I fear the hostility to the big pay package offered to RBS boss Stephen Hester is confusing the symptom for the underlying problem.
This problem is that the government is missing an opportunity to rethink how banks should be organized. Its big stakes in RBS and Lloyds give it a chance to raise (at least) three questions:
1. How big should banks be? Should commercial and investment banking be split, as Nigella‘s dad has suggested? Should banks become small enough to fail, and if so how?
2. What should be the internal organization of banks? The failure of Goodwin’s Stalinist management is, at least, consistent with the hypothesis that top-down running of huge organizations is a bad idea. What are the merits of the alternatives, such as forms of market-based management, mutualisation or worker-control?
3. If banks are to be the servants of the economy, how should they behave? A new paper estimates that it is corporate lending, not household lending, that promotes long-term growth. But banks have lent twice as much to households as to non-financial companies. How, if at all, should banks be encouraged to raise corporate lending?
Now, I can forgive the government for not having well-thought out views on these questions; after all, it never expected to own so many banks. What’s less forgivable, though, is that it is not taking this opportunity to start a debate.
There is, though, a reason for not having ones. Doing so might reduce the market value of banks. If Lloyds and RBS were to be split into smaller, competitive units they might not raise as much when they are privatized as they would if they remain large near-monopolies - and as the Treasury says, the objective of state ownership is to “create value for the taxpayer as shareholder.”
Which raises the question. Is this an example of the government being altruistic, and thinking about the future interests of tax-payers even though it’ll be out of office when any privatization happens? Or is it just that it has an ideological prejudice in favour of big hierarchical organizations and winner-take-all pay systems?
This problem is that the government is missing an opportunity to rethink how banks should be organized. Its big stakes in RBS and Lloyds give it a chance to raise (at least) three questions:
1. How big should banks be? Should commercial and investment banking be split, as Nigella‘s dad has suggested? Should banks become small enough to fail, and if so how?
2. What should be the internal organization of banks? The failure of Goodwin’s Stalinist management is, at least, consistent with the hypothesis that top-down running of huge organizations is a bad idea. What are the merits of the alternatives, such as forms of market-based management, mutualisation or worker-control?
3. If banks are to be the servants of the economy, how should they behave? A new paper estimates that it is corporate lending, not household lending, that promotes long-term growth. But banks have lent twice as much to households as to non-financial companies. How, if at all, should banks be encouraged to raise corporate lending?
Now, I can forgive the government for not having well-thought out views on these questions; after all, it never expected to own so many banks. What’s less forgivable, though, is that it is not taking this opportunity to start a debate.
There is, though, a reason for not having ones. Doing so might reduce the market value of banks. If Lloyds and RBS were to be split into smaller, competitive units they might not raise as much when they are privatized as they would if they remain large near-monopolies - and as the Treasury says, the objective of state ownership is to “create value for the taxpayer as shareholder.”
Which raises the question. Is this an example of the government being altruistic, and thinking about the future interests of tax-payers even though it’ll be out of office when any privatization happens? Or is it just that it has an ideological prejudice in favour of big hierarchical organizations and winner-take-all pay systems?
not sure about point 3 - lending for consumption smoothing is a different kettle of fish from lending for investment in production and I don't know a priori what the relationship between the two should be - I don't know we can look at household lending being larger than corporate lending and conclude the latter is at the wrong level. Sending corporate lending targets sounds like a very bad idea to me.
What about some other questions, like ... why do banks generate such large fees in the first place? After all, if you hold revenues constant and reduce wages and bonuses, you just increase profits, which doesn't sound like the kind of things all those worried about bankers' pay are shooting for. Why don't banks compete on price and cut each others' margins? Why isn't the supply of would-be bankers enough for competition between workers to drive down wages?
Posted by: Luis Enrique | June 23, 2009 at 03:32 PM
sorry, of course all that household lending isn't for consumption smoothing is it - it's mortgage. typing faster than I think, again.
Posted by: Luis Enrique | June 23, 2009 at 03:33 PM
I would suggest a return to purpose.
What are banks for? What is banking there to do?
These questions contribute to a clearer agreed definition of purpose that should help shape what they look like.
I think that the Stephen Hester pay packet will bounce back and bite politicians in the ass at election day.
It is again a sign that politicians just can't get regulation right, don't understand the strength of feeling and the public mood at the moment and just don't get it generally.
There is no justification for one person, in a bank owned largely by the public, to be paid a hundred times more than the lowest person in the bank.
Posted by: [email protected] | June 24, 2009 at 08:19 AM
Can you please post on the relative possibility that the Iranian woman, Neda Soltan, whom was shot dead by "plain clothed Iranian police officers" was assassinated by a servant of a foreign government rather than the current regime in the country?
The chances are not that remote, given the impact that it could have, the force put upon Twitter by the US government to stay active - thus the Iranian people have an outlet (since none of it was ever mentioned by Iranian news stations).
If you can't beat the system, break it.
Posted by: Tempest | June 24, 2009 at 09:02 AM