KIlling bankers

Should we kill bankers? I don’t mean as vengeance for their past misdeeds. Instead, I mean that, if banks are to remain in the private sector, the death penalty should be part of the new regulatory regime.
The problem with any regulation is that regulators are always at an informational disadvantage; outsiders know less than insiders.  There is therefore a danger that breaches of the new regulatory code - excessive risk-taking - will not be identified quickly; as Warren Buffett said, it’s only after the tide’s gone out that you can see who’s been swimming naked.
This means that if the penalties for breaches are low, bank bosses might have an incentive to ignore regulations - as they discount punishments by the probability of getting away with their crimes. To prevent this, punishments must be huge.
What I’m advocating here is a system of perfect deterrence, as discussed by Saul Smilansky in 10 Moral Paradoxes; if the punishment is high enough, no crime will occur.
What’s more, the death penalty will focus bosses’ minds. As Chesley Sullenberger showed us, when a man faces the likelihood of death, he finds a way to do a great job. The notion that bank bosses require big bonuses to incentivize them rather than the threat of punishments was always a self-serving fiction, not a realistic psychological proposition.
You might object here that threatening bank bosses with death would deter good men from taking the job.
I’m not convinced. For one thing, the threat of death doesn’t stop good people from applying to become airline pilots or army officers. And for another, having duffers run banks wouldn’t be a catastrophe. A return to the old 3-5-4 business model (borrow at 3%, lend at 5%, be on the golf course at 4 o’clock), whilst being sub-optimal, would at least save us from disasters.
Another objection you might have is that banks are so complex that no chief executive or board of directors can possibly control them adequately - hence the number of rogue traders. If this is so, then we risk killing men for things over which they have no control.
This, though, just raises the questions. If this is so, why have we attributed such importance to chief executives? And should banks remain such ungovernable structures?

Comments

[Francis Sedgemore]

Come on Chris, fair's fair. The regulatory system that got into this mess was put together by Gordon Brown. So why stop at the chief execs; should we not go one better and kill the king?

[arab]

Have been telling people for a while that this model has already been adopted with some success by the Chinese.

[Luis Enrique]

I like the idea ... as you say, the only way anybody would be prepared to get in the water would be dressed like this

http://www.fashion-era.com/early_swimwear.htm#Victorian%20Swimwear

So there would be absolutely no doubt, when the tide goes out, that you were fully clothed. No chance of finding yourself executed for wearing Speados. We'd get extremely conservative banking practices. Would that stop the tide going out ever again, though?

[john b]

The trouble is that draconian-penalties-seldom-applied is, empirically, a really bad model for deterring people from committing crime (see: criminal justice in the US). The moderate-penalties-frequently-applied model works much better.

China is a good example of a country where applying the death penalty for very rare cases of corruption and corporate crime clearly has very little impact on levels of corruption and corporate crime (since they're no lower than countries that're equally poor and don't apply the death penalty for such crimes).

[Luis Enrique]

"speado"

[Bob B]

"Come on Chris, fair's fair. The regulatory system that got into this mess was put together by Gordon Brown."

C'mon. The Tories were continually pressing for more and more "deregulation".

And why this in America after all those generous billions of tax cuts by the Bush administration?

" . . almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

"'Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,' he told the House Committee on Oversight and Government Reform."
http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=1&hp&oref=slogin

And try this diagnosis by Volcker, Greenspan's predecessor at the FED:
http://www.guardian.co.uk/business/2008/nov/18/credit-crunch-paul-volcker-bonuses

So much for the wonders of Free Market Capitalism as perceived by successive chairmen of the Board of Governors of the US Federal Reserve Bank.

For a slimmish, highly digestible P/B guide to international recessions or worse and the crisis of 2008, I can recommend the latest edition of (Nobel laureate) Paul Krugman's book: The Return of Depression Economics and the crisis of 2008 (Penguin Books, 2008).

[Leigh Caldwell]

Preventing future disasters is not the only motivation we should have! We also want a well-functioning, efficient banking system that boosts economic growth.

The current recession needs to be put in context of sustained growth over the last 15 years or so. While it's going to be (and already is) painful, it is not SO bad as to be worth giving up a permanent 0.5% of annual economic growth.

Rather than coming up with solutions that guarantee no more crises, we need to address the more difficult task of reducing the likelihood and severity of crises while still retaining dynamism, innovation and the most productive allocation of capital that we can achieve.

[passer by]

"when a man faces the likelihood of death, he finds a way to do a great job."

He and his passengers where very lucky, a cold day with little wind and very cold flat water to land on. (Cold water is more dense that warmer water thus making the river more flat)Of course he still has to land the plane, but skill was only part of the incident, and of course he is a very experienced glider pilot.

So if it had gone wrong despite his skill, would we still be up for a hangin' assuming of course he made it out alive.
-----------------------

Luis, This is a much better explaination of the crunch and it is the one the last and this US Administrations believe. And of course there is NO Nobel prize in economics.

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012303291.html

[Nick Rowe]

Why not have draconian penalties for all crimes? Because justice is imperfect, and so some innocent people will still be convicted. And in equilibrium, only the innocent (and those too crazy to be deterred) will be executed. We face a trade-off between severity of punishment and burden of proof.

[Francis Sedgemore]

"C'mon. The Tories were continually pressing for more and more "deregulation"."

That's fine; we can throw a few of them on the pyre too.

[Nick]

This sounds like an interesting idea, and it has already been trialled in China, but I think it would be best left to the private sector. Account holders should either hire or insure their assets with Tony Soprano or Omar Little. When recession hits, these agents would pursue any cheating bankers, attempting to recover as many assets as possible, regardless of jurisdiction, and liquidating as many as proves necessary to receive promises of repayment when the market recovers.

[Bob B]

"And of course there is NO Nobel prize in economics."

Try:
http://nobelprize.org/nobel_prizes/economics/laureates/

[ad]

"The problem with any regulation is that regulators are always at an informational disadvantage; outsiders know less than insiders."

There is an incentive problem as well: who regulates the regulators?

Should the regulators also be threatened with death in the event of a financial calamity? Or should they at least risk being sacked, like all those cost-cut bankers we hear about?

"C'mon. The Tories were continually pressing for more and more "deregulation"."

How do you know they were wrong? There was some regulation, we have a crisis. So one of the following statements must be true:

a) There was too little regulation, we would have been better off with more.
b) There was too much regulation, we would have been better off with less.
c) There was the wrong kind of regulation, we would have been better off with different regulations.
d) There was the right kind of regulation, wrongly enforced.
e) This really is the best of all possible worlds, things can be expected to go wrong every now and then under any system. We have had many fat years in a row, after all.

Everyone is claiming that a) must be true, but people always respond to every crisis by demanding more power and control, even when they have no idea what to do with it.

The fact that bank managers cannot manage the banks well, is not a good reason to believe that bank regulators can manage the banks well. Or even better.

[Bob B]

It surely can't be pure coincidence that so many banks in so many advanced market economies have chalked up billions in balance sheet losses from making bad loans and buying toxic assets while directors and senior executives in those very same banks have been paying themselves millions in personal bonuses for doing so.

And all that didn't just come out of the blue.

For an illuminating precursor, see this Wikipedia entry to remind us about an earlier financial debacle in America - the Savings and Loan Association financial crisis of the 1980s and 1990s:

"The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in 'the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.' The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government, which contributed to the large budget deficits of the early 1990s."
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

I first learned about moral hazards and the S&L Association crisis of the 1980s and 1990s on reading the first edition of Donald E Campbell: Incentives (Cambridge UP, 1995) but the obvious parallels seem to have escaped the notice of regulators in America.

Warren Buffett was warning of the lack of transparency in financial derivatives back in 2003:

"The rapidly growing trade in derivatives poses a 'mega-catastrophic risk' for the economy and most shares are still 'too expensive', legendary investor Warren Buffett has warned."
http://news.bbc.co.uk/1/hi/business/2817995.stm

And we had this warning in 2002 about the house-price bubble in Britain:

"CHARLES GOODHART, a former member of the Bank of England's monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

"His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . " [Daily Telegraph 6 April 2002]

It was only last autumn that John Redwood - shadow minister for competitiveness and a persistent caller for deregulation - was complaining that interest rates had been kept too high for too long in Britain, all of which which makes it mighty peculiar how we came to build a consumer debt mountain of £1.4 trillion and get such a bubble in house prices if interest rates were kept so high.

My informed assessment is that few on the Tory front bench know what they are talking about.

[Bob B]

Personally, I think we should try the Admiral Byng prescription on a few bankers just to encourage the others, as Voltaire put it in Candide:
http://en.wikipedia.org/wiki/John_Byng

It did the Royal Navy no end of good thereafter.

[passer by]

Bob B. Line one. what does it mean?

"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"

in simple terms, it means economics is NOT a science.

[Bob B]

"in simple terms, it means economics is NOT a science."

Big yawn. I really don't care whether economics is "a science" - whatever that is - or not.

Economic analysis has to stand on the merits or otherwise of its own arguments. After debating online since December 1995, I've long since learned that debating whether economics is a "science" (often intentionally) results in a long detour from what was the more interesting and important issue at stake.

[passer by]

Well the issue here is there is NO nobel in economics.

[Scorpio2000]

I really want to comment on the rhetoric but really you all just need to watch this (and it's kind of funny):

http://www.youtube.com/watch?v=D4latap0T2c&fmt=18

[Cabalamat]

Wonderful.

[Bob B]

Rather than debating puerile stuff - such as whether economics is a science - it makes far more sense to discuss which industries, if any, should the government support with taxpayers' money in the recession besides banking.

Steel?
http://business.timesonline.co.uk/tol/business/industry_sectors/industrials/article5594811.ece

The pharmaceuticals industry - which GB rates as having priority:
http://business.timesonline.co.uk/tol/business/industry_sectors/health/article5594350.ece

[passer by]

Bob, with respect I think it does matter, becasue it gives the illusion of control, and takes away from the really worth of economics, to give more rigor to political language and discourse.

As the reaction to Chesley Sullenberger skills indicate, we are prone to think more about the things we have some control over than the things that we dont, such as it being a good day for landing on the Hudson.

As for your main point,The only thing we can do, is try to cushion some of the pain, clear the mess up when the correction is over, avoid over correction and cut our cloth accordingly, cut public spending in due course (not now however desirable) then make ourselves efficient and make sure we have learned the lesson of the crash. Restructure our tax system towards LVT,(which we wont) The we can rebuild.

What would I do right now? i would set up some new clean banks.

[The Great Simpleton]

I'm with johnb on the death penalty and China.

If we want a punishment that acts as the best detterent to CEO's and Banlers then we need one that fits the personality. As most have huge ego's and crave public endosment of their skilles perhaps we should follow America's example and have a few more public arrests.

Being marched down to the local nick in handcuffs and surrounded by a couple of uniformed coppers in full public view, perhaps live on TV, will send a fairly strong message. A public trial, also on TV would add to the embarrassment as would a community punishment that requires them to be wearing pink day-glo jump suits.

A few regulators and politicians joining them might ensure that we get the regulatory balance right as well.

[David Heigham]

Juries are reluctant to convict in capital cases (though Civil Death - http://www.use-solon.org/page_1139842933197.html - might help with that).

I suggest that all Directors of regulated institutions and their top management should have unlimited liability. No juries and plenty of unwelcome publicity in the bankruptcy courts.

[john b]

"the issue here is there is NO nobel in economics."

I'm with Dan Davies on this one:

I’m sure you’re right, but among the ones who don’t care are the Nobel Foundation and HM Carl XVI Gustav of Sweden, and this is why they list Economics winners on the Nobel website, the winners call themselves Nobel Laureates, they go to Nobel Awards ceremonies and so forth and so on.

[Doug]

"Dans ce pay-ci, il est bon de tuer de temps en temps un financier pour encourager les autres." -- Voltaire, revised

[Kevin Carson]

A slightly milder response might be sufficient. Every time a story surfaces in the news of bank CEOs squandering money on bonuses and expensive perks after glomming onto billions of $$ in "bailout" money, the U.S. Congress should subpoena the offender. The committee chair should say something like this:

"Apparently you don't yet grasp the situation. We bought you. We own your ass. That's right--you're our bitch. Now do a little dance for us. No, no--that's not *nearly* demeaning enough. Let's try it again...."

[rolex replica]

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