I was travelling on the Docklands Light Railway last night. For those unfamiliar with the city, this passes through Canary Wharf, London’s central business district.
I picked up a free paper lying on one of the seats, which turned out to be not the tabloid celebrity rags that normally pass for free papers (though don’t get me started on the havoc these wretched things cause, not to mention the distributors who cause pedestrian jams blocking the streets until you take one off their hands). It was a copy of a city-only paper, CITY a.m., which – not spending much time in such places – I hadn't had the pleasure of reading before.
The experience of flicking through it was enlightening once again as to how far my daily experience differs from those operating in our financial sector.
The property pages opened with a country mansion retailing at a modest £15 million. It also showed the other way round, how far bankers’ experiences differed from the rest of the world's. The main feature on the front page was a rant, barely hiding within its pretensions to journalistic objectivity, against the current proposals circulating at the G-20 for controlling bankers’ bonuses. The piece neglected to consider views outside the city, quoting instead several business and financial sources explaining why Brown had signed up to a “dramatic u-turn”, caving in to the “fresh, much harsher line” proposed by the French and Germans.
Alastair Heath, general editor, expressed the hidden views more openly on the next page. “The entire endeavour was a bit of a distraction given that no serious economist really believes bonuses were the primary driver of the crisis.”
Mr. Heath, as just one of ABOUT TEN MILLION examples, can I refer you to a recent op-ed by a fairly well-known Nobel Prize winning economist on the New York Times staff, which begins as follows: “Americans are angry at Wall Street, and rightly so. First the financial industry plunged us into economic crisis, then it was bailed out at taxpayer expense. And now, with the economy still deeply depressed, the industry is paying itself gigantic bonuses. If you aren’t outraged, you haven’t been paying attention.” Once you’ve got your Nobel Prize I’ll be willing to defer to your definition of “serious economist.” Until then, shut up. Ok, I'll accept a Fields Medal, but I somehow suspect you don't have one of them either.
But aside from such patent absurdities, I was more struck by the whole tone of the paper than its individual contents. The BBC, for instance, represents the same bonus proposals as “an alternative to a formal cap on bonuses sought by some countries” - that is, a remarkably soft option given the shafting the financial sector has given us in the past two years.
It’s amazing to me, and I suspect the vast majority of people on the planet as well, that this crisis seems to have had essentially zero effect in challenging the complacent self-certainty of these enormously privileged individuals. These people have caused so much damage to society through their desire to amass ever greater wealth for themselves and yet still seem incapable of considering the idea that their self-serving assumptions might need a little modification.
Nevertheless, amongst more general unpleasantness, Heath does make some points worth bearing in mind. First, he argues that efforts to control bonuses may not have their intended effects. “Basic pay would jump; high performers would be given regular pay rises; poor performers would suffer pay cuts or be fired. Bonuses would reappear, albeit in hidden guise. Caps would severely damage efficiency and make banks even more likely to fail. Linking all bonuses to overall profit would make it impossible to reward star performers in loss-making organisations, a recipe for disaster. Even worse, the proposal would only apply to the largest banks, triggering an exodus of bankers to unregulated, smaller firms, hedge funds and start-ups.”
Obviously, the consequences of new regulations are hard to foresee, and need to be open for alteration if they fail to achieve their intended effects. In a sense, these arguments add up to not much more than "Don't bother trying to stop us, we will do what we like anyway." But even so, it's important not to dismiss them entirely, because we want to engineer a system that is more stable, not more byzantine.
Still, I don’t agree with Heath's characterization of the impact of incentives. Heath’s argument is that capping bonuses would damage the good functioning of banks in general. First, this assumes that salaried workers aren’t capable of discharging their responsibilities properly. This is fairly patent nonsense; the world is primarily run by salaried workers. Also, to accept the claim you have also to accept that bonuses have traditionally incentivized “high-performers” solely to add value to the corporation. I think that this is a fairly debatable proposition in the aftermath of the world’s biggest financial crisis since the 1929. The danger with enormous incentivization is that you might end up incentivizing people to do something other than what you wanted in the first place.
Heath goes on to complain that it’s unfair these rules are applied to banks which didn’t fail and didn’t take taxpayers money, calling this the “disgraceful concept of collective punishment.” Three things here. First, the city often acts as a collective when it suits them – putting enormous pressure on government to deregulate it as an industry, for instance. Second, if you don’t have collective punishment you need to have individual punishment. But the “too big to fail” problem means that the market hasn’t delivered the moral hazard necessary for this. Third, I’m not sure if you’ve noticed, Mr. Heath, but the rest of the world deals with industry wide regulations every day. If you’re a nuclear plant you’re expected to abide by safety regulations even if you complain that you weren't responsible for Three Mile Island. Suck it up, Mr. Heath, that's life.
Not only do I think that these G-20 proposals are a good thing, I think they’re essential if we want to reassert the simple primacy of citizenship over financial power, to establish the principle that voters collectively run the country, not financiers. The proposals are not hopelessly radical. In fact, they are astonishingly muted. I hope that they’re just the beginning. Banking is too important to our national well-being for it to be left to bankers alone.
Canary Wharf sits as a towering boil on the right cheek of London, located far from the commercial, residential and entertainment areas of the city. Not for the first time, as I sat reading this rag in bemusement, I was forced to conclude how appropriate this seems.
Jesus H. Beck
55 minutes ago
