Bankers’ bonuses-the great evasion

4 09 2009

images[9]The G20 meeting of finance ministers this weekend and the G20 itself two weeks later both look set to be dominated by the issue of bankers’ bonuses. Gordon Brown has joined with President Sarkozy and Chancellor Merkel in signing a ‘letter of intent’ to find a way of bringing banking remuneration under control.

Why are they focussing on this issue? Is it because the question of toxic finance, which triggered the recession, has gone away? Not at all, in fact banks around the world are still sitting on trillions of dollars worth of rubbish investments. The only reason they have not been written off as losses in their entirety is that such a move would render the banks bankrupt. Instead the bust banks continue to be propped up by government guarantees. The response of the banks has been to desperately save as much cash as possible to rebuild their balance sheets instead of lending it, which after all is their prime function as businesses, leading to a continued credit crisis, particularly in the UK and the US.

Is the focus on bankers’ bonuses  because the impact of the recession has gone away? Absolutely not. Unemployment is rising throughout the developed world and while there are some signs that the fall in production has stopped, there is little evidence that the world economy is back on a growth trajectory.

So, if there is still much to be done to get the world economy back into growth mode why the focus on bankers’ bonuses? Firstly, political leaders  are under pressure politically to find scapegoats for the crisis. The bonus issue has been the one thing that has stuck in the public mind as an ‘explanation’ for the crisis. The absence of any serious public debate about the recession and its causes has reduced the public discussion to a mere scapegoating exercise. Politicians posturing on the world stage about the need to contain bonuses is a cheap political gimmick aimed for domestic audiences. As there is almost no possible way in a market economy to restrict the pay of the rich, it is doomed to failure even were the political will really there to carry it through.

Secondly, a debate focussed around bankers’ pay  helps to distract attention from the fact that the world’s leaders have very little to say about the real long term problems facing the world economy. There is little evidence of a willingness, for example, to address the question of global trade imbalances which lie at the heart of the world recession. The G20 will discuss bankers’ pay because they have little else meaningful to discuss. The prevailing mood is to hope that we are out of the worst and that ‘business as usual’ can be resumed as soon as possible.

There are good reasons to oppose any restrictions on bonuses, but we should be clear that the fact that any debate about it at all is taking place is a clear sign of how empty the public discussion of the economy has become. It is a warning that there could be much worse to come down the line.

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4 responses

4 09 2009
jimbartlet

What an empty headed post this is. You admit that banks are not lending, and you say they are hoarding in order to balance their sheets, then you try and justify banker’s bonuses. I see no qualifications for your statement that this is a clear sign of things to come. You are talking for the sake of it, while saying very little.

One of cScape’s customers is Barclays, is this sucking up attitude really going to gain more of the like?

6 09 2009
Mike

Jim,

In the above section i can’t see any point where rob justifies the bonuses of the bankers, he is infact saying that the G20 is only focusing on the bonus culture becuase it makes for an easy “bankers are wankers” scapegoat for the public, whereas it isn’t dealing with the real problem behind the recession which is toxic investments that are swimming around in banks at the moment.

The toxic investments are the problem because as Rob points out the banks can’t write them off because (point out if i’m wrong Rob) the huge losses that would incur, would cause even more panic in the financial world which would lead us into even greater financial turmoil. But they can’t sell them on as they are completely worthless causing the banks to try and raise captial in ensure themselves against collapse by not lending which in turn is causing a credit crunch.

Rob is not excusing the bonuses, he is telling you why capping bankers bonuses would please the crowd but not do much to get the banks lending again or do anything about the toxic investments which is the real problem a strategic thinking group like the G20 should be busy solving.

8 09 2009
Stuart Simpson

I have to say that I think there is more to this debate than you suggest.
I agree with the two points you make. The search for scapegoats and the need to be seen to do something are both important factors behind the drive to regulate bankers’ pay.

But there is a legitimate discussion about how the incentive structure within the City has encourage some to seek short-term gains while increasing long-term risks, i.e. it is argued that bonuses help inflate bubbles. Whether I agree with that or not is a different issue – but it is a sensible argument.

Secondly, I think you fail to highlight the differences of opinion in the debate, between the discussion in the UK and the discussion in France in particular. You imply that there is general agreement amongst policy makers. This isn’t the case – the focus within the UK is to act to increase the capital reserves banks hold, while the French have argued that this is not a concern.

“We need to have a good and sound explanation among ourselves concerning what Basel II is about. It has been significantly improved, amended over time . . . and, as revised, I would have thought that addressed the issue”

Christine Lagarde, French finance minister

How to ensure that either future losses incurred by the financial sector are reduced through acting to prevent bubbles by amending incentives is not an empty debate.

Neither is the discussion over how to ensure banks are better able to absorb future losses through increasing capital reserves.

These debates may not be as important as the debate over how to stimulate dynamic growth within the wider economy – but they are important and serious debates.

12 04 2010
Ten questions to ask your candidates about the UK economy « UK After The Recession

[…] What do you see as the cause of the economic the crisis, greedy bankers, greedy people or the over reliance on the finance […]

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