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.
Similarly, I am not arguing in favour of government ceilings on interest rates or abolition of capital markets. I am not arguing against the continued existence of institutions that operate in those markets. These would be the characteristics of financial repression. So the reference to India is a red herring. It is irrelevant to my argument.
Nevertheless, the statement that systemic breakdowns are surprisingly rare in the free-wheeling Anglo-Saxon model is false. The US is the home of this system and, as I have already remarked, many money-centre banks were more or less insolvent in the early 1980s, because of the Latin American debt crisis, insolvent again in the early 1990s, because of the real estate crisis, and insolvent once again now, in the sub-prime crisis. Three times in three decades is not a rare event. In all these cases the banks were rescued by massive, though largely concealed, government-provided subsidies.
It really cannot be argued that this is a fundamentally safe system. It is not. It is one in which weak regulation has consistently led to excess and then breakdown. If we do not learn from this experience, we are condemned to repeat it.
I think that, once we get away from the red herrings, there are just three real issues at stake here.
The first is whether it is desperately important to pay bankers more than any other workers in a society (these are not entrepreneurs, after all), because their talents are so rare and so socially valuable. The answer to this is: you must be joking.
The second is whether governments have a legitimate interest as risk-bearers of last resort in the incentives provided by the structure of remuneration at least, if not its level. The answer to this is: of course they have – and how!
The third question is whether it makes sense to separate out a regulated utility banking industry from free-wheeling capital market-oriented institutions. On this last point, I have an open mind, though I am inclined to believe the answer is: yes. The fact that US legislators reached this conclusion in the 1930s seems to me quite important. But if that is not the answer, then we must accept tighter regulation of the financial system.