By Gordon Platt
After bungling his handling of the Northern Rock crisis in 2007, Mervyn King, governor of the Bank of England, was blamed for creating the crisis that many said made Britain the laughingstock of global banking. King has come a long way since those dark days when he was made the scapegoat for the first run on a major British bank.
Far from being a pushover, King demonstrated his mettle last month when he laid into bankers for giving themselves big bonuses only one year after receiving taxpayer funds that saved their hides. “Never has so much money been owed by so few to so many,” King said, paraphrasing remarks by wartime leader Winston Churchill during the Battle of Britain in 1940.
“Our national debt is rising rapidly, not least as the consequence of support to the banking system,” King said. “We shall all be paying for the impact of this crisis on the public finances for a generation.”
While it remains to be seen if King can use his bully pulpit to make a lasting impact on reforming the behavior of Britain’s banks, many of which remain dependent on the public sector for support, he has put his finger on a critical point. Encouraging bankers to take risks that result in big bonuses when things go well, and losses for taxpayers when they don’t, has created possibly the biggest moral hazard in history, he warned.
While public outrage in the UK could create a political backlash against the perceived avarice of the City’s bankers, reaction has been more muted in the US to news that banks recently on the public dole will soon be paying out billions in bonuses. The American public seems resigned to the fact that little is likely to change in a culture that handsomely rewards star performers, whether they are bankers or baseball players. Government-appointed pay czar Kenneth Feinberg has had some success in renegotiating pay packages with companies that received the biggest bailouts. He says there remains a huge gap, however, between Wall Street and Main Street on what kind of compensation is reasonable.