This week Gordon Brown, the British prime minister, announced the four principles that will guide his planned regulation of bankers’ pay. There will be no rewards for failure. Bonuses will be based on long-term performance. Bonuses will be “clawed back” if profits subsequently decline and banks’ bonus plans will be supervised by the regulator. Mr Brown believes that ending the alleged “short-term” bonus culture of the banks will help to avoid future financial crises.

It will not. To see why, imagine you are the manager of a lottery company. Your job is similar to a banker’s. You sell tickets (make loans) that have a certain probability of winning a prize (of defaulting). To ensure long-run profits, you must set a price for the tickets (charge a rate of interest) that is sufficient to pay out the lottery winnings (cover the cost of defaulting borrowers).