smartest guy in the pack, delivering Merrill Lynch into the hands of Bank of America for $50bn during the weekend that Lehman collapsed and obtaining a premium for Merrill shareholders amid the chaos.

Contrasts were drawn between Mr Thain’s pragmatism and the obstinacy of Dick Fuld at Lehman Brothers, who held out for too high a price from investors willing to inject capital into his bank and suffered the ignominy of its collapse.

Since then, it has been all down hill for Mr Thain, culminating in him being ejected from Bank of America today, amid revelations about his expensive refurbishment of his office suite by a designer hired by Barack Obama for the White House.

Symbolism matters, and Mr Thain’s initial attempt to gain a $10m bonus for 2008, as well as details of his $87,000 office rug, have turned him into a symbol of Wall Street excess and the tone-deaf unwillingness of bankers to realise the world has changed.

The whole affair is more surprising because, in my dealings with him at Goldman Sachs and the New York Stock Exchange, I have always found Mr Thain to be unusually low-key, modest and amiable for a Wall Street executive.

In a way, beyond even Merrill’s extreme losses in December that caused outrage at Bank of America, the most shocking detail is the FT story this morning that Mr Thain brought forward the payment date for 2008 Merrill bonuses to December.

That act has a ring of fiddling while Rome burned, particularly in view of the Roman theme of his office decorations. It will crystallise the growing public anger at public money being used to bail out institutions that simultaneously pay out billions in bonuses.

My FT column this week is on bank nationalisation (and, for regular readers, contains a mea culpa on Lehman Brothers):

Four months is a very long time in financial markets.In mid-September, as the credit crisis swirled around Wall Street, I wrote a column recommending that Hank Paulson, the former US Treasury secretary, refrain from bailing out Lehman Brothers. He did indeed let the investment bank go under, and the rest is history.

Looking back, I still think Lehman should have been allowed to fail, but I was wrong not to grasp that it had to be done in an orderly way. Once the chances of a private sector takeover were exhausted, intervention was required to prevent chaos.

Now we are back where we started, this time with large commercial banks instead of Wall Street brokers.Both the UK and US governments face pressure not merely to bail out these banks, which they have already attempted, but to nationalise them. This episode of nerves broke out after investors were told by Royal Bank of Scotland on Monday that it faces a £28bn loss for 2008.

Share prices in UK high street banks have fallen so sharply – leaving RBS with a market capitalisation of about £4bn and Barclays worth £6bn – that some financiers and politicians are calling for the UK government to end the uncertainty and take them into public ownership.

There have been similar calls in the US, after Citigroup and Bank of America disclosed big write-downs and large banks including State Street appeared not to have enough equity to ride out a big recession. It is now extremely hard for such institutions to raise common equity, which is what they need, on stock markets or by private placement.

Unlike in the Lehman case, I do not think governments should allow big banks that are cornerstones of their economies to go under. If the UK government has to follow the example of the Irish government in the case of Anglo Irish Bank and take over at least one big bank, so be it.

But I do not believe any country should be eager to nationalise its banks, except in extremis.

You can read the rest here and comment below.

I can see why Gordon Brown is annoyed at the former management of Royal Bank of Scotland, given that his government has had to take a 70 per cent stake in the bank in order to keep it afloat.

Still, I wonder about the prime minister’s portrayal of its problems being caused by foreign adventures such as its role in the ill-timed acquisition of ABN Amro. The implication is that things would have been all right if RBS had stuck with being a UK bank, taking deposits and making loans at home.

Here are Mr Brown’s remarks, as reported by the FT today:

“Almost all their losses are in subprime mortgages in America and related to the acquisition of ABN Amro. These are irresponsible risks taken by the bank with people’s money in the UK,” Mr Brown said, adding that the decision to buy ABN “was wrong”.

Nobody could dispute that RBS blundered in the case of ABN Amro, and in exposing itself to US sub-prime mortgage securities. However, it also has asset quality problems in the UK, including its exposure to commercial property.

More generally, the international nature of the City of London, and the broad scope of British banks such as HSBC, used to be a point of pride for the government. It is odd now for Mr Brown to suggest that UK banks should have stuck to their shores.

Of course, the first role of the “high street banks” is to provide credit at home. However, there is nothing inherently wrong with lending money overseas while gathering deposits in the UK – or with expanding into overseas markets – providing it is done soundly.

Indeed, as HSBC has shown, there are virtues in a bank having a geographically diversified asset base so that loan problems in one market do not bring the entire bank down.