A COGENT DEFENCE OF BANKER BONUS (A WEEK IN ECONOMICS 14/01/14 – 20/01/14)

Week-in-Economics

Particularly integral to the economy are investment bankers. Due to the way the financial system has been constructed, investment bankers have considerable power in dictating the affairs of a country.  They have access to income, directly and indirectly, generated from every individual and institution in a country. From that healthy pool of money, they can lend making profits from the interest. Individuals, businesses and governments rely on them, and require them to dispense money or transfer money. Their influence is pervasive.

Thus, for bankers, the current debate, and regulatory proposals and enactments, on bonuses raging on Europe is almost offensive. European Union directives have been passed that cap bonuses to 200% of a banker’s base salary contingent on shareholders agreement. The UK’s ruling Conservative government is not happy, not because they believe the bonus is mistake; rather, imposing a cap could lead to decoupling the link between performance and pay. The UK government is currently challenging the law in the European Court of Justice.

The leader of the opposition Labour Party, Ed Miliband, agrees with the bonus cap, and disagrees with the UK government’s opposition. But the disagreement is fatuous. It was quite an intriguing spectacle last week watching the sophomoric Miliband arguing in parliament that a one million pound bonus for a person earning one million pounds was sufficient.  For the majority of citizens, this debate is far removed from their own toils of earning just enough money just to survive. If they could even earn a million, that would be a boon alone. Arguing whether a banker should receive a bonus on top of their extravagant pay packet seems more Alice in Wonderland than reality.  It is certainly divorced from their reality.

But they do not have that position in the economy: they are not regarded as a centrifugal force like banks. The man working in a local grocery store has a limited scope of influence in the economy, and therefore is valued far less than the banker.  Their hard work is not remunerated as highly, because there is less demand for their products. Banks are pervasive: their tentacles spread far and wide imbibing revenue generated from multiple sources. The grocer has far fewer avenues to accrue funds.

A sense of unfairness naturally occurs.  Unfortunately, this is the natural outcome of the free markets, which boils down to demand and supply. Governments have to step in at times when the market is distorted, but in this situation, it becomes difficult to adopt an appropriate approach to banker bonuses. It is true, the financial crisis was an effect of banker actions, but contrary to some opinions, it was not the bonus culture that created the fiasco. Paying a bonus or no bonus, the crisis would have still occurred due to issues intrinsic to the banking architecture. Without a causal effect to market distortion, the uproar against bonuses is more visceral than practical. In any event, investment banks like Goldman Sachs are already finding ways of circumventing the directive. One way is to increase base salaries. Thus an already high salary will become higher.

It is difficult to resolve this sense of unfairness especially as the lives of millions have been unduly affected by the mysterious actions of banks in the financial markets. For many, it appears the ones who had their hands on the trigger are still being feted. Nevertheless, since the fall of Lehman Brothers, governments in Europe and USA have been attempting to curb the powers of banks. But after seven years, aside from a few changes in the law, banks still remain in their lofty position of power. Separating the commercial and security side of behemoth banks like JP Morgan has been touted, but never followed. The ultimate effect of this move would have been to reduce the pool of funds banks would have had access to, leading to less hefty bonuses.

It has not happened, and probably never will. Instead, newspapers still regale its readers with tales of malfeasance involving banks.  There is a burst of condemnation, maybe the odd fine and redundancies as happened with Barclays and its former CEO, Bob Diamond. The reactions are dreadfully unsatisfactory.  All it exposes is how powerful banks really are. JP Morgan were recently imposed a fine of $2billion for failing to notice Madoff’s loose and fast usage of other people’s money. It hardly made a dent to JP Morgan’s fine and healthy balance sheet.

As one financial commentator remarked, the divine right of bankers remains intact. They are regarded as too important to the economy. To truly restrain and curb the powers of banks is not deemed as political expedient. How can it be? When a government’s objective is to ensure a high GDP growth, and banks supply the funds to make this possible, there is less will to clamp down. Labourers are not as important. Worse, they are considered replaceable. This is the sad reality, when one group in society is inordinately cherished, another group is neglected.

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