Bankers’ Pay: Should be Changed, Won’t be Changed

Why pick on banks, and bankers? Steve Waldman tells us:

It’s not because they’re bad people. Most bankers are very nice people. We should pick on them because, as Andrew says, banks intermediate. They are a point where all the lunatics meet to transact, a point where applying pressure can change everything… Banks are formal institutions, amenable to laws, regulations, and litigable norms and standards that are easily reshaped. We don’t have to throw up our hands at frailty and corruption and watch reruns from the 1930s over and over again. We can actually mess with banks (and other financial intermediaries) in ways that indirectly shape the behavior of the rest of us (and that are not terribly intrusive to most of us)… We allowed our institutions to evolve to a place where misbehavior was ordinary, caution uncompetitive, and prudence a firing offense. If we change the institutions, we change the behavior. We can do that, and we should do that.

Steve has some radical ideas, like deregulating the entire financial system outside a few ultrasafe "narrow banks" and then putting a very low cap on the maximum size that any financial institution can reach. Mohamed El-Erian’s ideas, by contrast, seem positively modest. Central banks should be much more involved in understanding and scrutinizing the financial sector, he says, and "central bankers need to revisit the conventional wisdom that calls for separation of monetary policy and bank supervision". That makes a lot of sense to me.

Meanwhile, the lead story in today’s WSJ also picks on bankers’ pay, following the footsteps of (but not quite going as far as) Raghuram Rajan and Martin Wolf.

All of which reminds me a little of the general consensus following the 2000 presidential election that the US voting system, including the electoral college, needed a massive revamp. It really doesn’t matter how much unanimity there is that bankers’ pay needs shaking up: nothing’s going to actually happen.

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