Click here to read Martin Wolf’s opening salvo
By Martin Wolf
This will, I think, be my last contribution to this debate. So let me start by responding to Jo, Stuart and Ben.
Am I, as Jo says, confused about the riskiness of Anglo-Saxon banking? I think not. I have long been aware of the fragility of banking as an industry and have written about this many times over the years. As my recent book, Fixing Global Finance, notes, there have been more than 100 banking crises in the world over the past three decades. So this is not news to anybody who is reasonably well informed. I have similarly been well aware of the crisis-prone nature of US banking, in particular. So that is not new either.
What is new, however, is that, in the current crisis, this fragility has now been globalised to what is, I believe, a historically unprecedented degree. What I have learned (and Lex should have learned) is that the old fragility sensible people have always worried about (may I remind you that Milton Friedman, no less, was in favour of narrow banking) has now metastasised into something far more dangerous. Indeed, one of the things I am missing in the comments from the Lex writers is some sense of just how dangerous the situation now is. That is why we are thinking the unthinkable about the structure of the banking industry and its rewards. But the important point is that, if we make no changes, it seems to me reasonable to expect that our future banking crises will all be like this: a globalised mess of securitized toxic rubbish.
Let us agree that someone with “a suitably structured incentive package” will do the best job in restructuring RBS. Whether that someone should come from the toxic culture of the private banking system, as it has evolved in recent years, or from the public sector is, we should surely agree, an open question. The real question, however, is what “a suitably structured incentive package” would look like. Your assumption is that such a package is one in which the successful performer becomes vastly wealthy. I simply doubt this. It is possible. But I think it is rather difficult to prove, given the astonishing mess people with private sector backgrounds and such packages have already created. It may be that someone honest and diligent with a straightforward salary will do the job required perfectly well. See John Kay’s column of February 11 on this.
I agree that it is possible to find public sector officials who, being told to expand their bank at all cost, have made an astonishing mess. Alas, private sector people motivated to do the same thing have made even more spectacular messes. So, unfortunately, Mr Haberer’s incompetence does not help your argument. Incompetence has been everywhere, alas.
Now let me turn to Stuart. He argues that the clause “financial institutions to be privately owned and run, though subject to clear and cogent regulation” is “Obamaspeak” – that is, “beautifully obtuse”. Unfortunately for him, this happens to be the policy of every government on the planet. The only question is how to make that regulation work. That is difficult, but the objective is hardly obtuse, unless he is arguing that all regulatory authorities should be wound up tomorrow. Is that now the Lex position in response to the biggest example of private sector failure of our lifetimes?
Stuart argues that my view on bank pay is “nonsense” because they have no privileged access to the money flow. He also asserts that thousands of new companies emerge to eat their lunch. This is wrong. One of the striking features of finance is the long-running survival and dominance of the big banks. Most of them are quite old institutions. Equally clear is the difficulty of losing their privileged position as sources of credit and other financial services. Thus, unfortunately, when they do go bust, they are resurrected: they are too big to fail. In the meantime, as Adair Turner, the chairman of the Financial Services Authority has argued in his recent Economist Lecture (The Financial Crisis and the Future of Financial Regulation) - they are able to collect and distribute rent to their employees, leaving much of the downside to the taxpayer.
Stuart is also wrong about government’s role as risk-bearer of last resort. Quite simply, no other industry compares. Again, the evidence is in my book. In many cases, the fiscal cost of rescues of the banking system have between 20 and 55 per cent of a country’s gross domestic product. It is obvious why this is so: shareholders finance so small a portion of the banking balance sheet (in many recent cases about 3 per cent, or so) that any significant adverse event or folly wipes out shareholders’ capital. This has again and again left taxpayers bearing the losses. Indeed, it is unimaginable that banks could survive with such minimal capital if this were not the case. The right way of thinking about a financial structure like this is that “going for broke” is endemic. The upside is simply so large. Since taxpayers take the downside, once shareholder funds are wiped out, they have to be concerned with risk-taking. That is one of the reasons for the regulation. Another, of course, is the unique damage to the economy that a wave of bank failures can do.
Stuart denies the possibility of separating utility banking from the casino. I very much doubt whether this is as difficult as he believes. But, as I said, I am agnostic on this. If it is indeed impossible, then tight regulation of the system, including of incentives, is inevitable.
Finally, to Ben, if bonuses do not move around much, why do they provide an incentive? As to the “outgoings to match”, well, that’s life. This is surely not a charitable cause. As to the other points he makes, well, taxpayers have an interest because they suffer the consequences, as I have already pointed out many times. And, for once, I have strong sympathy with the “baying mob”. Look at what these institutions have now wrought. This is not just some little difficulty we are living through. It is a catastrophe.
Let me go back to the central issues here.
First, the big point Lex started with is the importance of being able to attract “talent”. I cannot be the only one who wonders what exactly this valuable talent consists of. Is it one I should want to see attracted to this industry at all? I suspect the answer is no. People who are much less “talented” might provide a much better service to me, in the long run.
Second, does the public have an interest in how bankers are paid? Of course, it does, since it lives with the costs if those incentives do indeed encourage dangerous risk-taking behaviour, at their expense. But it is impossible to imagine that, if those incentives work at all (and if they do not, why pay them?), they do not encourage dangerous risk-taking behaviour.
Third, does the public have a particular interest in the pay of those who work for institutions it now owns? Well, of course, it does. That really is a no-brainer.
