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Why should bankers get bonuses? Teachers don’t
In an extraordinary week that’s seen taxpayers bail out the banks to the tune of £37billion, Frank Dobson and John Mills compare notes on the worldwide financial crisis
THE worldwide banking crisis springs from the failure of market forces and uninhibited competition.
One result of that failure is that fanatical advocates of free markets who usually denounce public spending and government intervention have come cap in hand to the government to ask to be bailed out by the British taxpayer. We should recognise these bankers for what they are, the new scroungers.
The people of this country always seek security: in their homes, for their jobs and for their pensions. In recent times, they have seen all of those imperilled by grasping, greedy, arrogant and stupid bankers whose short-sighted actions were made possible by deregulation initiated by Reagan and Thatcher. This promoted a system based on debt.
We have also seen, as a result of deregulation, the development of hedge funds, increased involvement of private equity and the further promotion of tax havens so that rich people can get out of paying tax.
The deregulated banks have carried out what they portrayed as sophisticated financial transactions. Time and again, their representatives went on TV and radio and gave the impression that what they were doing was too complex for the average viewer or listener to comprehend. They were constantly announcing new products, ever more obscure and nearly always involving debt piled on debt. Those products were all dependent on inter-bank transactions so complex that several members of the boards of directors of the companies involved now say that they did not understand what was going on.
Apparently the only thing they understood was the whacking great cheque that came in at the end of each year to thank them for not understanding what their banks were doing. They apparently could not distinguish between assets and liabilities.
A banker who cannot do that has not got to first base in banking.
But it isn’t just the bank bosses who have failed.
There are supposed to be auditors. What were the auditors of Northern Rock, Bradford & Bingley, HBOS and the Royal Bank of Scotland doing? They were clearly not doing their job, but they were paid a fortune for not spotting that there was anything wrong.
We need a regulatory system that will do something about that. Anyone who has been damaged by the auditors’ failure should get ready to mount a class action and sue them.
Then there are the rating agencies. Until about six months ago, a chap from Standard & Poor’s would come on TV and radio and lay down the law to the rest of us about the wonders and risks of this, that and the other. Now we discover that the rating agencies were giving AAA ratings to pieces of paper that were worse than worthless.
We must not leave the determination of the regulations to the regulators. Their job should be to enforce rules, not make them up.
As we all know, the major problem at the moment is that the banks do not trust one another. The deliberate obscurity of their accounts means that some cannot fathom even the extent of their own exposure, let alone that of other banks.
If the banks cannot trust one another, there is no reason why the British people should trust them.
Some of us have called in the past about tougher regulation of the City of London, but we have been told “Oh, you mustn’t over-regulate, it would inhibit innovation.” Well, we can see where innovation has got us.
The Spanish banking industry, did not get involved in US sub-prime mortgages. That is because the Spanish banking regulations prevented them from doing so. No one can say that those regulations stifled initiative: if they had, the useless people running British banks and building societies would not have seen them taken over by the Banco Santander.
Then there’s pay and bonuses. Even without the bonuses, the pay of some fat-cat bosses in the banking industry is at ludicrous levels.
If we asked people in this country in an opinion poll who should be paid more, a cardiac or cancer surgeon at Bart’s hospital or a banker, I think that the ones doing the operations would get the nod.
As for bonuses, why did those overpaid people need them? Most people do their jobs to the best of their ability for a rate of pay. Why do bankers need bonuses in order to put their backs into their work?
Surgeons and teachers do not get bonuses. Firefighters, police and research scientists work properly without bonuses, so what is wrong with the bankers? They are obviously so ethically degenerate that they cannot work without getting a bonus. Most of them are deplorable failures, so why should they get a bonus at all?
I believe it’s only fair to taxpayers that any bank receiving public money should be treated as part of the public sector, with public sector pay and conditions applying. On a bad day, I think that bankers’ pay should be determined by the Low Pay Commission.
The failures of the banking industry start it off by causing a run on share prices. Then the hysterics in stock exchanges around the world drag prices down even further for fear of a recession which everyone agrees has been caused in the first place by the banking failures.
It’s also true that the share price falls have been worst among those shares most popular with hedge funds and least where there has been no hedge fund involvement. On top of that, the private equity buy-outs based on heavy borrowing are making the system more unstable.
That is what happens when deregulated, free-market, profiteers got us into a mess. We have to change the rules so they can never do it again.
I welcome the new Banking Bill, which is a second instalment in the attempts to deal with the crisis. The first was the Banking (Special Provisions) Bill, which the Tories opposed. George Osborne parroting the views of the British Bankers’ Association wanted the special powers to exist not for a year but simply for a month.
Had we taken that short-sighted advice, the government would have been unable to take the measures to sustain the banking industry and the British economy that they have taken. And in taking such measures, our Government has set an example to other countries around the world.
It’s time to wrest power away from those in finance
WHAT odds would you have got on a bet a year ago that by the middle of October 2008 the Royal Bank of Scotland would have been nationalised?
Who would have believed that a major American investment bank like Lehman Brothers would have gone bust – or even that the stock markets round most of the world would have fallen by about 40 per cent?
The behaviour of many banks – and those who work in them – is surely inexcusable. There are always risks in the commercial world and one of the most important aspects of running any business is to be aware of the risks which are being taken and to be reasonably certain that their downside consequences can be managed.
No such basic rules appear to have been evident in much of what the financial community has been doing over the last few years. Reckless mortgage lending, ever increasingly complicated financial bundling and myriad new intermediaries have left almost all financial institutions with no way of telling what their assets are really worth. This is what has caused the current financial meltdown.
Will this contagion spread to the rest of the economy? To some extent it already has. Sales of big ticket items such as cars, furniture and appliances have already tumbled.
Transactions in the housing market have fallen massively. Unemployment is starting to rise. Most experts, however, doubt whether most of the rest of the economy will be affected that badly. If there is no growth or even a small fall in economic output over the next year or two, the reduction in turnover in financial services and major items of consumer expenditure will largely account for the lost output. The rest of us will carry on much as before. The world will change, nevertheless. Much of the growth we have seen in Britain over the past few years has been in financial services rather than in what many people refer to, with some justice, as the real economy. The collapse in confidence in the City and the banks is bound to make relying as heavily on their activity as we have done recently seem a poor way ahead for the future. What, however, is to replace financial services as a driver for the economy in years to come? This is the really crucial question and the success with which the government – to give credit where credit is due – seems to have achieved in leading the way to containing the current financial problems is going to leave this question as yet unanswered.
What could we do? How, especially, are we going to pay our way in the world? If we are not going to rely on financial services to do this, the only real alternative is to go back to being better at manufacturing. The oil is running out. We are never going run a trade surplus on tourism. We need to make more goods and to sell them abroad.
Is this possible? I think it could be, but not with our economy in thrall to the City and the Bank of England. Instead we need to run our affairs in a way which helps industry and not finance, entrepreneurs and not old money, the provinces more than London, and blue collar workers more than those in red braces earning huge bonuses in the Square Mile. We need much lower interest rates, a far lower exchange rate to make our exports competitive, and then, when it is easier to make money in manufacturing than in finance, higher salaries in industry than in financial services – exactly what you have in the successful Far Eastern economies. When many of the most talented people are in manufacturing – as they are in places like China – the huge productivity gains which industry can achieve drives up the growth rate.
Will this happen? Maybe. Maybe not – but the disgrace in which the City and the banks now find themselves may provide us with the best opportunity there has been for a long time to wrest power away from those in finance to where, in the economy, it really ought to be, which is in making and selling the goods which the world wants.
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