Comments

1. #1 Dean Morrison

   2009/09/05

   The reason why the French and the Germans want universal action on this isn’t so much that they are worried about losing ‘talent’ as they are losing entire institutions as they bankers uproot them to move them to countries where the pickings are easier. It’s simply a matter of not wanting to be undercut in the same way that offshore tax havens undercut wealth producing nations.

   [It doesn't really matter if the question is losing individuals or institutions, the argument is the same I think. It is either worth having or not. You might I suppose argue that things would be better without bonuses, and you might even be right, but that hardly calls for G20 action -W]

   Quite what the ‘talent’ was that ended up in us bailing out the banks in the first place is rather hard to see.

   [In which case, why do they care if they lose it? -W]

   As for shareholder control – in theory that should have prevented excessive salaries and bonuses in the first place – but quite clearly it didn’t. Why should it be a sufficient solution now?

   [Because it is easy to see problems in hindsight and hard to see them with foresight. Two years ago, the idea that bankers bonuses were going to melt the worlds financial system wasn't commonplace. Now everyone, including those shareholders, does know. So they can stop it. If they want to. But they don't want to -W]

2. #2 CRM-114

   2009/09/05

   The top talent is what got the world economy into this mess. They were gambling vast fortunes on derivatives, based on the assumption that any individual loss would be negligible and independent.

   [I disagree; it really isn't that simple. There are many explanations of what happened, but none clearly correct. Most likely, the combination will be worked out after a lot of scholarly effort. But, suppose you are correct: and suppose furthermore that the G20 and the banks agree with you: then the bonus problem is solved without any need for legislation: no-one will wish to pay bonuses to useless people, will they? -W]

   It turns out that bubbles are built by overconfidence. As prices are bid up, people invest more, overpricing the market. Then, when confidence falters, there will be a rush to dump stocks, pull deposits, and call in loans.

   [Err yes. Read the crash of '29 by Galbraith. I am -W]

   An alternative to bonus is ‘malus’. How about for every million dollars in losses a banker caused, he gets a year in prison?

   [Thats asymmetric. You aren't offering them an extra year of life for every $1m gain -W]

3. #3 JamesG

   2009/09/06

   You’re failing to subtract the amount lost in the last two years from the amount earned in the previous 15 or 20 when you say that bankers earn money for their firms. Ultimately these chancers have collectively lost more money than they gained. This nonsensical idea about paying to attract the best talent ignores the salient fact that if you lose more than you earn over the long term then you have proven to have no talent worth keeping. Do you always just count the ups and ignore the downs?

   [No. *I’m* not doing the arithmetic – I don’t have the numbers available (I may have given the impression that I think they are a net positive; if so, sorry. I have no real opinion about that one way or another. I’m presenting the logical consequences of the G20′s position, and pointing out that it is inconsistent). The G20 are doing the arithmetic. They think that paying to attract the best makes sense, or they wouldn’t oppose unilateral caps on bonuses. Of course they could be wrong – indeed, I think they are wrong about many things.

4. #4 Phil Hays

   2009/09/06

   The bonus culture isn’t symmetric as well. As others have pointed out, there is an incentive to take risks. When the bet pays off, then the shareholders get rich, the bankers get bonuses, and all is well. When the it loses, the share holders lose their bet, the bankers don’t get bonuses, and the taxpayers get stuck with much of the loss. It is important to realize that even a net losing bet is profitable for the share holders, management and their employees, as part of their losses are socialized, ie paid out of everyone’s pocket.

   [and the taxpayers get stuck with much of the loss - I think this is questionable. But even if true, then the solution is: work out how not to get stuck with the loss -W]

   The employees of the bank, making bets for bonuses, are not the key problem. If bonuses were banned, then some other way of compensating employees for taking and winning bets would replace bonuses, as there is still incentive for shareholders is still to have the bank make risky bets.

   [OK, agreed -W]

   If the taxpayers are expected to cover the losses, the tax payers should have a say in how the business is run. It needs to be simple, easy to administer and effective in limiting risk to taxpayers.

   [Agree with your *if*. However, I think the solution is to stop having the TP cover the loss (if indeed they are, which I consider dubious). I don't think having the govt run the banks is a good idea, and the govt rather seems to agree - at least in the UK, where "we" majoity-own one or more, the govt has rather run away from actually using that majority control -W]

5. #5 Dean Morrison

   2009/09/06

   I applaud entrepreneurs who take risks, usually with their own money, and reap rewards when they produce products and services that are a benefit to society.

   The bankers are rewarding themselves as if they are entrepreneurs, or actually rather better than all but the luckiest entrepreneurs, without taking any equivalent risk.
   As long as the global stock market was rising, it would actually be hard not to make profit on trading and fancy financial transactions – and the inflation of that market simply inflated those rewards.

   It is clear that any risks were ultimately underwritten by the public, without our consent.

   [Clear to you but not me -W]

   Abolishing bonuses would be silly, but there it seems eminently sensible that these are subject to a reality check, relate to real and longer term gains and reward added value rather than luck. They should reward above average performance, and not just performance that looks good because there is an artificial boom.

   [Um yeeeesss. I'm quite happy to agree that a change in the bonuses would be a good idea. The question is who should be leading this? The problem you identify isn't confined to banks; many many businesses suffer the same problem. But I don't see that government micro-management will help -W]

   It isn’t possible to achieve this without global action – institutions and activity will shift to wherever the rules are the weakest. That won’t stop the impact being felt everywhere else the next time the whole sorry episode happens again. There needs to be a clampdown not only on tax havens, but also rogue centres of financial chicanery like Iceland.

   [Why should institutions shift? Because they will lose their best people, who will chase higher bonuses? Isn't that just conceeding my point: that the remain competitive, these institutions need to pay absurd amounts of money? -W]

   I’m afraid a self-controlling free market is a nice idea, but the supposed stability promised by the internal checks and balances of the market has turned out to be a myth. More regulation is needed, and that includes a greater focus on the motivation and incentives offered to those controlling the system, as well as the banking system itself.

   This article by Paul Krugman is instructive:

   http://www.nytimes.com/2009/08/03/opinion/03krugman.html?_r=2&adxnnl=1&ref=opinion&adxnnlx=1249304676-mDiSQ0yDhjzLlz1BgJSWKg

6. #6 Phil Hays

   2009/09/07

   [and the taxpayers get stuck with much of the loss - I think this is questionable. But even if true, then the solution is: work out how not to get stuck with the loss -W]

   That was the case in the USA before the 1930′s. Bank failures were losses for the depositors. What this meant was that when the economy slowed, the depositors would start to withdraw money and put it in their safe or bury it in their yard (or what ever), which helped to destabilize the economy even more. If not the taxpayers, and not the depositors, then who? And how?

   [Agree with your *if*. However, I think the solution is to stop having the TP cover the loss (if indeed they are, which I consider dubious).]

   Indeed they are, in the USA at least. It is one thing to disagree about what to do, and another thing to disagree about the facts.

   In the USA, $200 billion for Fanny Mae and Freddy Mac from the Treaury, and another $360 billion from the Federal Reserve. Washington Mutual, 700 billion in assets (mostly bogus home mortgages) that might be worth 400 billion or less. And so on, and so on. FDIC is mostly out of reserves, the Treasury will need to start to kick in more funds soon.

   [FM & FM aren't the "bankers" in the sense of the current moral panic. Indeed, aren't they (and weren't they) essentially organs of the state? -W]

   In Canada, where I’m currently working, the banks are and were tightly regulated and didn’t fail. Current cost of all this to the Canadian Taxpayers, zero.

   Canada might be on to something.

   [Or, indeed France. Or Germany. All of these countries have bankers -W]

7. #7 Bishop Hill

   2009/09/07

   You question Dean Morrison when he says that it’s clear the risks were underwritten by the public without their consent. I would have said it was clear that the public were underwriting the risk – this is explicit in the role of the central banks as lender of last resort. It’s debatable that the public didn’t consent though – they can be argued to have voted for such a system.

8. #8 Phil Hays

   2009/09/08

   FM & FM aren’t the “bankers” in the sense of the current moral panic. Indeed, aren’t they (and weren’t they) essentially organs of the state?

   They were once essentially “organs of state”, but they were privatized. They are now kinda weird: they owe the government (and the Federal Reserve) far more than they can hope to repay, but stock still trades. Still pays million dollar bonuses.

9. #9 Dean Morrison

   2009/09/08

   @ Bishop Hill:

   “It’s debatable that the public didn’t consent though – they can be argued to have voted for such a system.”

   That’s an interesting point – although I don’t seem to remember a proposal that the public should underwrite the fun and games on the financial markets appearing in any party manifesto. The public were clearly ignorant of the risk they were being exposed to.

   We’re not now, and we have every right to put an end to those antics if we choose to. Democracy trumps free-market ideology – the question is to what extent we live in democracy, and to what extent the bankers still call the shots. The reason why global action is needed is so that the bankers don’t slip off to the protection of nearest flag of convenience.

   http://www.bloomberg.com/apps/news?pid=20601170&sid=aX8D5utKFuGA

   As for the ‘best people’ and ‘talent’ – I’m entirely unconvinced that these guys are quite as clever as some people think they are. There are winners in every casino, and if you’re in a weird casino where you get to use other people’s money to print more, you expect rather a lot of big winners. They don’t need much in the way of talent – being privileged and lucky will suffice.

10. #10 James Annan

    2009/09/09

    The idea that the bankers are more talented than, say, scientists, is laughable. Moving into finance is a typical career path that a scientist who either doesn’t want to continue, or is unable to survive, in a research career. (I’m not saying they are all failed scientists, though.)

    [I think that a really talented person could make far more money in banking than in science. So given the lure of money, it is entirely possible that the average successful banker is more talented than the average successful scientist. But how you would measure that I have no idea -W]

11. #11 Phil Hays

    2009/09/09

    Germany and France didn’t need to have local bank bailouts, as the US taxpayers did it for them. “French and German banks, which pulled in $19 billion and $17 billion respectively” (through just the bailout of AIG).

    [Um. The problem with noticing this is that the country most in favour of limiting bankers bonuses is France -W]

    UK’s Barclays was given $8.5 billion. Divided by the population of the UK, that is just $140 each person, or $560 for a family of four. Say thank you. Didn’t Barclays manage to avoid a UK government “investment” (aka bailout)?

    [Sorry, don't understand you. Barclays was given $8.5B but avoided a bailout. What do you mean? (disclosure: I have shares in Barclays, bought precisely because it was one of the few UK banks to avoid being touched by the govt) -W]

12. #12 Phil Hays

    2009/09/10

    Barclays bank owned defaulting mortgage backed securities, guaranteed against default by AIG, which had no assets to back up the guarantee. Without the US taxpayer funded bailout of AIG, Barclays bank would have lost $8.5B. Barclays, at least judging from the news articles I’ve read, was fairly close to needing a bailout from the UK earlier this year. Was the $8.5 billion the difference between independence and bailout? Maybe, maybe not. Surely didn’t hurt. It was at minimum (disclosure: while I’m currently paying Canadian taxes, I was paying US taxes earlier this year.)

    [Ah I see. Well, thats very generous of the US taxpayer :-) -W]

13. #13 Dean Morrison

    2009/09/10

    [I think that a really talented person could make far more money in banking than in science. So given the lure of money, it is entirely possible that the average successful banker is more talented than the average successful scientist. But how you would measure that I have no idea -W]

    - actually a really talented person would probably make most money (and cause much less damage)through crime. However that wouldn’t justify letting them get on with it.

    There is no reason to take fatalistic attitude to the status quo, nor to accept that it is the best and only system on the basis of free market dogma.

    The Dutch don’t see it that way, and they’re as sensible as you get:

    http://news.bbc.co.uk/2/hi/business/8246651.stm

    Lets see if there is a mass exodus of ‘talent’ from Holland on the basis that if you can’t double your salary every year, its hardly worth getting out of bed in the morning… ;)

14. #14 James Annan

    2009/09/10

    The mass exodus thing is fairly obviously specious bullshit too. You don’t hear people saying we must increase the minimum wage or else all our burger-flippers will head off to Sweden (or wherever). Funny how the only way to motivate the well-paid is to pay them more, but the only way to motivate the badly paid is to treat them worse.

    People live in London because they like a basically cosmopolitan and interesting city. They could already go to Abu Dhabi if they wanted more money, but they don’t (for the most part).

15. #15 Dunc

    2009/09/11

    The most telling reason is the excuse given for the need to all the G20 to do this at once, rather than for individual countries doing it if they feel like it: it would put their financial centers at a competitive disadvantage. Why would it do this? Because they wouldn’t be able to attract the top financial talent? Why would this put them at a disadvantage?

    But then whose cocktail parties would they (the pols) go to? Whose villas and yachts would they holiday in / on? Who would give them lucrative consultancy gigs when their time in office is up?

    I suspect it has more to do with wanting to hang out with the cool (i.e rich) kids than actual economic benefit. But I could be wrong…

16. #16 outeast

    2009/09/11

    I think that a really talented person could make far more money in banking than in science.

    That’s an odd thing to say. A talented investor might make more money in banking than a talented geneticist would in science, perhaps, but there’s no reason to assume a talented geneticist would make any kind of a go in finances.

    [Ah no, you misunderstand me. This is on the assumption that "talent" is a generic feature - perhaps I could have said IQ - that applies to any job. Obviously there are specific characteristics that would fit one more for banking, or genetics, or whatever -W]

    But with regard to your more general point: states need banks for domestic industry, for trade, to keep housing markets moving, etc etc. The banks have their own business priorities, of course, but because they are needed for a country’s economic stability it is the government’s job to make sure they’re delivering on that role.

    Strong regulation helps ensure that banks deliver on the ‘national interest’ role but can impede the banks’ self-defined (profit-making) role. The banks in many countries argued that the two roles were necessarily not in conflict – that they could better deliver on the former role if left unimpeded in their pursuit of the latter. And plenty of experts concurred… given which it’s fair to pound the pols for failure to regulate, but it hardly absolves the banks does it?

    [Part of the national-interest role is to be part of the "invisible hand"; or less mystically, to help redistribute resources efficiently. This goes in hand with the profit-making of course, but is impeded by regulation. So there is an arguement for deregulation that is not tied to bankers profits / bonuses. The conflict is pretty well entirely within the national-interest role, wherein the pols have to manage the efficient-redistribution role vs the not-allowing-wild-swings role -W]

17. #17 Dean Morrison

    2009/09/12

    [WC Part of the national-interest role is to be part of the "invisible hand"; or less mystically, to help redistribute resources efficiently.]

    Just because you give a the ‘invisible hand’ a different name – doesn’t make it any less mystical, nor does it provide any evidence that an unregulated economy allocates resources better than a regulated one.

    I think you’ve bought into free-market dogma without questioning the evidence base for it William. The idea that that regulation is the enemy of economic performance is a very convenient myth for those that benefit from it personally – but it is not supported by evidence, only by the hypotheses that have emanated from the University of Chicago over the years.

    In fact that the recent collapse of the world economy is clearly related to the removal of the regulation that was put in after the great depression – which had led to decades of steady economic growth, is rather strong evidence that an unregulated free market does not allocate resources effectively.

    The banks weren’t bailed out by free market adjustments at the end of the day – but by direct intervention by governments who took positive steps to see that there wasn’t a disastrous collapse in the production and distribution of resources full stop.
    Sure the market is a force which can be used to energise society and to provide benefits for all – but then so is fire, and to start to worship it on a semi-mystical level and to remove any restraints on it is just asking for trouble… ;)

18. #18 Phil HYA

    2009/09/12

    “The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.”

    Amusing, eh?

    http://www.nytimes.com/2009/09/12/business/12change.html?_r=1&em=&adxnnl=1&adxnnlx=1252771345-CEez1bDRVsFJesDDvX8pjQ&pagewanted=all

    (Registration required)

19. #19 penbuyut

    2009/09/15

    I think you’ve bought into free-market dogma without questioning the evidence base for it William.

20. #20 Phil Hays

    2010/01/05

    “and the taxpayers get stuck with much of the loss – I think this is questionable.”

    Questionable or not, it is interesting to notice the taxpayer revolt against bailing out the Icelandic banks.

    http://www.theglobeandmail.com/report-on-business/iceland-in-crisis-recovery-in-doubt/article1419490/

    The vote on the referendum on the bill will be interesting. I’m glad I don’t have to vote on this one. Vote yes, and owe a whole pile of money. Vote no, and trash the country’s economy for years/decades. Cheerful choice, isn’t it?

    Can a country file for bankruptcy?