View source for User:MinetteShephard226

THE man who the polls suggest will be the next French president, Fran�ois Hollande, claims that finance is his �real adversary� in the coming election. Britain has just stripped the former chief executive of the Royal Bank of Scotland of his knighthood. Even Newt Gingrich is attacking the �vulture capitalists� in the private-equity industry. Perhaps the West is set for a �war on finance� along the lines of the �war on terror�, with similar uncertainty about how to define victory.

Politicians seem to have three main beefs with the financial sector. The first is that bankers earn too much. The second is that banks take reckless risks and then need rescuing by governments. And the third complaint is that investors in financial markets have undue influence over an economy through their ability to affect bond yields and equity prices.
In this section

The first two problems are really related. People do not worry too much about footballers� high pay. The problem with bankers is the extent to which they are subsidised by explicit and implicit taxpayer support. (Of course, you might worry about income inequality in general but that is not specific to banks and can be tackled by redistributive taxation.) It is hard to disagree with Paul Tucker of the Bank of England, who has written that: �Those who most espouse the disciplines of capitalism�bankers and financiers�should live by them.�

The problem of banks being �too big to fail� is being addressed, albeit slowly, by the higher capital ratios being imposed by regulators. Higher capital ratios should mean lower returns on equity; over time, this should lead to less rapid pay growth for bankers. Andrew Haldane, a colleague of Mr Tucker�s, has found that the pay of bank bosses correlated well with returns on equity, but not with returns on assets�in other words, managers prospered by gearing up bank balance-sheets. That is now harder to pull off.