Wednesday, October 14, 2009

Mr. Big Bank Executive You Owe Me.

This is a reply to Tobold post today about a Fair Distribution of Profits from Banking.

Tobold if you set-up up a company selling mousetraps and it goes bust due to mis-managament then I may feel sorry for you but unless I was foolish enough to invest in your enterprise I don't end up paying your bills.

The past year has shown us very clearly that this is not the case for financial institutions. Every citizen ends up paying dearly for  mistakes in the banking and financial services sector.

This shows us that although we didn't realise it at the time  they were actually gambling with public money, our money, because of our dependence on a working financial sector and the public necessity of underwriting their bad debts.

Of course this means that that we need strong regulation to prevent financial institutions from gambling recklessly with our money. This is a lesson we seem to have to re-learn every few decades.

I believe it also means that it is absolutely wrong for the profits of gambling with funds implicitly underwritten by the public purse to be commandeered by such a small group. Any claims that these are a super elite who can only be motivated to do the wonderful things they do by astronomical salaries and bonuses are made laughable by the rampant evidence of outrageous incompetence, general untrustworthiness and greed motivated recklessness that these high paid high flyers have exhibited over the last few years. Yes cap salaries. Yes get rid of ridiculous bonuses. In fact not only do I want to limit indivduals ability to cream off an excessive return from taking risks with my money I also want to ensure that the institutions themselves are forced to pay us back for that "free underwriting" they enjoy. Perhaps this means part public ownership. Perhaps it means higher taxation. Perhaps it means being forced to pay hefty "financial insurance" premiums. 


Thallian said...

good post. I think public ownership might cause more problems than it solves, but increased taxation and financial insurance with increased premiums for failure are good ideas that will help regulate them some and make all profits from the insurance go back to the public they are taking advantage of.

mbp said...

You are probably right that nationalising banks is not the ideal solution. This is not about left versus right wing politics though. Even the most staunchly right wing free marketeer understands that if someone is gambling with your money then you should have a) some control over the risks they are taking and b) a decent share of the profits.

Thallian said...

too true

Anonymous said...

Interesting that you blame the bank for taking a risk and missing, rather than the government for letting the bank fail for missing. You would limit salaries instead of increase accountability. I say get the government out of the way and let them reap what they sow. A government bailout costs everyone, and teaches risk takers that there is a safety net.

mbp said...

I absolutely blame bankers for the outrageous risks they took with assets that were entrusted to them. The absolute primary requirement of a bank is that they do not lose the money which is under their care. Certainly governments and financial regulators were also extremely culpable but when someone commits a murder the finger of blame points first to the murderer not to the police for letting it happen.

If the banks were let fail as would happen with any normal business then I wouldn't care how much they pay themselves but governments all over the world have decided that banks are too valuable a resource to let fail. Given this scenario, which effectively means that I am underwriting the speculation of banks then I feel entitled to demand salary caps as well as tight regulation of their activities.

Tesh said...

Bankers and government. If memory serves, good old Thomas Jefferson had a few words of warning about both.

Pity we've ignored him.

Anonymous said...

mpb - where is the accountability for the "outrageous risks they took with assets that were entrusted to them"? There are no consequences for the risk takers if the government comes in and bails them out. They don't get sued by the public, they don't get prosecuted by the district attorney, burned in effigy by a mob, ruined by the press. They get a free safety net. And then because they have no black mark on their name, they go get another job and take even bigger risks because they are certain to get bailed out again.

Risk controls don't mean anything if there are no consequences of failing. Reputation doesn't mean anything if you are never at risk for damage.

mbp said...

I don't disagree with you - I would like to see those who took the risks bear be accountable for the consequences. However there is a strong message out there which seems to be influencing governments that says "we cannot allow these institutions to fail or else we will all suffer". I am not an economist. I don't know what would happen if we let all the banks fail. However the very fact that they appear to have this power over us to frighten public and politicians into thinking that they can't be let fail is enough to differentiate them from normal businesses which are left to sink or swim on their own resources. This is what justifies my demands for tighter controls on the risks they take and their remuneration.