With the talk recently flying around about "Red Ed" Miliband and Marxist Vince Cable, the Economist brings some sense to the debate.
"One of the issues Mr Cable is referring to is the "agency problem" - that managers do not act in the best interest of shareholders. From the figures quoted in the Deutsche Bank long-term asset return study, that is a valid criticism. Earnings per share growth have lagged GDP growth over the long term. Companies have reduced the payout ratio without growing earnings sufficiently to compensate. Since the overall remuneration of executives has grown dramatically faster than GDP over the last forty years, it is not difficult to see where the money has gone.
Or as that well-known Marxist Warren Buffett remarked
"Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay.""
yeah, i'd go with that. free markets rarely work out, and the economist would go along with that to a lesser extent than me, but we broadly agree on the need for regulation:
As for markets being occasionally irrational, we have surely had adequate evidence of that over the last 10 years. Even the renowned free market advocate Alan Greenspan confessed in 2008 that
This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.
The Economist is in favour of free markets, but both words are important. If banks are too big to fail, then their cost of capital is implicitly subsidised. This creates barriers to entry and encourages risk-taking at the taxpayers' expense; the market is thus not truly free. In an ideal world, we ought to be able to let banks fail in the same way that we let widget manufacturers fail. But since bank failures have a devastating economic impact, we need to have some approach to regulating them. Markets also have externalities, a concept long established in academia; a chemical company cannot be free to pollute a river, for example.
To say that any further regulation is socialism, or that any consideration of inequality is misguided, seems wilfully blind. If banks earn huge profits, and their traders huge bonuses, only because of an implicit state subsidy, that seems a legitimate matter of public concern."
and that's the thing - moral hazard. if banks are unwritten by the tax payer then the taxpayer must have a say in how the money is used. if there's a better way to do that than government involvement, maybe a civil servant or two sitting on the board, i'd certainly be open to it. but for the moment, that will have to do