Friday, 27 January 2012

Traditional Forms of State Regulation of Banking - Worth Another Try?

Enough of this wimpy stuff about bonuses. Bonuses aren't the point. How a given individual's remuneration package is divided between base salary and add-ons is a detail. The point is how large the overall payment is, and what the payment is made for. & payments to senior staff in state owned banks should be made for benefiting society -say by increasing lending to small and medium sized enterprises -   not the remaining private  shareholders of the bank.

Bonuses are a particular application of the whole performance related pay idea, which, as Tom points out, is looking  increasingly  untenable even to ex-heads of the CBI. There is also an argument about 'aligning incentives' of senior managers with shareholders to , er, prevent them stealing a firm's assets as they are otherwise thought likely to do. This is known as the 'agency problem' in corporate governance theory.  But its never been an argument I've understood: if you think someone may steal from you why give them a job which allows them to do so and then pay them what amounts to protection money?

So I think it may be time to return to a more traditional form of motivational incentives for senior bank executives.  Michael Hudson points out that,

"....banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. .....

Relations between banks and government used to be the reverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing the Knights Templars’ wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices."

Worth a try?Just a Modest Proposal.