Dorks

also, this may appeal to people in fields where there is relatively little difference in ability or productivity from person to person.

I read the commentary to see if it was as bad as you say, and well, yes. it's pretty stupid. quotes from the commentary:

"traders who threaten to walk off to a rival if they believe they are not compensated adequately."

ok, the author understands that much

"However, bank executives should dig their heels in and resist calls to jack up wages if bonuses are restricted. "

maybe a bank might try to decided to do that for its own sake, but how does it matter to the author?

"This cannot be good for morale across the banks" (when there are large income disparities across bank employees)

Still, how does it matter to the author? is the author in charge of keeping everybody's morale high?

"Some shareholders are beginning to doubt"

well then let the shareholders use their powers to deal with it. boost the power of shareholders, if what you're worried is that shareholders aren't getting heard.

" reward for apparent failure "

this is the closest I can come to finding a rationale that makes any sense in here. the point that the author could have made, but didn't really do so, is that poorly designed compensation structures can overly incentivise imprudent or even illegal behaviour, to the extent that the traders get around internal controls in the banks to prevent those things. as a result, banks end up going bad and the state picks up some obligations. that would at least be a point that is coherent and would begin to justify some state action, somewhere in the process (if not on the compensation side, then on requiring better internal controls, or probably just through external prudential regulation).

[Agreed with the last point. The true problem we have is that the State felt obliged to step in and prop up some banks. The required work is to redesign to make this unnecessary in future -W]

RBS IS state owned, effectively, and the entire banking system is backstopped by the taxpayer.. so it's not private sector decision making we are looking at here.

[If RBS is state-owned, then the State can tell it what to do. There is no need to make global rules, just do It.

Unless... you actually think that doing It will cripple your bank. In taht case, yuo'll only do It if you can cripple everyone else too. To be fair, the UK govt thinks these rules are stupid, too, so has no intent of imposing them on RBS. Its just it can't make a fuss with the EU, because it knows that economic sanity will be unpopular with the electorate -W]

Even before the crash, it is/was the government-sponsored limited company structure that allowed this kind of thing to happen.

[Pardon? That was a complete non-sequitur -W]

Personally, I think that making banks full-liability companies with bonuses only in deferred shares would concentrate minds wonderfully..

[Why stop at that level of interference? Why not move to a full Soviet-style command economy? -W]

(Secondary point:: Demonstrate that the traders involved are actually exercising skill, and not merely a combination of luck and working for a major bank).

[No. Why should I? If you think that is relevant, you've entirely missed the point -W]

William Connolley: " they don’t seem to realise that the bankers are not being paid because the banks like throwing money away; they’re being paid because the banks think they need to (banking isn’t easy, its fiercely competitive, you do it wrong with not-quite-top-grade people and you get stuffed)."

This is true for the bulk of the people working at banks, but not for the top management. They can give themselves almost any salary, as long as it is small compared to the size of the bank there is no competitive pressure towards lower wages. There is not much market economy in this part of any large company.

[In theory that isn't true - there is a renumeration committee for such folk. In practice, its not clear that works well, but its also not particularly relevant to the current discussion -W]

I thought the idea of having less bonuses was to increase the salary part of the pay.

[Not if you read the Graun article I linked to. It appears to be a massive surprise to the nice lady that salaries are going up. I really doubt that switching to salaries will lessen risk, either - because salary rises will be linked to results -W]

From this perspective it is fine if this rule leads to higher salaries. People hope that that will lead to less risky investments, which if they turn out to have been bad bets, leads to the tax payers paying the bills.

I see no problem with treating banks that are too big and too interlinked to fail and will be rescued as governmental agencies.

[I think it is an enormous problem. The govt is not competent to manage these things, and we don't *want* the govt running actual companies in the economy. That's not their function -W]

That would provide an incentive to be smaller and less system relevant and be part of the market economy again. Now there is an incentive to be as big and interlinked as possible as it means that you will be bailed out and you can thus take larger more profitable risks.

Firstly a disclaimer - I work in banking myself, although I'm not likely to be given a bonus greater than my annual salary.

I think that carrot eater makes a fair point above - there is a possibility that the kind of bonus culture which has existed in some places can create perverse incentives which can to the kind of irresponsible behaviour we have seen from some people in our industry.

What's more I don't think it's enough merely to argue that the state has no business involving itself in the way that banks (or other companies) reward their employees - we do after all have a minimum wage and employment legislation, as well as other inds of legislation (consumer protection, health & safety etc., which affects how businesses operate. Banking itself has actually been subject to a massive amount of government intervention in the last decade or so - there have been various EU regulations about charging and value dating of payments and anti money laundering measures, and in the UK we have had to intruduce various changes to the way we operate following the Cruikshank and Vickers reports (most of these I have no problem with and have addressed genuine issues). The government recently strong armed the industry into dropping the entirely reasonable plan to do away with cheques.

But ultimately the reason for the problems with the banking industry in recent years have been about poor management, inadequate internal controls and lack of accountability - to the extent that the bonus culture got out of control it is a symptom rather than a root cause. Putting caps on bonuses are not only gesture politics, they don't actually address the real problems in the industry.

banking isn’t easy, its fiercely competitive, you do it wrong with not-quite-top-grade people and you get stuffed

Well, I'd agree that it isn't easy, but even top-grade people seem to be capable of some astounding cock-ups. Everybody thought Fred Goodwin was the second coming until he decided to buy ABN Ambro... Turns out, any idiot can make money in a rising market. I'm really very sceptical about the claims that these highly-paid individuals have some remarkable and rare skill. All the studies which I'm aware of indicate that, over the long haul, the "top people" don't actually outperform a random number generator.

its a lot of work (at least the only guy I know in banking regularly leaves the house before his kids get up and gets back after they are in bed)

Oh, boo fucking hoo. I used to work 12 hour shifts (with an hour's travel either side), 13 days a fortnight, in a fucking factory. That's a lot of work. I grossed about £250 a week.

[You're being dishonest by selective quotation. I said paid more than them for what they think of as little work. In fact they are completely wrong: its a lot of work. No-one is asking for sympathy for it; all I'm doing is pointing out this isn't money-for-no-work -W]

You are missing the bigger picture here which is whether a sensible economy should be investing so much of its capital (intellectual and monetary) in banking.

[Well, how indeed would you know how a sensible economy would behave? But having central govt (or you) decide is definitely a bad idea -W]

Banking is a competitive business in the same way as being a dinosaur was a competitive business. The bigger and tougher you were, the more successful you were. But that's all. Big dinosaurs ate small dinosaurs, and big banks squeeze small businesses for profits to invest it in their own games. They don't add more value to wider society by these actions, and clearly in the past it has led to invention of really stupid products to sell to stupid or distracted people like 110% mortgages with 1 month fixed rates, PPI, and interest hedges for small businesses.

You can argue that their work improves liquidity. But the people who benefit from that are the private equity folk who arguably are taking too big a share of profitable businesses and avoiding tax by offsetting profits against interest.

For at least the next few years we are still in a situation where we cannot afford banks to fail, which means they are being propped up by the tax payer.

[I'm not sure there is a significant degree of propping left -W]

If we can't stop them siphoning off some of the ink-still-wet money into risky business we can at least discourage them. This is not a step to a Soviet-style economy any more than taxing other harmful/enjoyable stuff (cigarettes, alcohol, carbon emissions).

Sure banks could pay bankers more, but contractually agreed salaries are so much more risky than profit related remuneration. So they won't want to do that. And this is of course a first step in the process (like Kyoto was for CO2 reductions - ha ha!).

[Kyoto was a mistake, and a diversion from the True Path, which is carbon taxes -W]

Andrew Adams above raises an important point: It's not bonuses per se that are the problem, it is the way they are structured. Typically on Wall Street (and I have no reason to think the City is any different), bonuses are based on results in the current (fiscal) year, full stop. So if a trader enters a position that will make huge profits this year and next year but will blow up the company in three years, he will be rewarded with handsome bonuses this year and next year, which he won't have to give back when the company blows up--if he's really astute, he will have moved on to a different firm before the first blows up. And if he was one of dozens to hundreds of traders to put on such a position (as with mortgage backed securities in the mid-00s), the failure won't be held against him. That actually is a problem that needs to be addressed.

At one time investment banks were partnerships, with everybody at risk of losing everything in the above described scenario (thus the legends from 1929 of bankers jumping out of windows). That's no longer true on Wall Street (don't know about the City); all of the major US investment banks have stock shares that trade on the NYSE. Today, if a Wall Street firm blows up, the shareholders are the ones who take the hit.

You seriously think that an unlimited liability company is 'Soviet style command and control'? SERIOUSLY??

[No, I think you're so all-fired-up about this that you're not reading what I'm writing. I said Why stop at that level of interference? Why not move to a full Soviet-style command economy? - which is to say that unlimited-liability isn't full-soviet-style. Slow down -W]

Ok, some very basic economics history for you... the limited liability company exists because the GOVERNMENT allowed the legal structure to exist,

[There is no legal structure without government. You aren't mistaking me for someone who thinks there should be no govt or no laws are you? -W]

whereby those who chose to invest in novel, risky ventures would not suffer personal bankruptcy if those ventures failed. However, the existence of such ventures entails moral hazard, because the shareholder/manager/executive may enrich themselves at the expense of creditors, leaving them with the debts on collapse. Hence lots of these evil, nasty regulations that annoy pretend-libertarians (cf. corporatists) so much. They want the nice bits of limited liability without the downside.

You want rid of these nasty regulations, then the full-liability company is for you. Full on free-market here: the creditors can take every shareholder for every penny they have or will have, should the company go down. It's quite funny that a 'libertarian' would throw their hand up in horror at the idea. Personal responsibility? Thats for the little people..

[No, all that is broken. Limited liability exists for a good reason, which is why everyone has it. A world without it would be very different, and worse. If you want to be one of those people who argue for unlimited liability you can, if you like (best not done here though) but its as cranky as the Iron Sun stuff -W]

And if you think that asking that performance based pay is , well, based on performance, is 'missing the point'.. words fail. When the entire banking system stops being dependent on government support it can pay what it likes - but with it's own money. Not handing out cash like candy in the full knowledge that it'll not be responsible for the consequences.

[The point you've missed is "Why should I?" It isn't, and shouldn't, be up to me to micro-manage these things. I'm astonished that you've got the time free to do it; fortunately you're not allowed to -W]

"Well, how indeed would you know how a sensible economy would behave? But having central govt (or you) decide is definitely a bad idea -W"

It's not unreasonable to say that what we have is not sensible, so discourage it and see if all the clever folk find something more productive to do. Making these judgements is no different to deciding to move tax burden from earnings to VAT or whatever.

[Agreed. "discourage" or "encourage" is reasonable, if done sanely; prescribe or proscribe generally isn't -W]

"[I'm not sure there is a significant degree of propping left -W]"

Have you seen mortgage rates recently. The incredibly low mortgage rates are a result of the money printing. Banks will make big profits on these mortages, and the low interest rates will continue to prop up the housing market and thereby the banks. I expect the same applies to business loans.

[Dubious. If the mortgage rates that I see are low, then so is the banks margin on them -W]

If you left it to the markets alone, eventually interest rates would go up a whole load of people would be repossessed/go bust, housing goes through the floor and the banks go bust.

Additionally, the efforts to keep Greece in the Euro are defending the banks' liabilities at a cost to the tax payer.

[Having Greece (or Italy) in the Euro was politics. You can't blame the banks for that. Keeping Greece in is also driven chiefly by politics -W]

The banks *are* still being propped up.

"This is almost entirely lead by jealousy and stupid pols trying to make a name."

Yes, but... rewards in banking have significant externalities associated. They:

1)can be reasonably hypothesised as having driven the behaviour causing the crash.
2)can be reasonably seen as exploiting a monopoly position.
3)can be reasonably seen as incentivising illegal actions (libor, PPI, insider trading)
4)can be reasonably seen as exploiting risks which as has been so vividly shown, are underwritten by the state.
5)can be reasonably seen to be so high as to undermine societal values.

etc – I could go on

[No, don't. You need to pay more attention to your thinking. Quality not quantity.

2 is obvious nonsense. No bank has a monopoly. The entire banking sector doesn't even have a monopoly on lending.
1 is I think wrong.
3 is marginal - any incentives will do this.
4 is the State's look out. Consider the behaviour of Greenspan, or Brown, during the boom.
5 no clear meaning -W]

For these reasons, both levels of remuneration and the structure of that remuneration (high relative bonuses) are unwise. State action to limit both bonus and indeed total remuneration are therefore not at all unreasonable.

If the mortgage rates that I see are low, then so is the banks margin on them

The margin may be low in absolute terms, but not necessarily in relative terms.

[You'd need to do a careful analysis of the spread between the rates the banks borrow at, vs the rates they lend at. But the assertion, by SM, appeard to be that *because* rates were low, the banks were making loadsa money. That made no sense -W]

Government bonds in countries with solid credit ratings are low and have been low for several years, e.g., the US 10-year Treasury bond has been yielding below 2% for a while.

[US, and German, debt has had negative yields on some maturities at times -W]

True, you can get a higher return by investing in riskier debt, like Greek or Argentine government debt. But if you're worried about return of capital rather than return on capital (because, e.g., you need to keep some minimum reserve on hand), you won't. Mortgages, at least to creditworthy borrowers, are perceived as safer (there is a reason the expression is "safe as houses"). Not to mention that bankers actually are in the business of lending money to people. Furthermore, you can often sell the mortgage to investor groups who need supposedly safe investments with good yield (this was one of the factors driving the mortgage bubble).

I'm not sure how to square this circle, but there are some conflicts of interest to manage.

[If the mortgage rates that I see are low, then so is the banks margin on them]

Yes the relative margin stuff that Eric mentions, but also a prop is a prop. Without all the invented money, the lending doesn't happen, the housing market grinds to a halt, house prices fall and the banks crumble. We're in a room with a tiger by the tail and we are trying to veeerrry slowly back out through the door.

[Having Greece (or Italy) in the Euro was politics.]

Having them in was and remains politics. Letting them out is business, as a third of the 300+ billion Euro debt owed by Greece is to the banks.

But the assertion, by SM, appeard to be that *because* rates were low, the banks were making loadsa money.

I don't agree with this interpretation of SM's statement. He may not have been perfectly clear, but banks are being supported (at least in the US) by a policy of allowing them to borrow at zero or negligible interest rates. Thus the banks make loads of money in spite of the low mortgage rates.

[Ah, in that case I disagree with you. Interest rates are being kept low to stimulate the economy. It has nothing to do with propping up banks -W]

While I'd like to believe your assertion that there isn't much room left to prop things up, the example of Japan is evidence to the contrary, as is the US Federal Reserve Bank's stated intent to continue zero interest rate policy as long as necessary.

You would really have enjoyed the bank runs in the 1900s.

1. Banks are regulated because of deposit insurance.
2. Banks will not raise salary to the level of bonuses because there are good years as well as bad ones.
3. Most of your comments on economics are drivel.

[1. So what? No-one is suggesting that banks aren't regulated, or shouldn't be regulated. 2. Yes, this is the bleedin' obvious, as I was saying. I think you've missed the point: the EU is trying to force people to do this particular bit of stupidity. 3. All you mean by that is you don't like the Real World but have no coherent arguements. You've got a blog; try to make a case instead of just flinging insults like a Wattie -W]

OK, less quantity, let's just take 1.

WMC position: "Is I think wrong"

Let's look for some evidence.

Here's what a couple of LSE economists think: "

current skewed incentives faced by bankers drive excessive risk-taking, which ultimately has to be paid for by taxpayers

Or, if you think you know better than the LSE, you could try the OECD.

remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests"

Or you could simply look at the number of financial instruments which have been routinely mis-sold and ask yourself *why* all those scandals happened. Could it be the incentives for the salespeople, perchance? Here's what the FSA concluded

"we considered the commission and incentive structures and targets for individual sales staff could encourage the mis-selling of PPI"

Any chance of some *evidence* to support why you "think" this is wrong? Or are you just flinging unsupported assertion like a Wattie?

[What you've written above doesn't even address your point 1. Let me remind you of what you said: 1)can be reasonably hypothesised as having driven the behaviour causing the crash. I've helpfully bolded the bit you've forgotten about.

So your "evidence" above appears besides the point. If you feel the urge to present evidence showing that incentives can sometimes have perverse results, then don't bother with that, because I already agree -W]

What Dunc said.

The ideas in your post are not universal - they are recently found wisdom that has currency after 1980.

Australia's banks are among some of the most profitable in the world. Leader of the pack by a large margin is the Commonwealth Bank which was state owned and run by non-incentivised public servants from 1912 until 1991. It was so successful as a state-owned enterprise that the local capitalists were desperate to get their hands on it. The subsequent deregulation of the Australian banking system, the privatization of the Commonwealth and State banks and their takeover by incentivised bankers led to a mini GFC in Australia and the subsequent collapse of many of the banks.

The Commonwealth was forced to takeover the newly privatised State Bank of Victoria (founded in 1842 and run by public servants for most of its history) which collapsed under the weight of bad loans made to "entrepreneurs".

[I'm not familiar with Australian banking history. http://en.wikipedia.org/wiki/State_Bank_of_Victoria says "The State Bank of Victoria was a bank that existed from 1842 until 1990 when it was taken over by the Commonwealth Bank.[1] It was owned by the State of Victoria." which doesn't quite fit what you've said. "The bank collapsed due to the weight of the bad loans made in the 1980s, in particular by its merchant banking arm Tricontinental, after deregulation of the banking industry in the mid-1980s by the Hawke ALP government." seems to suggest that bad loans occurred during a period of state control -W]

Rather than add to competition the collapse of the incentivised banks led to concentration - we now only have 4 banks. The CEO of the CommBank now gets obscene recompense - for what - making a quid off the back of a near monopoly of the house mortgage market in OZ. Money for jam.

[If you have 4 banks, the CommBank doesn't have a monopoly, or a near monopoly -W]

[If you have 4 banks, the CommBank doesn't have a monopoly, or a near monopoly -W]

They are, however, fairly likely to form part of a complex monopoly...

[Or a quadropoly? That might require quaternions, not just complex numbers -W]

Even Rupe's papers are having a whinge about the concentration of banking in Oz.
(" concentration of banking" instead of near monopoly - does that pass?)

http://www.news.com.au/money/banking/australians-unaware-of-how-much-of…

"Figures released last week reveal the big banks are in fact writing 92 per cent of all new loans."

But we are talking about incentives. The point is that the argument that bankers (or other execs) need huge incentives to function effectively is a self-serving argument that gained currency with the rise of the neo-liberal think tanks that were established to promote precisely those ideas.

[I don't think I or anyone else has made that argument. The argument is that you need to pay well to attract the best. How exactly you tell who are the best, how you motivate them once you've got them, how you convince them to work for you rather than themselves are all continuing problems -W]

this is more interesting

http://www.economist.com/news/finance-and-economics/21572220-europe-loo…

The way it used to work in the US was a clear separation between commercial and investment banks. The former were for low risk loans; the latter for high risk stuff. The former probably required neither particularly high salaries nor bonuses. The latter probably did, or thought they did.

"What you've written above doesn't even address your point 1. Let me remind you of what you said: 1)can be reasonably hypothesised as having driven the behaviour causing the crash. I've helpfully bolded the bit you've forgotten about."

Yes, it precisely does. What the taxpayers are paying for is the post crash rescue. That's the point. Excessive remuneration and bonuses drive risky behaviour driven by short term rewards leading to an unstable financial system which taxpayers have to bail out.

[Sorry guv, won't do. You asserted that this behaviour caused the crash. You can't use post-crash behaviour as evidence for this. Your logic is simply broken; please think about it -W]

Not a new issue. Quoting the Graun from February 2009, former Royal Bank of Scotland chief executive Sir Fred Goodwin told MPs on the Treasury Committee he "could not be more sorry" for what had happened.
But on the issue of remuneration, Sir Fred said if bankers felt they were not paid enough, they would leave.
His Total pay (including bonuses) for 2007 was £4,190,000.

Also in 2007, the brilliant Matt Ridley of Northern Rock only got a modest £223,000 and the failure to pay him more seems to have led to him having to shift his employment to the House of Lords. We should perhaps be grateful that his well known climate change denier is now devoting his efforts to public service....

oops, "his well known climate change denier" should read "this well known climate change denier". Guess I'll lose my bonus for that...

I have no problem with any bank giving their employees bonuses if the bonuses are to reward work the provides a long term benefit to the bank. Unfortunately, the bonuses appear to be paid on a short term basis, if they were tied to long term share options (say 10-years) the employees would have an incentive to ensure that their efforts were aimed at providing a secure and prosperous future for the bank, rather than a quick profit from some rather dubious dealings.
Small bonuses could be paid in cash or shares with any bonus exceeding a reasonable value (say the national average salary) being paid in the long term share option.
To often the consequences of dubious dealings only come to light when the banker has moved on and is probably in the process of screwing another bank.

[But that's the bank's problem, not yours or mine. Why would you (or I) wish to intervene in their internal affairs any more than any other private company? -W]

Just because the reference article was stupid does not allow one to make stupid articles themselves doen't it?
Well... this is the first stupid posts on the stoat so far. Maybe it s just because it isn't about climate...

The govt wants to make shareholder votes on remuneration packages binding. That's a nice symbolic step but even if it somehow curbed Coddenham- or Goodwin-like excesses at the top level (and it won't in any company with majority aggregate institutional shareholdings cos those wielding such votes see nothing wrong with £million pay packets cos they're on the same whack) it wouldn't do anything to stop daftly short-termist payments lower down. The place to be would be somewhere where there's a cap - 49%? - on aggregate institutional shareholdings and shareholders get a binding vote on the maximum pay received by all employees. How to get there? Impossible. And if you could, you'd probably find the place pretty empty pretty soon.

So what is to be done? People have proposed German-style workers' councils but how's that going to help when the workers in this case are money-mad amoral Cityboyz who think risk-free gambling is their inalienable right?

Perhaps the answer is to introduce laws capping the earnings of any male under the age of 25 employed by a public company. The national average might be about right. (At the same time, the govt might as well ban all <25 males from driving or owning a thickset dog.)

[Why? You're using "public company" as though it meant owned-by-the-public, rather than owned-by-the-shareholders. All this micromanagment is *bad*. The aim should be for it not to be necessary. This is basic do-what-you're-competent-to stuff. The govt is tehre to make and enforce laws. Companies are there to make stuff. Etc. You don't want companies making laws and you don't want govt running companies.

So all your questions are misconstrued.

If you think there is a problem with short termism, then the first question is "is this something that basic market operations will sort out for itself"?

Perhaps you believe that short-termism is bad for a company. In which case, you ought to believe that long-term-viewing companies will do better. In which case, errm, there is no problem requiring intervention.

But you might believe somehow that the current structural setup forces everyone into short-termism, because the long-term incentives take too long to come out. You'd need to demonstrate that, somehow. But even then, the correct answer is not detailed fiddling that people will waste time and effort getting round, but some change to the overall structure to favour the long term -W]

Which waffle and question-begging is really just an excuse to tell Dunc about my random number generator. I beat UBS's quant prediction for the last World Cup (and was only just pipped by two other banks) using a model based entirely on tomato production. The bloody Germans let me down in the end. Perhaps they had been inflating their tomato statistics.

Part of the problem here is that the Weasel doesn't know [bad word redacted - WMC] about the history of banking. The two major things that happened were

a. The walls between investment and high street (main street) banks fell. This gave the investment banks access to a huge amount of cash and to depository insurance, which then exposed governments to investment losses. It gave the main street bankers delusions of getting rich.

b. The investment bank model changed from partnerships to stock companies, which meant that the bankers had no reason to look anywhere by the short term for bonuses and quarterly profit estimates. Since they were no longer partners, there was no reason to preserve the company beyond the payment of the next bonus and since the market rewarded quarterly profits, pushing short term profits became the goal, not long term ones.

Take a look at this to see how wrong Timmy and the Stoat are

[Well, I looked. Why does that make me wrong? called for multi-year guaranteed bonuses to be banned throughout the banking industry and for the widespread introduction of clawbacks to recoup bonuses from loss-making bankers. I'd certainly called "guaranteed bonuses" silly, multi-year or not. And bonuses with clawbacks (assuming we mean the same thing) are sensible too.

Note that he, too doesn't want the govt involved: t is understood that rather than wanting some form of regulatory veto being imposed on multi-year contracts, Mr Blankfein believes that the compensation committees of major banks should work together to ensure that they are not allowed.

Did you actually read the article? -W]

Sure, and Father Goldman Sachs is going to make it right.

[Pardon? It was you who introduced GS, not me -W]

Eli has some other fairy tales to tell you. Basically Blankfein is saying that if the investment banks don't control themselves the government will do it for them, but that bonuses need to be limited. So here the bunnies are, three/four years down the road and the investment banks are not controlling themselves. So what happens and the bleating about death panels begins.

[Others indicate they will simply find some ways around the rules. Top banking executives are said to already be discussing sharp rises in base pay, which would go a long way toward circumventing the new rules. “It will drive up fixed salaries to compensate,” alas, I'm not seeing your point.

If people like B think bonuses need to be controlled, and they aren't being, then that indicates a deep problem with the way things are run. That requires some deep thinking and re-work to fix it. Not stupidity -W]

Yes, why should we want to interfere in the private affairs of any company?

Lets put it another way - why would we want to interfere in the internal affairs of a government agency whose actions affect many people's lives and can lead to premature deaths?
Hmm, I can' think why...

[Sorry, I don't understand you. The govt can't help "interfering" in a govt agency, because its running it.

What did you actually mean to say? Could you say it directly, instead of via what I suspect was intended to be a rhetorical question -W]

Swiss dorks

[Bad news, Wabbit. Timmy likes the Swiss proposals. Are they now wrong? -W]

Obviously the stoat thinks we should not have propped up the banks either, which would at least be a consistent view.

[Its not so simple. As I understand it, people's judgement then was that propping up the banks was necessary. But that it was regrettable that we'd got ourselves into such a position -W]

However, given the inevitability of said propping up, the real issue is how to best manage the resulting mess. "Not our business" won't wash as a response, because we (collectively) have made it our business.

[Well, yes. We do need to manage the mess. I haven't suggested otherwise. I have said that we shouldn't try to micromanage the mess -W]

[Sorry guv, won't do. You asserted that this behaviour caused the crash. You can't use post-crash behaviour as evidence for this. Your logic is simply broken; please think about it -W]
The logic is crystal clear.
1) Banks remuneration policy drives risky behavior (see cites above). This was true before and after the crash.
2) Excessive risk taking was a primary cause of the crash .
3) Government intervention to rescue banks was essential for the stability of the whole system.
4) Therefore government regulation of remuneration policy is reasonable.
Perhaps rather than make sweeping comments you could address which of these points you disagree with, and why?

[Well, yes. We do need to manage the mess. I haven't suggested otherwise. I have said that we shouldn't try to micromanage the mess -W]

You said that the "dorks" want to cut pay because they are jealous, and that banks know best what they need to do to reward the bankers' hard work.

[Not quite, no. What I said was that, despite many people (including the banks) agreeing the current regime is sub-optimal, they're still doing it. Or something fairly close to it. Which means there is a strong pressure on them making them still do it. I think we can dismiss the idea that the banks are weak-willed fools who hand out dosh to anyone who asks for it. What needs to be looked at more carefully is the pressure making this so. Applying some stupid fix without addressing the underlying problem will inevitably just lead to avoidance -W]

It seems this is what is offending most commenters.

At the moment the central banks are pumping massive amounts of money into the banks.

[Are they? If you mean QE, that doesn't go to the banks -W]

Yes the aim is "to stimulate the economy" but an essential part of the stimulation is to keep the banks propped up.

[Sez you. But where is your evidence? See comments above - #9, #12 - you've already said this, I've already not believed it, you need to provide evidence, not just say the same thing again -W]

So they are being propped up whether that is an aim or a side-effect, and given that they are propped up it is legitimate to examine more details of their business model.

The banks should be recapitalising themselves,

[They are. An effect of which is to reduce their loans. Cue pols complaining that the banks aren't lending enough -W]

but the temptation is there to syphon off some of the profits into investment banking. Restricting bonuses may not be the best way of dissuading them, but maybe the politicians have a limited number of tools in their box.

The argument is that you need to pay well to attract the best.

This assumes that there is actually a real difference between "the best" and everybody else. Since, as mentioned earlier, all the empirical evidence seems to indicate that, over the long term, there is no statistically significant difference between "the best" and a bunch of pigeons in Skinner boxes, I remain unconvinced.

[Ah, that will be your All the studies which I’m aware of indicate that, over the long haul, the “top people” don’t actually outperform a random number generator. Forgive me if I remain unconvinced by the weight and detail of your citation. I've also answered your silly boo-hoo comment, which I missed earlier -W]

Seriously, if somebody wants to set up an OEIC that's managed entirely by pigeons in Skinner boxes, with the commensurate management fee of a handful of grain a day, I'm willing to buy in. There's a good argument that strong randomness is actually an optimal investment strategy, and that all attempts at skill are liable to reduce performance in the long term. It's like a massively complex, global game of rock, paper, scissors.

[You're confusing banking with funds management -W]

[You're confusing banking with funds management -W]

Well, perhaps we need to clarify our terms then, as "banking" covers a very wide remit, from boring old-fashioned retail banking (the stuff of deposits and loans, which as far as I know does not attract the sort of bonus we're talking about) to the most abstruse and abstracted financial shenanigans yet dreamt of by man (which, as far as I understand it, is where the big bonuses are to be had, and which bears much more resemblance to funds management than to "traditional" banking). Once we're clear as to what we're actually talking about, I may have more to say...

[And we'll quietly ignore the problem that the crash was triggered by subprime US mortgages, ie the tedious bricks-n-mortar business, not the complex derivatives -W]

> [I think we can dismiss the idea that the banks are weak-willed fools who hand out dosh to anyone who asks for it. What needs to be looked at more carefully is the pressure making this so.]

That goes back to my first point. The pressure comes from the fact that it's easy money. The fact that it is easy money is not justification to do it because the collective action by too many banks has the potential to lead to dangerous bubbles.

[I think you *are* suggesting that the banks are fools who dish out dosh to anyone who asks. They aren't. If that isn't what you're saying, then I don't understand what you're saying -W]

> [Are they? If you mean QE, that doesn't go to the banks -W]

Seems likely that banks are one of the main beneficiaries of QE because it appears to have raised bond prices.

["Seems likely" isn't close to good enough -W]

But there has been and is more direct assistance from the asset protection scheme and the funding for lending (that's what is making mortgages astonishingly cheap at the moment).

[We're going round in circles. Cheap mortgages don't make money for the banks. See above -W]

And banking bailouts are still happening (Anglo Irish bank quite recently).

[Anglo was nationalised in Jan 2009. That's really some time ago. Have you nothing more recent than that? -W]

So they are still being propped up by all manner of government and central bank shenanigans, and that gives politicians a justification to fiddle with bank pay policy.

[What, one Irish bank from 2009 justifies worldwide action now? -W]

You are very quick to challenge the evidence behind other people's arguments, but you do have a bit of a stonker of a claim here with no evidence whatsoever to support it:

"The basic problem here is there is a fair segment of the population / chatterati that are really really jealous of people being paid more than them for what they think of as little work."

I dredged through the BBC comments and there is little or no indication of jealousy or a belief that bankers do little work:

http://www.bbc.co.uk/news/business-21608938

Compare those comments with comments on stories about bonuses and pensions for civil servants where it is regularly opined that civil servants don't work hard enough and get gold-plated this and that.

More of a simile - e.g. the police can cause deaths, so too can crashing the banking system then the economy with resultant poverty for lots of people.
I would have thought that was rather clear. In this case the state did need to interfere in private enterprise more than it does already (H&S, employment law etc) to the extent of saving the banks so I think the state acting on behalf of the taxpayers should be trying to change banking and remunerations.

[That something needs to be done to the banking sector, I'd agree with. That its the renumerations, and in particular the current fad for caps, that should be done, I'd be doubtful. Certainly I'd disagree with your certainty over the matter -W]

I would say that deciding which individuals get bonuses is micromanagement, but capping bonuses in general isn't, given the situation.

THen you wrote:
[Are they? If you mean QE, that doesn't go to the banks -W]

All I have ever read on the topic states that the money ends up in the banks accounts.

[Well, QE is the BoE buying bonds, from whoever wants to sell them. that's all. They pay the market price, obviously, and their intervention affects that market price - again, obviously -W]

E.g. this BBC one says that the financial institutions sell government bond or such and they are bought by the government using 'printed' money, thus at the end of the day the QE money is held by banks and other such institutions.
http://www.bbc.co.uk/news/business-15198789

[Actually it says "either commercial banks or other financial businesses such as insurance companies". Plenty of investment companies, including pension firms, hold bonds -W]

Of course another point, related to Dunc's complaint that it isn't clear what you mean by banks, is that all forms of money magic and manipulation have been merged into megacorporations, thus the same entity does both high street banking and financial gambling.

[I object. It was Dunc who started rolling the bond funds in with the banks, which I think is confusing -W]

Stopped clocks and Timmie are occasionally right. That's cool.

If you want to know why Citibank was saved and Barings and not, look to #27.

Clearly banks and other large corporations are suffering a mismanagement crisis. The Swiss plan is one means of resolving some of the issues.

[I object. It was Dunc who started rolling the bond funds in with the banks, which I think is confusing -W]

I repealed the Glass-Steagall act? Well, that's a surprising twist, I must say...

OK, it's time to ask the awkward question: exactly what is that you think the people in question actually do? Let me lay out my position: I believe the people getting the big bucks are mostly investment fund managers, who happen to work for banks.

(Side note: an OEIC isn't a bond fund. Well, they can be, but OEICs dealing in bonds are very much a minority. If you're going to get snarky about terminological exactitude, then I've got some sauce for your gander.)

[Exactly? I can't answer that, obviously. I've never worked in banking or related. Neither can you. But this stems from your "if somebody wants to set up an OEIC that’s managed entirely by pigeons" stuff, which I was claiming was irrelevant to the main discussion -W]

Banks don't pay big bonuses to reward hard work: they pay them to attract and retain the best staff. If you stop them paying the bonuses, a lot of that money will shift into salaries - when the Swiss government (quite reasonably) stopped UBS paying bonuses at the end of 2008, it responded with eye-watering salary increases in 2009.

But banks won't like this, because paying the money in bonuses makes it possible for them to adjust staff costs to profits each year, at least to some extent. So they will not be willing to pay enough to keep the really high earners. Those people will move to hedge funds or outside the EU.

If you think that the big money making banking activity is a net loss to the EU, because of implicit government guarantees, then that move would be a good thing. But you might want to compare tax revenues from banking with bailout costs before you decide. Certainly, it would be bad for the UK, which gets a lot of the tax revenue and bears only a small part of the bailout costs. Which is why the UK government is so opposed to it.

PaulB has it about right about the reasons banks pay large bonuses to some staff - it's the compensation model which suits the industry (or at least parts of it) and whatever the rest of us might think they obviously value the skills of those employees sufficiently that they want to keep them.
So I agree that if the bonus cap comes into effect the bank will be forced to an extent to compete on base salary, but obviously given that all banks operating in the EU will be in the same boat it will limit the scope of people to just walk out and get a better deal from a rival bank. And I'm not convinced there will be a mass outflux of bank employees either to hedge funds or outside the EU - hedge funds only employ a limited number of people and require specific skills which not all bankers will have, and I reckon many will settle for still being very well paid in this country rather than taking their chances abroad (with all the associated uphevals involved for those with families).

[Exactly? I can't answer that, obviously. I've never worked in banking or related. Neither can you. But this stems from your "if somebody wants to set up an OEIC that’s managed entirely by pigeons" stuff, which I was claiming was irrelevant to the main discussion -W]

You don't know what I know (or where I've worked for that matter, not that it's particularly relevant here), and you're neglecting the possibility that I might personally know some people who actually do this shit for a living (albeit not at such rarefied levels). The big money is in the investment side - either trading directly in securities of various kinds, or managing those who do - which is almost exactly the same as running an OEIC or hedge fund. The performance of fund managers has been fairly well studied (the studies are easy to find, if you can be bothered), hence the comparison.

Fun bonus fact: the people I personally know who do this shit for a living told me that the whole system was primed to explode horribly (and that practically everybody involved knew it) at least as far back as 2005, if not earlier.

[Good for them. In that case they made enormous piles of money out of this foreknowledge and have now happily retired. What, you mean they didn't? Oh... -W]

Backing up to an earlier comment of yours that I missed:

[And we'll quietly ignore the problem that the crash was triggered by subprime US mortgages, ie the tedious bricks-n-mortar business, not the complex derivatives -W]

The subprime US mortgage business was only able to exist (at anything like that scale) in the first place because of the complex derivatives built on top of the original loans - nobody would have underwritten them otherwise. Furthermore, the derivatives turned out to be so profitable that they became one of the main drivers for giving the loans in the first place - the banks offered those loans on such absurd terms because that was the only way to generate more loans to base the derivatives on. And if it hadn't been for the derivatives, a crash in the sub-prime market should have been fairly contained, rather than threatening to take down the entire world financial system. A few regionals would have gone tits-up and nobody would have much cared.

(Thanks for cleaning up my blockquote cock-up.)

The above is not to sugggest that the bonus cap is the answer to the problems with the banking industry, which as I said above were largely managerial and regulatory. Similarly, neither is some kind of Glass-Steagall type legislation the answer in itself. There is a lot of talk about "casino style" investent banking as compared to "safe" retail banking but we should remember that Northern Rock and HBOS, two of the biggest UK casualties of the banking crisis did not have investment banking operations and their problems were as a result of over aggressive or even outright fraudulent mortgage lending, and a lot of RBS's problems stemmed from its disastrous takeover of ABN Amro. Similarly Spain's current financial problems are largely due to a banking crisis caused by dodgy property lending by the regional banks.

> [We're going round in circles. Cheap mortgages don't make money for the banks. See above -W]

We're not going around in circles. Cheap mortages make more money than no mortgages. And no mortgages lose less money than repossessions. The fundamentals for the bog standard house price to stabilise, and then rise (in say Devon or Berkshire which are areas I monitor) are just not there when bog standard wages are falling. The banks are the intermediary for support of housing and business, but they are also the beneficiary.

>[Anglo was nationalised in Jan 2009. That's really some time ago. Have you nothing more recent than that? -W]

I didn't say "nationalise", I said bail out. The Anglo Irish debt was restructured last month.

[So what? If its been nationalised, that 's the govt bailing itself out, not bailing out private enterprise -W]

The Greek banks are in line/need of recapitalisation. Half the Spanish banks are failing stress tests and some may need bailing out - no talk of letting them fail.

You said:

"The correct solution to all this is for teh State not to be intervening in private enterprise if it doesn’t need to."

It does need to because all the decisions about Greece, the Euro, the economies are completely tied up with the banking system, and it is obviously politically unacceptable if the banks or some bankers benefit in an unseemly way from the solution: specifically, that they are in a position to earn vast bonuses because interventions in the economy and austerity budgets are providing stabiliity that allows such bonuses to be earned.

[Hold on. The Greek bail out is for the country, not the banks -W]

It would seem that most people, if given a choice, would prefer less austerity. Less austerity probably means more instability, less secure capital and probably result in no bonuses for bankers. That's nothing to do with jealousy.

[Most people would prefer warm fluffy bunnies. As we've seen in Italy just recently, most people prefer stuffing their heads under the blanket and pretending that nothing bad will happen if they vote for non-reality -W]

The Spanish banks are into a round of merging rather than closing. Same thing.

The cynic in Eli says that the Greek bailout is for the German banks and what, precisely is the problem with fluffy bunnies?

[And we'll quietly ignore the problem that the crash was triggered by subprime US mortgages, ie the tedious bricks-n-mortar business, not the complex derivatives -W]

The subprime US mortgage business was only able to exist (at anything like that scale) in the first place because of the complex derivatives built on top of the original loans – nobody would have underwritten them otherwise. Furthermore, the derivatives turned out to be so profitable that they became one of the main drivers for giving the loans in the first place – the banks offered those loans on such absurd terms because that was the only way to generate more loans to base the derivatives on. And if it hadn’t been for the derivatives, a crash in the sub-prime market should have been fairly contained, rather than threatening to take down the entire world financial system. A few regionals would have gone tits-up and nobody would have much cared.

well said Dunc ;). the weasel is often right, but in this particular case spectacularly wrong. Now that I think about it, he's also horribly confused on the practicality of efficiency standards. maybe it's a side of effect of too much forbes.

Really, Weasel, you are painfully clueless on this stuff.

The profit on mortgages to banks is in the origination costs (points, fees, etc), so what you want as a bank is to make a lot of mortgages and then sell them to an organization set up to buy the mortgage and turn them into securities (Fanny Mae, Freddy Mac, Goldman making derivatives, etc.) claiming your capital back and making more mortgages. What the organizations buying the mortgages did not do, is diligence on the nuclear waste they were buying, and, of course, the banks selling the stuff to them, were not exactly diligent about providing the information.

The spread on mortgage rates btw inflation and the rate is fairly constant, so you can't make a pile there. What the banks want is low or falling rates so more people are taking mortgages or refinancing.

Even a dumb bunny knows the (or at least Ms. Rabett who is in the financial business). If you really want to understand what happened read Tanta on the Complete Uber Nerd

[Spare me your strawmen. The claim was "Have you seen mortgage rates recently. The incredibly low mortgage rates are a result of the money printing. Banks will make big profits on these mortages..."; I was pointing out this was nonsense -W]

[Good for them. In that case they made enormous piles of money out of this foreknowledge and have now happily retired. What, you mean they didn't? Oh... -W]

Is this a sly way of accusing me of lying, or are you just being silly?

Sorry Weasel, you are in the position of the guy at the poker table who can't figure out who the mark is

http://www.economist.com/news/finance-and-economics/21572796-feds-frust…

Profitability on federally-guaranteed mortgages is tied to the difference between what a bank charges a homeowner, and the yield paid to an investor once the loan is bundled into a mortgage-backed security (MBS). Since mid-2011 MBS yields have fallen further than mortgage rates, so the spread widened to a record (see chart) before falling back a bit recently.

Fannie Mae and Freddie Mac, two government-backed housing agencies, have played a part by hiking the fees they charge to guarantee a loan against default. That cost gets passed on to borrowers. But even after accounting for these fees, banks still earn roughly $3.50 on every $100 loan they sell compared with about $1.50 in 2007, according to a study sponsored by the Federal Reserve Bank of New York*.

[Yes, all that after the first para is true. You still haven't understood what I'm saying, and I can't work out how to say it any simpler. My suspicion is that you're not reading what I'm writing -W]

There is some nice deployment of denier-style arguments - cherry-picking quotes, saying "look, a squirrel" etc. The trolls have taught you well.

> [Hold on. The Greek bail out is for the country, not the banks -W]

I've already said, a third of the 300+ billion Euro debt owed by Greece is to the banks.

[But that's not what you started with. You started with "all the decisions about Greece, the Euro, the economies are completely tied up with the banking system". Now we're down to 1/3. That's quite a change -W]

Surely there comes a point where you cannot pretend the QE, the funding for lending, the Asset Protection Scheme, the bail outs and the massive loan restructuring is done in complete isolation of the banking system, and therefore you cannot argue that the banks should be protected from interference because they are private businesses.

[I've never said it was done in complete isolation from the banking system. Nor am I saying that banks should be immune to all interference. I am saying that this particular measure is deeply stupid -W]

Actually, *all* the bailouts have been about the banks.

It's the same ideology as the loan shark: Defaults must never, ever, be allowed. Because if they were allowed, then they would happen a hell of a lot more, which would mean that those lending the money would have to, well, do their job properly. Really; Greece should have left the euro and undergone both nominal and real defaults.

[Agreed, re Greece. And it was a political decision that great efforts be made to keep them in, and a political decision to let them in, in the first place. Neither of those decisions were primarily "banking" decisions -W]

This would have left its creditors with some pretty epic losses, but that's what you get for lending to deadbeats without due diligence. I also have to note that the breakdown of greek debt is, essentially, 1/3 market, 1/3 eurozone central banks and 1/3 domestic, so that's 2/3rds outside the country.

You'd think that these highly-paid supergenuises would be doing that anyway but, apparently, no. Indeed, you'd have thought that these guys would have spotted multiple housing bubbles, wildly over-leveraged banks, appalling takeover deals and all the rest. But with very few exceptions, they didn't. Which certainly shows, empirically, that the guys getting the big bucks are not exercising skill and therefore do not need stratospheric basic pay or bonuses.

(If you want to present any evidence - something scientists normally use when making an argument - that these guys are exercising skill then do so. Or just spout some ad-homs at me again, either works.)

[You've already presented the necessary evidence: they are highly paid. Isn't that the measure of success in that world? I suppose you might hope they'd do it for the pure love of their job, but that's unlikely in most cases. There is a reason people are paid, after all. therefore do not need - you still don't understand. Or you write badly; I'm not sure which. The clue is the bit I bolded -W]

Given this, combined with the gigantic implicit and explicit state subsidies that the sector requires, a cap on bonuses represents a good start. Complete abolition of bonuses and a direct cap on pay* would be better; and if the supergenuises of the sector didn't like it, then fine. They could put their skills to use in some more productive activity. After all, if their pay is really due to skill and not merely being in an inside position in the financial markets, they will be able to make just as much money outside of banking. Good for them, and better for the wider economy. Why on earth would anyone think that having your best PhD physics graduates employed devising ways of shuffling cash around would be a good and sustainable economic policy?

Remember that during the 1945-73 period of sustained growth, full employment and rising real incomes, the City was practically a backwater. Again; evidence that allowing high finance to operate without interference is not present, quite the opposite.

*You could, of course, relax this for small organisations paid with share options. But it's the big organisations that we need to nail down here.

[Why limit state intervention to "a direct cap on pay" - if your State is so good at directing the economy, why not propose Soviet-style 5-year plans for all -W]

If Eli thinks that the Greek bail-out was for the German banks, he should not be making accusations of cluelessness. The (corporate sector) banks took a write-down of about 75% on Greek government debt. According to ISDA definitions, the forced restructuring constituted a default.

wait, which exactly is nonsense, of this list?

"The claim was "Have you seen mortgage rates recently. The incredibly low mortgage rates are a result of the money printing. Banks will make big profits on these mortages..."; I was pointing out this was nonsense -W"

--
seen mortgage rates recently -- check
incredibly low -- check
result of money printing -- maybe, or just 'promised to print'
big profits -- or lots of worthless paper, hard to tell

Well, this has been an interesting thread. Interesting enough to de-cloak.

This is how I understand W's argument in the original post:
The EU's proposed measure of capping the bonuses of top bankers ain't gonna work. Market forces will just drive up basic salaries instead (and- me not him now- perhaps with 6 monthly salary reviews/other workarounds we'll end up with a similar system in all but name). It doesn't address the underlying problems in the financial sector, but it plays well to the crowd, therefore the politicians are pushing it.

No argument from me there.

But I'm a little unsure what to make of W's solution:

"The correct solution to all this is for teh State not to be intervening in private enterprise if it doesn’t need to"

Well this isn't a solution at all, it's just saying do nothing, with a big get out clause in the 'if it doesn't need to' and scope for confusion in the easy over-generalise 'all this'. I think many commenters here have taken this to mean that W thinks the State (note evil capital letter) should stay away from banks completely, that there's been no market failure in the financial system, that everything will sort itself out in the end in the way that markets always will if governments just left them alone.

I don't think this is the case- I think/hope W is making a limited point about bankers bonuses here, and that he recognises there has been a huge market failure (as most of the world now does) that needs sorting out, and that governments are the only entities big and powerful enough to get a handle on things in the short/medium term.

(Just wish I knew how...)

My preferred long term solution— higher standards of ethical behaviour from individuals in the industry, with an idea of utility that better incorporates a sense of the 'greater good' than the current generation of financial types— may sound ridiculously idealistic and/or old fashioned to many. But there it is.

[I agree there has been a failure, and you could reasonably call it a market failure. "if it doesn’t need to" is indeed a bit of a get-out; who judges that? See #58 for a "principle". I don't think the s/State should stay away from banks entirely; banking regulation is probably necessary and inevitable. But there, I'm talking about stuff like reserve requirements and deposit insurance.

As to what I think the real Solution is: its far easier to say what the solution isn't. Most of the proposed solutions are stupid, based on a misunderstanding of the problem. Far too many people are projecting their own pet ideas onto the crisis, rather than trying to understand what actually went wrong. So at the moment, my first step in a solution would be for people to back off and study what went wrong more carefully. Otherwise we'll just build yet another Maginot line -W]

> [Why limit state intervention to "a direct cap on pay" - if your State is so good at directing the economy, why not propose Soviet-style 5-year plans for all -W]

Why do you keep falling back on this strawman? There is a huge difference between regulated capitalism and a complete state-directed economy. There is no unregulated first-world economy that I am aware of... Putting a cap on compensation is hardly a "Soviet-style 5-year plan." It may or may not be a good idea, but your comparison is ridiculous.

[Its not a comparison. The point I'm trying to make is, where do you draw the line? We seem to have a lot of people here arguing for increasing state intervention, with no apparent though for the downsides, and no thought for where it might stop. No, I'm not arguing that caps on pay are equivalent to a state-directed economy.

Its a matter of guiding principles, I think. Mine would be that the State should not be involved in the economy. Its not an absolute, its just a way to think about each decision. Deciding to *do* something interventionist should require careful thought and analysis. Which the bonus-caps stuff certainly hasn't had (can you point me to a careful analysis?). It seems to me that many commenters here are quite the reverse - they are keen for any excuse for the state to intervene more. I think that is bad -W]

whatever

[Some of that appears to be wrong; for example German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks’ aggregate capital. In other words, they lent more than they could afford. As for the rest, I guess your "whatever" means you don't care to summarise a complex situation. However, I don't dispute that German banks benefited from the bail-out. That doesn't mean it was lead by the banks; it was, as I said already, politically lead for political reasons; just as letting Greece in the first place was -W]

can you point me to a careful analysis?

Well, here's some thoughts worth considering...

<a href="http://leftoutside.wordpress.com/2013/03/03/the-eus-bankers-bonus-cap-w… EU’s bankers’ bonus cap will make banks safer and richer

Which in turn references Bonuses vs fines, which uses actual empirical research in the field of behavioural economics to argue that bonuses are not efficient, and in fact that "[t]he effect of bonuses is not to induce more effort, but rather to siphon off cash from bosses to workers."

(For the sake of completeness, I should note that Timmy disagrees.)

> [Its a matter of guiding principles, I think. Mine would be that the State should not be involved in the economy. Its not an absolute, its just a way to think about each decision. Deciding to *do* something interventionist should require careful thought and analysis. Which the bonus-caps stuff certainly hasn't had (can you point me to a careful analysis?). It seems to me that many commenters here are quite the reverse - they are keen for any excuse for the state to intervene more. I think that is bad -W]

States do intervene continuously in the economy to set tax regimes, to agree tax loop holes, to agree enterprise zones, to dish out council grants, to provide financial backing to large infrastructure projects, to protect consumers against what are perceived to be unfair practices. The European and UK governments on the whole would like to think they make these decisions with some degree of careful analysis of the political and economic situation. For example, setting up OFT to clamp down on unfair terms in contracts, regulating telecoms so you don't get ripped off if you step over the border while making a phone call; reigning in the dominance of one software company to allow innovation from others to come to the fore and so forth.

If you'd started with a careful analysis as to why banking ought not be regulated,

[I think you have it backwards. A bunch of pols, egged on by a public keen to burn some witches bankers, are proposing some ill-thought-out regulation. You, and they, ought to be able to point to the clearly-thought-out justification for this action. If you can't, you're obliged to admit taht there is no such clear thought. If you then want to go ahead, despite a lack of clear thought, that condemns you -W]

then you might have got careful thoughts about the risks of lack of regulation. But you started with what was perceived to be a glorification of bankers' hard work and a severe knocking of politicians trying to do something or to be seen to do something that might minimise an activity that many people believe has caused the much of the Western economy to come to the brink of destruction. So you started the fight.

[This is childish. "Mummy, he started it!" -W]

We really don't need so many investment banks. We don't benefit from having so many: we waste talent by allowing them to employ people to enrich a minority; we allow big successful businesses to be destroyed because collectively they have enough clout to short-sell the shares to a point where the business can be bought for a song; we allow small businesses to be destroyed because private capital based on massive borrowing (supported by investment banking) and the tax benefits it brings can wipe them out because of the unfair competition; the concentration of money in such a small space skews the politics. It took the near destruction of the Western economy for some politicians to a) realise it b) have the courage to tackle it. There are plenty of things the politicians could and should be doing about it.

[We really don't need so many investment banks (etc). That's your political programme for more state interference. I'm firmly opposed to it -W]

>[We really don't need so many investment banks (etc). That's your political programme for more state interference. I'm firmly opposed to it -W]

You are not firmly opposed as you also say:

>[Deciding to *do* something interventionist should require careful thought and analysis.]

I think there is plenty of careful thought and analysis to justify the proles egging on the pols to do *something*. The profits of investment banking have come about through prior "intervention" - it's not all one way.

[I think there is plenty of careful thought and analysis - well link to it then. You've jumped from "do something" straight to "have fewer investment banks". I'm firmly opposed to the State deciding how many investment banks we should have (with the proviso that fixing "too big to fail" might involve making sure none are too big to fail, which might involve effectively mandating numerically more banks, rather than fewer) -W]

> [This is childish. "Mummy, he started it!" -W]

I didn't say that, or anything like that.

we allow big successful businesses to be destroyed because collectively they have enough clout to short-sell the shares to a point where the business can be bought for a song

This is complete nonsense. It's a free market: if speculators drive the price of the business down to below what it's worth, other speculators come in and start buying.

How investment banking etc. growth has massively outstripped the "proper" economy during a period when economic growth didn't improve and then got worse:

http://www.economist.com/node/10881318

Written in 2008.

(I was going to say we don't need so many investment bankers - but it sounded too personal so I deleted the "er".)

[Its an interesting article, that I (now) recall reading when it first came out. Perhaps you could try reading it too:

Alan Johnson, a consultant who designs pay packages for Wall Street, predicts that in future senior executives will face the prospect of some of their bonuses being contingent on the bank's performance over several years. Yet to the extent that many senior bankers are paid in shares they cannot immediately sell, they already are. And to the extent that Bear Stearns's employees owned one-third of the firm, they already looked to the longer term.

If altering pay cannot stop manias, can regulation? The criticism that this crisis is the product of the deregulation of finance misses an important point. The worst excesses in the securitisation mess are encrusted precisely where regulation sought to protect banks and investors from the dangers of untrammelled credit growth. That is because regulations offer not just protection, but also clever ways to make money by getting around them.

Although in retrospect I bet they wish they hadn't said:

Spain's banking regulator prudently said that such vehicles could be created, but only if the banks put capital aside. So far the country has escaped the damage seen elsewhere.

And

If finance is foolishly reregulated, it will fare even worse

is exactly what I've been saying.

-W]

Their analysis of what to do about the situation is neither here nor there. Their evidence supports the view that investment banking is sucking life out of the real economy.

They've identified the fact that bankers will get around sensible regulations and will ignore incentives that encouraging them to think long term.

However, "foolishly reregulated" banking will shrink the finance industry, which does not seem like a bad outcome to me even if the article's writer didn't mean the comment to be taken this way.

I said: we allow big successful businesses to be destroyed because collectively they have enough clout to short-sell the shares to a point where the business can be bought for a song

Paul B said: This is complete nonsense. It’s a free market: if speculators drive the price of the business down to below what it’s worth, other speculators come in and start buying.

Valuing the business based on the sentiment of the market rather than the sentiment of the people who own the business is not always rational particularly when the short-sellers have ludicrously deep pockets. Remember, businesses depend on their valuation to borrow the money they need to operate. Forcing the price of the share down forces down the company value by stopping the company from operating.

Remember, businesses depend on their valuation to borrow the money they need to operate.

No they don't. Borrowing money depends on their creditworthiness, not their share price.

Go on, give us some examples of these big successful businesses you say have been destroyed by short selling.

You can pledge shares as collateral

the cost of short-selling went way up in the past few months.

[Too cryptic for me I'm afraid -W]

You can't use your own shares as collateral. Think about it.

Cryptic

http://www.forbes.com/sites/nathanvardi/2013/01/10/death-of-the-hedge-fund-short-seller/

"... Driving the reduction in hedge fund short trading is the escalating cost of selling stock short in the last few years....
... In other words, it can get really expensive for a hedge fund to borrow and sell shares it does not own in anticipation it will buy the shares after they have fallen in price. It’s not uncommon for brokers to charge more than 20% annual rates these days, which would mean a hedge fund would need a stock to drop substantially before it even starts making any money."

[shorting stocks has become increasingly tougher... the decrease of short interest activity in individual stocks—over 18 million shares on the New York Stock Exchange in July 2008 versus 13.3 million in October 2012 but surely this is largely due to the change in the markets: they are, in general, going up now. In 2008 they weren't. Shorting is not a natural activity now. Why is why your story is about Herbalife, which is proposed to be a fraud, not "normal" shorting of a business merely doing badly. You might find Bronte Capital on Herbalife interesting.

It’s not uncommon for brokers to charge more than 20% annual rates these days. I'm not sure, but isn't this the same thing? If you own shares, and expect them to go up, naturally you're going to charge a hefty premium for borrowing them. [Update: I've struck that, because its bollocks, as PaulB was kind enough to point out discreetly. In which case, I guess, I'm obliged to replace it with: OK, so what did the rate used to be?]

Another point is that shorting used to be innovative, but isn't now: everyone wants in, hence including rising demand for hard to borrow securities.

But overall: what is your point? What does an increasing premium for lending out shares demonstrate, to you? -W]