Martin Wolf

Moral Hazard



Skuldkrisen 1982


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"Pay bankers more than other workers because their talents are so rare?
You must be joking"

The statement that systemic breakdowns are surprisingly rare
in the free-wheeling Anglo-Saxon model is false.
Martin Wolf February 9, 2009

The US is the home of this system and, as I have already remarked, many money-centre banks were more or less insolvent
in the early 1980s, because of the Latin American debt crisis,
insolvent again in the early 1990s, because of the real estate crisis,
and insolvent once again now, in the sub-prime crisis. Three times in three decades is not a rare event.
In all these cases the banks were rescued by massive, though largely concealed, government-provided subsidies.

It really cannot be argued that this is a fundamentally safe system. It is not.
It is one in which weak regulation has consistently led to excess and then breakdown

The first is whether it is desperately important to pay bankers more than any other workers in a society (these are not entrepreneurs, after all), because their talents are so rare and so socially valuable.
The answer to this is: you must be joking.

The second is whether governments have a legitimate interest as risk-bearers of last resort in the incentives provided by the structure of remuneration at least, if not its level.
The answer to this is: of course they have

The third question is whether it makes sense to separate out a regulated utility banking industry from free-wheeling capital market-oriented institutions.
On this last point, I have an open mind, though I am inclined to believe the answer is: yes.
The fact that US legislators reached this conclusion in the 1930s seems to me quite important.

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