Click here to read Martin Wolf’s opening salvo

By Tim Harford, author of the Undercover Economist

Philip is certainly right: why shouldn’t the state have a say, when it is propping up the institutions in question?

The evidence on this is intriguing: CEO pay seems to be much more closely pegged to meaningful measures of performance if there is a large shareholder such as a controlling family or a Buffett figure. Meaningful measures are things such as share price performance relative to close competitiors. But when shareholders are dispersed, CEOs get away with sloppy measures of performance.

Governments are large shareholders in some banks. In principle, they should be able to follow this example and set pay that encourages effective performance.

Whether politicians attempting to appease a baying mob are going to do a good job of this… we’ll see.

Click here to read Martin Wolf’s opening salvo

By Ben McLannahan, Lex Asia writer

A few points to toss into the mix:

1) Bonuses are generally tied to four metrics: individual performance, desk performance, divisional performance and bank performance. So if one guy has a terrific year and the rest of his team or the rest of the bank didn’t, he wouldn’t be rich beyond his wildest dreams. Bonuses are a reward for being
part of a profitable group. In that sense, they encourage cohesion.
2) Bonuses do not move around much. Go back a decade, and there’s usually about 15-20% annual variation in the amount paid. As such, there is an expectation that the bonus is part of overall compensation
3) Most traders do not earn millions. Most in London take home between £100k and £500k. Is that too much? That’s another question. And all have outgoings to match… Continue reading "Lex still supports the principle of variable performance-related incentives"

Click here to read Martin Wolf’s opening salvo

By Stuart Kirk, US Lex Editor

Lex is always happy to leave herrings aside, especially red ones. But when economists write “I do not think anybody can possibly disagree with this position”, Lex is quick to detect a fishy smell. Martin Wolf wants “financial institutions to be privately owned and run, though subject to clear and cogent regulation”. That is pure Obamaspeak: impossible to disagree with because it is beautifully obtuse. How much clear and cogent regulation? Too much and eventually there will be nothing private left.

Continue reading "Forget bonds - the biggest bubble right now is banker-baiting"

Click here to read Martin Wolf’s opening salvo

By Martin Sandbu

We don’t need to think that bonuses were an important cause of the crisis in order to criticise them. I doubt that they made a large difference. The mistakes made by the banks were not just a product of misaligned incentives, but just as much of misperceptions of reality.

If many bankers actually thought that they had a sustainable and highly profitable business model - they shouldn’t have, but they probably did - then even if their motivations has been completely aligned with shareholders’ interests, they would have entered the same investment positions as they actually did (their remuneration would just have reached less astonishing levels). Continue reading "Bring bankers’ pay down to earth"

Click here to see Martin Wolf’s opening salvo

By Jo Johnson

And what did people call Talleyrand? “A shit in silk stockings”, I believe, or “de la merde dans un bas de soie” in the original.

Anyway, just a couple of quick points:

First, re the big wobble: there seems to be a logical inconsistency in your position, if I understand it correctly. On the one hand, you cite Keynes’ “if the facts change, I change my mind…” to justify the big clampdown. Then on the other hand you say that my statement that systemic breakdowns are surprisingly rare in the free-wheeling Anglo-Saxon model is false and argue that they in fact happen on average about once a decade. Continue reading "Treasury bottle-washers would do no better than bankers"

Click here to read Martin Wolf’s opening salvo

By Martin Wolf

As Talleyrand said of the Bourbons, “They have learned nothing and forgotten nothing.” That seems to be Jo’s position. It is not mine. I am with Keynes who said, “When the facts change I change my mind – what do you do sir?”

Let me be clear, I am arguing neither in favour of nationalization nor in favour of financial repression. On the contrary, I want the financial institutions to be privately owned and run, though subject to clear and cogent regulation. I do not think anybody can possibly disagree with this position. We are only discussing the content and structure of that regulation. Continue reading "Pay bankers more than other workers because their talents are so rare? You must be joking"

Click here to read Martin Wolf’s opening salvo

By Jo Johnson

Martin,

With maximum respect, I think you are performing the most enormous wobble. It is surprising to see an economist of your distinction make the case that the UK should suddenly decide that what it needs more than anything else is financial repression.

Economists have for yonks agreed that financial repression - whether through high bank reserve requirements, government-determined credit allocation or straightforward government domination of banks - prevents the efficient allocation of capital and thereby impairs economic growth (of which we have precious little to begin with). Our system has not been perfect. But it has not been so imperfect that we all now deserve to be permanently repressed. Continue reading "Our system is not so imperfect that we deserve permanent repression"

Click here to read Martin Wolf’s opening salvo

By Martin Wolf

My esteemed colleague, Jo Johnson, is confusing the issues. So let me reply to his points in turn.

First, do I want the banks I support as a taxpayer to be utilities? Yes, yes, yes. In fact, I would be delighted if they were utilities. But what has this to do with the fate of the City of London? Nothing. The City of London is an offshore financial centre. It does not depend on institutions guaranteed by the British taxpayer. If foreign-owned financial institutions wish to operate in London because of the skills on offer and foreign taxpayers are also happy with the risk their institutions are running there, I would be delighted that these “world-class skills”, so powerfully demonstrated in recent years, be gainfully employed. Continue reading "Pay structure should be aligned with taxpayers’ interests"