At last we are getting some hard-hitting ideas about how to reign in and reform free-booting finance capitalism. From those camped outside St Paul’s? A new left wing think-tank? Perhaps a leading financier gone-rogue in the manner of Soros or Buffett?
No, nothing so predictable. The new ideas are flowing from that well known citadel of radicalism in Threadneedle Street. It’s not just the Bank of England’s now familiar, yet still striking, use of aggressive and unorthodox monetary policy that best captures this new disposition. Nor is it the fact that Mervyn King led the way in calling for far-reaching structural reform of the banking system, making it more difficult for the government to recoil from the proposals in the recent Vickers report. In fact, the new radicalism isn’t really about the Bank Governor — rather it’s coming from other senior figures working for him.
This week Andrew Haldane who leads on Financial Stability — a name you may not have heard before, but certainly one you should watch out for — made a powerful proposal about containing the pay of the overlords of finance. His argument is that both short-term investors and bank executives have extracted huge rents from the finance sector, at the expense of other groups like tax-payers and long-term investors. His suggestion is that rather than link bankers’ pay to share value (return on equity) it should be tied instead to the return made on assets (for example, bank loans). A technocratic tweak? Well, it’s one that bites. Haldane points out that if this approach had been followed in the US over recent decades then CEOs of top banks would have had to scrape by with salaries a mere 68 times the typical household income rather than their current ones which are 500 times that of the ordinary family.
And this comes hot on the heels of Mr Haldane’s historically rooted and empirically robust critique of City short-termism — “mounting myopia” as he terms it — as well as his hard-headed assessment of the still unfolding consequences of the personal debt tsunami and its implications for the real economy and households.
None of this is to suggest that Mervyn King himself is becoming a force for radicalism. The Governor’s widely reported opposition to the Bank getting involved in direct lending to businesses, reiterated yesterday at the Treasury Select Committee, reflects a deep rooted institutional conservatism on this front. His recent remarks about how until the recent eurozone crisis things were “on track” with the UK economy look a bit detached, and have already attracted the ire of some commentators. And that’s leaving to one side his hawkish views on fiscal stimulus and controversial role at the time the coalition was formed.
But this doesn’t change the fact that the Bank is becoming one of the most interesting homes for fresh and original thinking about the nature of serious economic and financial reform that we desperately need. That’s not a sentence you could have written before.
So what’s changed? Part of it is doubtless the Bank flexing its intellectual muscle in advance of it reclaiming regulatory powers that it no doubt feels it should never have lost to the FSA in the first place. Another explanation is that the genuine and laudable desire among its leading lights to get ahead of the systemic risks facing economic stability in Britain (and contemporary capitalism more generally). Which in part, at least, will be spurred by the widely shared belief that the Bank fell badly behind events in the recent past: both in failing to see the crisis coming, and then in reacting too slowly in its early days. On top of this, it may also be that Mervyn King, the career academic, may have become comfortable playing the role of “department head”, allowing his leading lights at the Bank to think aloud.
Whatever the reason, it’s a welcome development. Let’s hope the free-thinking in Threadneedle St continues — and that both the Chancellor and his Labour counterpart are listening. They need to be.