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Bowler hats or Ferraris?

January 18, 2011

Aditya Chakrabortty in the Guardian debunks two of the myths about banker’s bonuses: first, that complex tasks need bigger rewards. Aditya cites economic research showing that it’s the other way round – that people who perform menial tasks work harder if they’re incentivised, whereas more money doesn’t make any difference to those who do complicated stuff (it would have helped if he’d explained why).

The second myth is that banks need to pay mega-bucks to keep their superstars. Apparently someone called Boris Groysberg found that when bankers switch employers they get worse at their jobs. They need support from the colleagues and the institution that made them great. It isn’t all down to individual performance. And technical skills aren’t all that rare anyway, when Asia is producing hordes of maths and engineering graduates.

There’s a third argument, which Aditya doesn’t talk about. Do we actually want banks to be run by brainbox technicians, skilled in the art of financial wizardry?

The global financial crisis was partly about the long-term build-up of complex forms of investment as global competition increased. Banks competed furiously, with what Marx called the ‘roving cavaliers of credit’ creating dodgy investments because they were so frantic for returns. Unshackled by financial deregulation, CDOs, CDSs and other derivatives reached epic levels. This process inflated a debt bubble, which eventually burst. Many of the new forms of capital were exposed as fictitious.

None of this could have been done without the financial wizards. You need a good Masters’ degree in maths to be able to understand, let alone construct the more exotic credit derivatives, and even then many banks failed to appreciate the full extent of their liabilities. Bankers stopped being boring; they ditched their bowler hats and bought Ferraris.

But do Ferrari-driving bankers best serve society? If the end result is a crisis that plunges the world into recession, then probably not. Like in any job, a certain level of talent is required to run a bank, but it shouldn’t require technical skills and rewards far above those of the rest of society.

We should cap banker’s pay at a level on par with other socially-useful occupations. If banks fail to attract young high-flyers, and the rocket scientists quit, then all the better. They can go and design rockets. Of course they might leave the country — but so far suspiciously few appear likely to follow through on their threats — and that’s why regulations need to be international. Hopefully, more technically-qualified people would move on to more productive occupations in medicine, engineering or science.

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