Wednesday, 12 January 2011

When "punishing the banks" becomes Self-Defeating.

Ed Milliband's line of questioning at PMQs today was telling. Sod the amount a tax-payer, in this case "the banks" pays. What's more important is the detail of HOW that money is raised. Punishing "The Bankers" is more important than raising money for a near-bankrupt treasury (thanks, Labour) or ensuring that the credit needed for the functioning of the economy is made available by the banks (thanks, Basel III) or that the treasury gets as much as possible back on its investment in 2008.

Bonuses are a way by which Banks, and other businesses match their wage-bill to the success of the business in any given year. Large bonuses have often been in the form of shares - tying key revenue generators into the long-term success of the businesses. Whilst there is a case for politicians to have a majority or major shareholder interest in the remuneration policies of RBS and Lloyds banking group respectively, Barclays, HSBC, Standard Chartered and others which avoided a government bail-out should be able to pay what they like to whomever they like. It is a matter for them and their shareholders.

The (temporary - just wait for the Labour screams when the marginal rate falls) 50% tax band sees to it that HALF of the biggest bonuses go to the treasury, but Labour are suggesting that temporary measures like banking levies and micro-management of private business should be continued, as if the Laffer curve did not exist and the banks had nowhere else to go. That may be true of the bust domestic banks, but the big, profitable international banks currently based in the UK would go elsewhere, unless idiot politicians calm down the rhetoric.

Now I am sure that the performance of Bob Diamond yesterday has seen to it that the coalition huff and puff for public consumption, but basically do nothing, allowing the banks to do what they do best - make money.

It isn't the city-boys who went bust, a point eloquently made by TravelGall to the squaddies. It was the bri-nylon end of banking: salesmen who flogged loans to people who couldn't afford them to buy houses for much more than they were worth in return for sales commission, who caused the crisis. This process was encouraged by a government which wanted to "improve access to home ownership", and regulated the housing markets as if they were a one-way bet. The failure was not of "de-regulated" banking, that end of the market survived the crash nicely and would have done so more profitably had they been allowed, but of the tightly regulated retail and mortgage end.

If left to it (and that includes paying bonuses to people who are making the banks money) the banks will pay more tax to the exchequer, pay back Government loans and shareholdings quicker, beef up their balance sheets to Basel III standards over the next few years AND lend more to people and businesses as the recovery cranks up, and the "cost" of this is that a few key people facilitating this get rich. Aside from a deeply ugly outbreak of the politics of envy, I fail to see what the big problem is...


lost_nurse said...

Aside from a deeply ugly outbreak of the politics of envy

This always gets brought up... but the fact is: across all sectors, many people do immensely demanding and complex jobs - without the need for ridiculous salaries or (IMO) fairly dubious bonus structures.

It's the "paying the brightest and best" rhetoric that I find offensive. I certainly don't envy the overpaid suits.

Jackart said...

The city is a tournament. Few make the mega bucks, but everyone's striving. And as you correctly ascertain, they sacrifice a lot to do so.

You say "many people do immensely demanding and complex jobs - without the need for ridiculous salaries or (IMO) fairly dubious bonus structures"

There are 2 mistakes here, you think that effort and the nature of the job should be rewarded with pay - but what is rewarded is talent and luck. There are bright people in the city, but a lot of the mega-bucks is down to luck in the tournament.

Pay is what you can get. Nursing has a near monopoly employer, so there's no alternative if you want a pay rise. Thanks to the NHS, you have no bargaining power. A good city trader has LOTS of bargaining power, because there are lots of companies who want to employ him, and because you can measure his profits, it makes sense to pay him a proportion of them. So the bonus structure is not "dubious". It is in fact a way to match the wage-bill to the success of the companies, so the workers who earned the profit get some of it.

Newmania said...

Oh sod off I have met enough of these people over the years to know they are nothing special. The sort of rewards on offer which are NOT restricted to the big pay offs .Every idiot middle manager schmoozer and clerk gets gold stuffed into their mouths . This can only be sustained when market entry is being restricted but management has become commensurately shambolic .
Short term this amounts to no more than saying life is unfair but you do not have to wake up a child every day to see that both failure and market entry have to be looked at.
The pay structure may not be dubious but that is a long way from saying the structure and framework of banking is ok as it is. It quite clearly is not,and it is an exemplar of generalized a problem with International Capitalism.
A conservative would contend that sustainable markets and trade stem from trust and custom and workable markets do indeed require regulation of a quite knowing sort
What then do you do about money flowing globally without any constraint whereby it is immune from civilization just as until very recently international relations were ( The Anarchy Of Nations ). Was war ok because it was hard to stop ?
Short term you are right , £7 billion of bonuses versus about £50 billion of revenues to the exchequer it’s a no brainer . Long term banks have to fail and be small , that at least is what my total ignorance and intestines murmur.

Jackart said...

I concurr, banks have to fail and be small, but if a trader makes a million for his bank, shouldn't he get a share? Just as a salesman is remunerated OTE and bonus? If you're skimming basis points of billion dollar trades, you can make a lot of money...

Anonymous said...

I work for a major hedge fund. The taxpayer have supported all banks, even those that didn’t get direct support. By shoring up the financial system, and then launching taxpayer funder QE, they made a one way bet for the city boys. It’s been like shooting fish in a barrel since the dust settled and QE kicked in.

That doesn’t mean that railing at bankers isn’t just empty rhetoric for the masses, or that the taxes stripped from the financial sector are any less extortionate. Government, the public and business have been living off cheap loans from China for decades, but you won’t hear a word from politicians about the first two culprits, much easier to focus on the electorally insignificant investment bankers (who certainly weren’t blameless).

Dangermouse said...

@Anonymous - 4.52pm

I call bullshit - if you do work for a major hedge fund it must be in the catering.

"shoring up the financial system..."

That statement is straight out of the Gordon Brown big book of Economics and is complete shite. RBS and Northern Wreak should of been allowed to go down. I seriously doubt they would of brought the other 1,248 financial services companies in the City (not including the West End or Mayfair) with them.

lost_nurse said...

you think that effort and the nature of the job should be rewarded with pay

I'm not asking to be paid more. I think my salary is (reasonably) commensurate with my role - bastard stressful as it can be.

The point being... in the context of the support extended by the taxpayer (which the likes of Barclays have subsequently benefited from, albeit indirectly) what is often taken as "the politics of envy" is more likely plain ol' disgust.

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