The debate in the U.S. over how to reform the financial system has been overshadowed by the health-care hubbub.

It’s been a bit hotter in Europe recently. To see a bit of what we’re missing, check out Philip Stevens good column in the Financial Times today.

His essential point, and it’s a critical one, is that simply trying to cap bankers’ pay is likely to be futile. Stevens, via Lord Turner, the chairman of the Financial Services Authority, raises the point that the size of of the banking industry itself causes outsized pay.

Thinking aloud during a roundtable discussion reported by Prospect magazine, (Turner) said bonuses were as much a symptom as a cause. Policymakers needed to ask more fundamental questions about why financial services generated such vast profits and about whether the industry had grown so big as to outstrip its usefulness to the rest of the society.

His tentative conclusions were damning. Activity for the sake of it – a characteristic of bloated and ever more complex wholesale financial markets – serves only those who manage to extract large profits from the enterprise. “Stunning” levels of pay are not a measure of efficient markets or individual brilliance, but of a market failure providing large “rents” to a small group of players

Regarding the size of the financial sector, economist Simon Johnson points out that the industry recently accounted for some 8 percent of total gross domestic product and a whopping 40 percent of corporate profits.

“Just what do the banks offer the rest of society to deserve those vast profits?” Stevens asks. Good question.

What are we going to do about it? he also asks. Alas, Stevens is as pessimistic about the Brits as many of us in the States are about our own governance:

Even as they stash away this year’s bonuses, the bankers are betting that politicians and regulators will bow before demands that they protect London’s “competitiveness”. I fear they may be right. Lord Turner, though, has at least mapped out an alternative.


Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.