Monday, October 26, 2009

George Osborne on bonuses

George Osborne on Monday called for retail banks to use bonus cash to boost lending in the real economy. Unlike Boris’s attack on bonuses last week, which was based on justice, Osborne is pitching it as a practical way to get lending going again.

Saturday, October 24, 2009

Idealogy for regulators

In today’s FT supplement on the Future of Finance, John Authors describes two ideologically different approaches to regulation, each requiring a different response to the financial crisis.

First, there are Minsky-ists, who believe governments should intervene to stabilise inherently flawed markets, he writes. Then there are Mises-ites, who believe government should never intervene because they always distorts things.

Followers of both economists correctly predicted the crunch and Authors concludes that regulatory reform can only be achieved after a nasty and ideological fight between them.

He is right that ideology is at the heart of regulatory reform, as proved by the comedy protests against Lord Turner after the FSA chairman dared to ask if the financial sector had grown too big for its boots, and the slow progress resolving the Too Big Too Fail problem.

Ideologically, whether you follow Hyman Minsky or Ludwig von Mises depends on whether you think markets can ever work properly.

Wednesday, October 21, 2009

Mervyn likes narrow banking, phew!

Mervyn King’s endorsement of narrow banking is a big relief. A worrying gap has been opening between politicians and economists on bank reform, so let’s hope King’s call for a structural review of the sector will sway the decision makers in the right direction.

Monday, October 19, 2009

Boris vs Botin

The bank debate went all Old Testament this week. From the responses to Boris Johnson’s “cockroach” broadside in the Telegraph, it looks like there’s a growing desire to see bonus recipients receive a mighty smiting, or at least a windfall tax.

Friday, October 16, 2009

Ditch the campaign

The Mayor’s report on the competitiveness of London as a financial centre is out today. Among the threats it lists is this: “London’s reputation could be tarnished due to its close association with the financial services industry”.

That’s a bit awkward. And how do you reconcile it with the report’s other view, that London’s role as the world’s financial centre is threatened by new regulation?

Perhaps there’s too much hysteria about this, especially as some of the proposed legislation comes from Brussels, triggering a false note from the Telegraph in the form of its “Ditch the Directive” campaign.

Wednesday, October 14, 2009

Ethical innovation

Should banks be subject to ethical review when they invent new financial products? It sounds like a recipe for red tape, but imagine if, when collateralised debt obligations and credit default swaps were created, they had been scrutinised by an ethics committee. Perhaps the financial crisis might not have been so bad.

Ethics in finance normally relates to tobacco and arms, not finance itself. But a committee in a bank or a regulator with a brief to take an ethical look at financial innovations might study the real economic and social effects of a new product

Tuesday, October 13, 2009

Save the hedge funds?

What do hedge fund managers and bluefin tuna have in common? Both have recently been described by the European Commission as “emblematic”.

Officials drafting support for the endangered tuna reportedly argued for hours over which adjective to use, rejecting “beautiful” and, apparently, “delicious” (see Prospect magazine Oct Brussels diary) as inappropriate.

It seems they had the same adjective problem with hedge funds and private equity firms.

Thursday, October 1, 2009

Make bank fees disclosable

The government today announced plans to make banks disclose their high bonus data, after chancellor Alistair Darling earlier refused to rule out “naming and shaming” the highest paid.

This may excite anti-capitalists with picketing plans for bankers’ Chelsea houses but it misses an important point in bonus culture: mega-payouts are merely a symptom of a greater failing in the system. That failing is that investment banks charge too much for what they do.

One of the difficulties in the bonus debate is that there is little visibility on who ultimately pays for them, beyond a vague sense that somehow we all do. Leaving aside proprietary trading and normal retail and commercial lending, much of the “extra” income funding the rise in banker bonuses is from high transaction and trading fees. These are normally signed off by finance officers and traders, acting in their capacity as agents for their own investors and shareholders. These are the real clients, in the sense that they foot the bill but would never know how much is paid in their name. It includes all of us with a pension fund.

One way of addressing this agency problem would be to make fees for corporate banking services visible in the accounts of the companies paying them.

Where should we put the FSA?

Wouldn’t it be great if the hot air about bank reform could be captured as green energy – two problems solved in one! But as the bank reform debate drags on, the possibility of using the financial crisis post-mortem to rebalance the economy in favour of more socially useful activities – such as R&D, climate research, public services or even public sector deleveraging – is fading slowly away.