Envy over Economics
The Bank of England is the last bit of the British Empire. It was once a grand and powerful body that did great things, both good and bad.
It may come as news to the self important people there that it is not in position to do this.
Firstly of course, they just ain't that smart, and could not work out how to do it. Managers of both BoE and FSA have publicly said they can't attract good people becuase the pay is so bad compared to real jobs.
One person holding a very important job in the government's financial section approached me for a job, and I was genuinely shocked at how little he was paid, less than what a good, but not outstanding PhD would expect in his first year.
Even though King has never had a job in a bank the various drinks parties and cricket matches he attends must have at some time brought him into contact with bankers, so he should know better.
London is now the most important financial centre, and has the ability to innovate around the simplistic controls his staff are capable of generating. There will be of course bureaucracy, which will give these mediocre people something to do, but let us not pretend that a gang of PhD mathematicians in debt markets would have a problem whatsoever in outwitting them. But of course it will get in the way of genuinely efficient incentive plans.
The low pay of BoE staff including King is of course an issue here, he's not entirely stupid, and he did quite well in academia, so naturally feels serious envy for people he feels as his inferiors earning 10 or even 20 times as much.
Economics does have much to say about "agency theory" where the difference between what you pay people to do, and what they actually do is modelled. It is easily the most cynical analysis of human nature I have ever encountered. But in my experience of neogtiating pay for bankers, I can say with complete confidence that this is rarely if ever used. Indeed many people who do money for banks have never heard of agency theory at all.
Agency theory of course predicts that manyjournalists, whatever their base political position go along with him. Many British journalists earn less per hour than I pay my household staff.
It is tempting, but naive to believe that senior staff can be precisely incentivised to get the "optimal" risk for the bank. First up, this is not a constant over time, are you going to calibrate it in real time ?
I can imagine a future where you don't get a contract, but a spreadsheet with a real time data feed. I can also imagine a future of alien invasion. My bet is on the little green men coming first.
Also, there is the obvious, but awfully difficult case of someone who does a good job for 5 years at a bank, then leaves. Why should he be hostage to what his successor does. Will the successor not have a huge incentive to load losses on the outgoing manager ?
Even if you get past this, the sums of money involved are such that financial engineering will quickly erode what in financial terms is a clear mispricing.
Share options can be bought from staff (at an appropriate discount), as can shares, etc. This happens already. Sure you can pass laws against it, but that just means an extra level. How for instance do you stop loans secured against future earnings ?
The BoE is neither feared, nor loved. Opinion is divided between those who blame the FSA for the Northern Rock disaster, and those that hold King himself personally responsible. Like most people I was truly surprised he survived the gross mishandling of this crisis, the first run on a bank in a generation.
This is not an idle threat to the working of the London Markets, which of course is a people business, and losing talent to NY and Chicago, even Paris would hurt.
Non-British readers may be surprised to know that the government that took Britain into the Iraq war, supports GW Bush, colludes with the CIA to torture British residents, deports children away from their parents to places like Libya & Nigeria and raises tax on the most lowly paid to make richer people pay less ,is actually the Labour party. Ie the left wing section of Parliament. The current situation is not unlike McCain being in charge of the Democrats. Except of course (right wing) McCain is an implacable opponent of torture, whereas (left wing) Brown sees it as a business process to be outsourced. But...
The Labour party is full of people who despise the rich, which they defined as couple of years ago as any household that makes > $100K a year. This sort of rubbish would keep Brown's backbenchers happy.
