Overpaid bankers

Friday, 3rd July 2009

Robert Peston's lengthy blogpost is worth reading because it undercuts the argument that those inflated City salaries made economic sense. He also raises the question of how to revive the old-fashioned notion of moral hazard:

The problem is that no one can possibly any longer believe that there are any circumstances in which our government will let one of our biggest banks collapse. Which is an enormous comfort to the chief executive of a bank. It means he or she can do something spectacularly stupid, safe in the knowledge that taxpayers will bail out the bank as and when it all goes wrong.
The best deterrent against greed-fuelled gambling by banks is the threat of being sacked when it all goes pear-shaped. But that's not a particularly scary threat to any banker who's earned enough in the preceding years never to need to work again. That rather implies that bankers should be paid a decent wage, but should not be able to get their mits on any serious wealth for years and years and years. Arguably they shouldn't be allowed the big haul till they retire and it's clear beyond a scintilla of doubt that they haven't dangerously over-mortgaged their respective institutions.

[Via Sunder Katwala]