Welcome to 2011. A new year, a new start, but the same old problems. Financial regulation and bankers bonuses will be high on the agenda this year across the world as governments of all stripes try to put the recession behind them.
Bankers have been the evil face of the recession, with billions in taxpayer’s money being funnelled into failing organisations across the world, but it has proved difficult for any government to make headway in regulating both the actions taken and the bonuses given by financial institutions.
Why is this? Most, if not all, people agree the actions of the bankers involved in sub-prime mortgages and high-risk investment strategies were, at the very least, a catalyst for the problems now being seen world wide. So how come no government has been able, as yet, to heavily crack down on them.
Take the UK as an example. Currently the new coalition government is rolling out its austerity measures with the hope of eliminating the deficit in five years. This has included slashing the budget of almost every government department, a hike in university tuition fees and an increase in VAT to 20%.
Essentially what has happened is the ordinary people have to pay off national debt, put up with public service cuts and pay more for everyday goods because of a problem caused by the banks.
It is true large budget deficits are not good for any economy. They reduce business confidence, discourage foreign investment and can lead to unemployment and high inflation.
Financial services are also vital to the economy. The countries most affected by the credit crunch all have, or maybe had, large financial sectors, generating huge quantities of money, tax revenues and investment.
The question continually arising here is why the banks continually refused to take responsibility for what they caused and accept the part they should play in helping countries out of their current predicaments.
This time last year The Royal Bank of Scotland, which received a huge bailout from the government, defended its bonus strategy saying it had to attract and keep top bankers. Many people, myself included, criticised them for this arguing its current predicament showed they had no banking talent to keep.
On 11 January this year the new head of Barclays Bob Diamond said it was time for the public to stop blaming the banks and bankers and allow them to get on with their job as they see fit.
Their economic importance aside, this is just arrogance of the highest nature. A lack of regulation allowed the banks to cripple themselves, and every global economy, because of unnecessary risk taking, and the bonuses they are still receiving are several times the national average income.
Let us face facts, bankers are not badly off, and while people are all in favour of annual bonuses being paid to those who have earned them through hard work, it is ridiculous to have them written into a contract.
The Oxford English Dictionary defines a bonus as a sum of money added to wages for good performance or an unexpected extra benefit. How come etymologists understand more about how benefits should be paid than bankers?
So far this has been a bit abstract and a repetition of what most of the general public feels about bankers currently, so lets have a bit of perspective.
Public transport ticket prices in London have risen 8% on 2010 prices. Although this might not sound like much a monthly tavelcard for all zones in London cost around £170. Per month they now cost £13.60 more, £163 more annually. A 2.5% increase in VAT to 20% is a regressive tax as it cost low income earners more in percentage terms than high income earners. University fees will now be doubled to slash the government budget for higher education, but this means children from lower income families will be put off entering higher education due to the debt levels they will incur.
At the same time bankers still have bonuses written into contracts, many of which would allow them to buy and run a luxury car, write off any price increase and send their child to university without even having to break into their basic salary.
This issue has always had the second thread of regulation. The political right will tell you increased regulation is bad for business, while the left tells you less regulation means organisations will not act responsibly. As with most things spilt along ideological grounds, both are wrong.
No business will act responsibly unless they are forced to. Privet companies, as utility companies have shown us, act only to make a profit. However, if you hem in companies to act a certain way it takes any fluidity out of the market and punishes innovation.
Again we must look back at the causes. Excessive risk taking, with the sole aim of making a larger profit, caused a crisis which crippled almost every economy in the world.
For bank now read power station. If a power station had burnt down or exploded because the company was trying to make power faster to make more profit would the operators still be running the company. Of cause not, they would be serving prison sentences for criminal negligence and the inspection procedures at all power station would have been ramped up.
What if an international delivery company had lost several thousand packages? This would not have led to criminal prosecution, but would certainly have led to a revamp of the process and additional supervision.
Governments have issues with attacking banks. They are generally very powerful organisations which have high stakes in national debt, generate huge tax revenues and encourage investment in the country.
One of the major fears has always been banks leaving the country if increased regulations were implied or bonuses were taxed leaving the country in an even worse state.
However there are ways of dealing with both the regulatory issues and bonus culture without damaging the banks.
With bonuses there should not be a tax, plain and simple. The bankers will receive their bonuses in shares in the bank. This would mean their bonus value is directly linked to the performance of the bank. This has been thrown around before, but has never been implemented or properly discussed and no reasons have been given as to why this would not work.
In terms of regulation many people would argue it is time for the bankers to get off their high horse, admit they were to blame and to stop acting like petulant children.
No other industry in the world would expect to cause a global crisis and not get punished, and the banks have not been punished. Yes, we understand the burdens of regulation, but a lack of regulation allowed this to happen so surely it is the only option.
Problems do arise though. As already mentioned banks can move abroad to countries with lesser regulation causing a sudden plunge in tax revenues and investment, not a good thing for countries limping out of recession.
What needs to happen is a global deal on how to regulate the banks. This was a global crisis and as such requires a global solution, not 50 different ones varying from country to country.
The nuances of any deal are more difficult to explain, but independent auditing of records, stronger penalties for those who take excessive risk and an end to sub-prime lending are obvious places to start.
It is time the banks realise they work not just for themselves, but for the people, understand if it was not for intervention many of them would no longer exist and accept their greed caused the problems everyone is now facing, including unemployment, rising prices and public spending cuts.
Cyrano de Bergerac said “The insufferable arrogance of human beings to think that nature was made solely for their benefit, as if it was conceivable that the sun had been set afire merely to ripen men's apples and head their cabbages.” We appreciate the role the banks play, but nobody likes to pay for other peoples mistakes, and it was the banks mistakes.
To have the arrogance to turn around afterwards and claim you should be left alone with no punishment is an insult to the millions of people who now struggle to find work, cannot pay the mortgage and find it impossible to get a loan from a bank bailed out by their money
What the public feel now is not malice, but utter disappointment and frustration at the lack of action taken and the problems they must now face all because the banks want to get back to making obscene profits.
Nobody else in the world would be able to get away with doing what the bankers have done or as Napoleon put it “Never ascribe to malice that which can adequately be explained by incompetence”.
By the way, this is not a new issue. Chief Justice of the US Supreme Court Earl Warren once said “I hate banks. They do nothing positive for anybody except take care of themselves. They're first in with their fees and first out when there's trouble.”
