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.





The summer is over, what has changed and what needs to change?

2 09 2009

images[6]After a six week break I am returning to the fray, refreshed, reinvigorated and ready once again to try to make sense of the complex economic environment in which we live. The first thing to do is to draw up a balance sheet of what has happened in the intervening period before setting off into the future. So here goes:

1.As we explained back in May, while there are some signs that the technical recession, two or more quarters of negative economic growth, may be coming to an end, this does not mean that our problems are over. The financial crisis has to some extent been stabilised, but not resolved, through the massive and coordinated actions of central banks across the world. However the real impact of the recession is only now beginning to be felt. Unemployment is continuing to rise across the world and consumer spending is falling in most places. Real hardship is being visited on millions as a result.

2. The underlying causes of the recession have not been tackled,although there is increasing recognition in some quarters that this is the case and that we are storing up trouble for the future. The prevailing sentiment is that we should return to business as usual as fast as possible. While many see that there are problems with this approach, in the absence of any alternative plan this view will of necessity prevail.

3. There is an  intellectual void in the sphere of economics which is being filled by the irrationalities of the behavioural economists. The conclusion that many in the elite are drawing from the recession is that the view that the market is rational, which has prevailed for the past thirty years, can no longer be accepted. The problem is, as I argued in my review of a book by leading behavioural economists, that rather than this leading to a search for a more rational way of understanding and managing the economy, many are now saying that this proves that there are no rational explanations for human economic behaviour. This view and its consequences was summed up thus by Gillian Tett,

However, the unpleasant truth is that there is never going to be any complete intellectual system to explain how financial systems should work. ..That is not an easy idea to sell to politicians, voters or even regulators. After all, as Lord Turner points out, a world without a reliable compass is frightening, exhausting and time-consuming to navigate: “For the regulators of the world, once you have accepted that you don’t have an intellectual framework of ‘more market is always better’ you’re in a much more worrying space, because you don’t have an intellectual system to refer each of your decisions.”

4. In the UK the political parties are beginning to prepare for the next election in which the state of the economy is going to play a key central role. This discussion will take place in an  intellectual vacuum, or at best an intellectual climate in which the irrational is celebrated over the rational. The terms of the ‘debate’ will be over narrow issues, such as whether to call cuts in public spending ‘cuts’ (Tories)or ‘tough decisions on spending’ (Labour)

To sum up, we are entering a darker economic period with no intellectual framework nor any effective political leadership to help steer us through it. In these circumstances it is vital that more people focus on trying to comprehend the present as well as working out alternatives to what is on offer. This will remain the focus of this blog in the months before the next general election in the UK.