Adair Turner: who are you calling economically illiterate?

Adair Turner, Chair of the Financial Services Authority, says that the FSA should not be expected to curb city bonuses:

Lord Turner, head of the Financial Services Authority, said it was “economic illiteracy” to expect his organisation to be able to dictate to banks what they paid their staff.

He complains that is is beyond the remit of the FSA:

“My message was . . . stop telling the FSA to go beyond its remit and to start imposing limitations on the level of bonuses, which it is neither within our legal power or our practical ability to do,” he said.

Well, up to a point, Lord Copper.

It all depends on why you want to curb city bonuses:

  • concerns about social inequality
    If inequality is your motivation, Adair Turner is right. This is for the Government to sort out, not the FSA.
  • concerns about the cost to the banks
    If you are worried about the cost of salaries, this is for the shareholders to sort out. Again, since the Government is a big shareholder in a number of the banks, the Government could take steps to address it.
  • concerns that bank staff have incentives to take unnecessary risks
    But this is squarely the business of the regulator.  If you think that the bonus culture leads city folk to take risks with our money because the bonuses reward short term payback and do not sufficiently penalise long run losses, then this is something the FSA should sort out.

So it is not economically illiterate to think that the FSA should look at city bonuses, if there are concerns that they might create incentives for risky behaviour that we want to avoid. (I have no idea whether the FSA  the legal powers to do so: but that is a different point.)

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