When the financial crisis was unfolding, shades of populism coloured it, as politicians pandered to their angry electorates. Now, that populism has seeped into recovery plans as well.
On Saturday, finance ministers from the Group of Twenty countries targeted bankers’ pay (see Page 22). Of late, pay and bonuses have been on the chopping block. Meanwhile, the public—goaded by its leaders—calls the financial sector “greedy”.
The problem is that in a market, we are all profit-maximizers, and therefore in a sense, greedy.
Sure, bonuses should be linked to performance—as it is, many bankers aren’t punished for extraordinary loss, encouraging risk-taking.
But capping pay is not how the financial systems should be fixed. Instead, these officials need to think bigger: Exotic securities should be regulated, full transparency must be fostered. Excessive pay did not cause Lehman Brothers to fail, or the real estate bubble to burst. Populist answers are convenient but they’re often just incomplete.