Last week saw the attempted return to normality for bonuses in the banking world. The arguments were superficially persuasive: that these bonuses were an essential part of successful modern banking. These hugely talented people are in such demand that they will be persuaded to join other banks if the million pound plus bonuses are not paid out. The risk was that the public rescue money sunk into these banks would be jeopardised by their inevitable defection. The recovering share price would fall back. A narrow short-term view that some restraint in remuneration was somehow required in misplaced guilt and shame was counterproductive and would backfire.
The entire (reconstituted) board of one rescued bank threatened to resign en masse if the bonuses were not paid. Here was the private sector standing up to the political pressure, espousing common commercial sense. These champions of capitalism were quietly explaining the cold commercial reality that the public money so painfully invested in the bank would be put at risk by a misplaced blame culture. We all had to adapt to the post-credit crunch world and let go: move on.
I almost bought it, but only for a moment.
The common wisdom is that the credit crunch and the recession which followed were directly caused by greedy bankers. The banks made super-profits on a debt-fuelled spree over a long period of economic stability. This led to overselling mortgages to individuals with a higher credit risk. These mortgages were then bundled up into asset-backed financial instruments and traded around the world, spreading the toxicity and rapidly increasing the risk to other banks, some of which had taken no part in this reckless and viral activity.
As long as there was economic stability, the housing market remained buoyant and interest rates stayed low, this was a phenomenally profitable market. But the moment the market faltered and the economy took a half breath from continuous growth, the underlying risk of high and rising debt was exposed. Confidence was fatally affected.
Even then, it was the banking sector which lost confidence first, and lost it in other banks. The initial squeeze on credit was caused by banks protecting their own position by holding onto cash and refusing to lend to other banks. Because no-one knew the exposure which other banks might have, the contagion spread rapidly. It became a canker, making a mockery of a ‘light-touch’ regulatory regime.
The resulting crushing squeeze on credit was beyond the resources even of the world’s key central banks. The UK government stepped in to provide funds to try to persuade banks to begin lending to each other again. It has so far invested £200bn in trying to protect the UK economy from a deep recession. That is more than the total annual budget for education in the UK.
The ramifications will be felt for years. Pay awards for public employees are likely to be low or nil for the next two or three years at least. Public investment programmes will be cut. Efficiencies and service reductions will be an essential part of the scene, whichever political party forms the next government. Taxes will rise. Living standards will fall. There is no alternative, no plan B.
It is ironic that the failure in the banking market came so soon after the apparent complete victory of the free market and the hegemony of capitalism across the world. The global market had arrived and was unchallenged. The fall of the Berlin Wall, the collapse of the Russian empire, the opening of the Chinese economy all appeared to signal total confidence in ‘the market’. It is the market we should look to. The market will adapt to every circumstance, providing all the answers.
But the governments of the developed world have been forced to mortgage the future to sustain this position. And it is public services which will be reduced to meet the colossal cost of this failure of the market.
So, on reflection, perhaps we should welcome the resignation of the board of directors of any nationalised bank determined to pay million pound bonuses to bankers, no matter how talented they are. The defence that there will be a ‘brain drain’ feels unconvincing. Firstly, there must be displaced bankers available from failed banks. Secondly, this superstar status is bestowed on too many people. The very high salaries which a small number of financial geniuses can command appear to have spread beyond a sensible definition of genius. Pay levels and bonuses were not just to a very small number of talented people, but were paid to many thousands of city workers. That these bonuses could be reinstated within a couple of years of the collapse, as if nothing had happened, as if we are getting back to normal, seems ethically wrong.
The argument that the talented people will immediately be attracted away to rival banks is also a stretch. It paints all bankers as mercenaries, available instantly to the highest bidder. Off at the drop of a hat to bitter rivals for a mess of pottage. No loyalty. No looking back. Cutting and running for the cash: confirming exactly the picture the media has painted for us of bankers. No morality, no ethics: just a free market. It is just as corrupt and extreme a stereotype as the view that all public sector workers are lazy and inefficient.
Most people work hard without getting any bonus, whether in banking or elsewhere. The short-term view that the banks continue to espouse on bonuses may tell us more about their approach to profit and sustainable growth in recent years. Bonuses, even if they are paid, should surely be on longer term, sustainable and realisable profits. They should also be proportionate to pay, rather than many times the basic salary. Banking is not poker. It is not gambling with investors’ money and then paying large sums of cash to the employees rather than the owners of the wealth.
And the argument that if our nationalised banks have to continue this practice of obscenely high bonuses because others will do it if they do not, is also ethically questionable. It is the argument of the arms dealer and the drug dealer. And the introduction of a super tax to discourage the practice is also morally corrupt. The government would benefit from the higher taxes associated with the payment of the large bonuses! Nationalised banks are owned by the public and they are accountable to the public and to government. We should not have to ask them not to do it, nor discourage them. Shouldn’t we be able just to tell them?
Jim Brooks is executive director of Sector
