As the 2009-10 political season splutters into life there is no bigger question facing this country than the future shape of our most important industry: financial services. In this month’s interview with Britain’s top financial regulator Adair Turner, a respected group of experts talks about the swollen size and excessive profits of high finance using language that would, until recently, have been heard only on the wilder reaches of the left. Turner himself even backs a global Tobin tax on financial transactions, something normally sneered at in the Anglo-Saxon world. Yet the crisis—in Britain at least—has not benefited the left. Instead it seems to have prompted a fresh bout of political cross-dressing with the Tories raging against their own City backers and Labour cursing the fat cats but unable to do anything constructive about them—a further coda to its slow death.
Notwithstanding Turner’s bold words, his Financial Services Authority has lately been under fire not for its radicalism but rather its feebleness in the face of a revived bonus culture. And there does seem to be a case to answer. There is now a broad consensus that big City bonuses are both morally dubious and contributed to the crisis through encouraging excessive risk. Yet, just one year on from the fall of Lehman, here they are again, this time partly underwritten by the taxpayer. Government ministers (in private) and George Osborne, the shadow chancellor, blame the FSA. But this is not fair: the FSA doesn’t have the legal authority to cap pay or bonuses. The government does have the authority.
Parliament could pass a law banning pay above, say, £500,000 a year in the City—but the law would either be side-stepped or financial firms would leave London. More practically, why isn’t the government using its powers as a shareholder in Royal Bank of Scotland and Lloyds (and as a provider of state guarantees to private banks like Barclays) to enforce better behaviour? It must be possible to apply some sort of check on bonuses without sinking the City. The deeper problem, as Turner points out, is that bonuses are a symptom of the super-profits earned by wholesale financial firms. What is required in the longer run is more vigilance from big investors (pension funds and so on), global agreements that constrain the market power of financial insiders in the world’s biggest industry, and perhaps even a shift in the moral…