Excessive pay fuels City gambling, says Mervyn King
Gary Duncan, Economics Editor
February 27, 2009
The Governor of the
Bank of England has attacked the “astronomic” pay enjoyed by top
bankers for creating a culture of reckless gambling in the City, but
stopped short of condemning Sir Fred Goodwin’s generous pension.
Mervyn King spurned
pressure from MPs to speak out against the pension of £650,000 a year
that is being drawn by the disgraced former chief executive of the
part-nationalised Royal Bank of Scotland.
He said that he did
not want to “jump on the bandwagon of a rather unappealing sort of
vengeance” aimed at individual bank bosses.
However, he laid
into the City’s multimillion-pound bonuses and said that the “vast
amounts of money” being paid to corporate executives were very hard to
justify..
“The
real question is how was it the case that everyone thought that it was
a good idea that executives should be rewarded in this way,” he said.
“It was a form of compensation which rewarded gamblers if they won the
gamble, but there was no loss if they lost it. It’s obvious that if you
do that you will give people incentives to gamble.” Mr King condemned a
wider culture that he claimed made it “massively difficult” for
regulators to challenge excessive risk-taking without being accused of
being unpatriotic in attacking the City.
He said: “They
would have been seen as arguing against success. The Government would
have been lobbied. It would have been a lonely job.The lesson I would
draw is not to expect too much from the regulators. It’s very hard to
say to someone who appears to be very successful that what you are
doing is potentially damaging to the rest of the economy.”
The remarks came as
Mr King sought to deflect charges from MPs on the Commons Treasury
Committee that the Bank had been “running behind events” in the crisis.
He pinned much of
the blame for events on financial regulators, which he said were ill
equipped. But he also took a swipe at Gordon Brown, suggesting that
excessive government borrowing before the recession had left it badly
boxed in now and having to use tax and spending measures to combat the
slump.
Mr King said that
the scale of government debts had been an issue. “We entered this
crisis with levels of borrowing which were too high and that made it
difficult,” he said.
Mr King insisted,
though, that it was “wild exaggeration” to suggest that a surge in
public borrowing and debt to fund bank bailouts and shore up the
economy meant that Britain could go bust. “We will come through this,”
he said. “There have been downturns and financial crises in the past.
It won’t go on for ever. It will be painful, but we will come through
it.”
With the Bank
preparing to launch radical measures next week to jump-start the
economy through quantitative easing, or “printing money”, the Governor
played down worries that this could eventually stoke inflation. “We are
not going to allow a great inflationary surge,” he said.
As the Treasury
unveiled moves to guarantee “toxic assets” clogging the flow of bank
lending, Mr King admitted that the full scale of support for banks
could burgeon. “How much capital banks will need in the end is
impossible to tell. We should have a detailed, asset-by-asset audit.
Only then can the Government work out how much the taxpayer should pay.”
He called for the Bank of England to be given additional powers to demand information from banks.
— Gordon Brown and
Alistair Darling have been running a “reckless” fiscal policy that will
lead to sharp tax rises and swingeing public cuts after the next
election, the head of a leading public finance watchdog says in The
Times today.
Steve Bundred,
chief executive of the Audit Commission, says that the nation’s
financial situation means that any public servant who does not believe
that there will be spending cuts in two years’ time is living in
“cloud-cuckoo land”.
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