Does Martin Wolf like you? Or perhaps more to the point – if you work for a bulge-bracket investment bank – after this morning’s article, do you like Martin Wolf?
By paying huge bonuses on the basis of short-term performance in a system in which negative bonuses are impossible, banks create gigantic incentives to disguise risk-taking as value-creation.
We don’t mean to be glib. Wolf’s analysis is timely, to the point, and sure to inflame sentiment among the city’s finest. The Raghuram Rajan article in the FT last week certainly raised heckles.
Mr Wolf says he’s not prejudiced about bankers, he’s “postjudiced”. And the only answer he can see to runaway bonuses, loath as he is to admit it, is regulation:
Yet individual institutions cannot change their systems of remuneration on their own, without losing talented staff to the competition. So regulators may have to step in. The idea of such official intervention is horrible, but the alternative of endlessly repeated crises is even worse.
I understand that the bankers will not like this. Yet one thing is surely now quite clear: just as war is too important to be left to generals, banking is too important to be left to bankers, however much one may like them.
Martin Wolf: Why regulators should intervene in bankers’ pay
Update: Yves Smith at naked capitalism weighs in; “Martin Wolf’s current comment is great fun. He makes a recommendation which is logical and well argued but so contrary to the prevailing orthodoxy that it is sure to elicit a lot of ire. And I guarantee it will be misconstrued as well.”