Wednesday, April 30, 2008


Dr King's Medicine Unlikely to be Taken

A delicious sketch-now on Youtube- by the brilliant Johns, Bird and Fortune, set the current credit crunch in perspective for me. Its punchline comes when the merchant banker's interviewer says: 'So when you make a profit, you keep it and when you make a loss, we the taxpayer have to bale you out?' 'That's about it' answers George Parr, smiling smugly. I'm a huge fan of the Johns' well researched satire and it's reassuring to discover none other than the Chairman of the Bank of England, Mervyn King, seems to agree that one couldn't even make it up.

Giving evidence to the Treasury Select Committee he:
i) laid into their astronomic salaries:

'Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change,".

ii)criticised the way excessive pay attracted the brightest graduates:

'It's not a very attractive situation that such a high proportion of our talented young people naturally look at the City and think it is the only place to work in. It shouldn't be. It should be one of the places, but not the only one,".

These criticisms chime in with other claims that young City brokers, in pursuit of sky-high bonuses, take irresponsible risks, thereby putting the system at risk. Such risks- like lending money to people who cannot possibly repay large mortgage loans- were at the very heart of the 'sub-prime' mortgage crisis which has swept across the Atlantic, laid low one major bank and wounded several others to the extent that first time buyers cann ot raise the money to make their start in life.

As always, it would seem, it's the taxpayers who have been called in to apply their healing financial balm and to keep the over privilieged financial community in ther manner to which they are accustomed. Dr King's sotto voce clarion cry is to be welcomed but do we seriously think it will have any effect? Tony Blair, I'd say, has about the same chance of becoming a socialist.

The fact that huge amounts of money are available to banks must mean that society values decent banking services very highly. Thus the problem is not so much the level of bankers' bonuses, but rather the way in which they're dished out.

You quote the Treasury select committee as saying that banks are "paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves".

So it's the discrepancy between the long-term nature of investment and the short-term nature of bankers' bonuses which is at fault. And this isn't very easily remedied: despite his comments, Mervyn King can do little as BofE governor. The overriding incentive for banks is to attract the best bankers (since this is how they make money), and any deviation from the culture of short-term rewards will surely precipitate an outflow of talent from the foolhardy bank.
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