The bankers and the tsarists after 1905
We are, I think, living in precarious times.
Oh, just another prophet of doom.
The Government have just about admitted that they can’t do anything to stop the bankers paying out obscene bonuses this year. They have been held to ransom on a lie and an inconvenient truth. The lie is that unless we allow the bankers to pay each other obscene bonuses, they will up sticks and relocate to Switzerland, Shanghai or Frankfurt, so destroying the City of London’s pre-eminent place in the world; but the inconvenient truth is that the Government needs the tax revenue that these bankers will pay on their obscene bonuses.
The problems in Greece play into this doom-laden scenario; the Greeks, like us, have been enjoying a life financed by credit that can never be repaid. The old way of repaying debts, through a healthy dose of high inflation, no longer works.
But the Greeks’ debts and the bankers’ bonuses aren’t the problem. They are symptoms, but not the cause of a deeper malaise; and everyone who has paused a little amidst the echoing shock and horror to think about it knows that tackling the cause will be much harder, and much more painful for most of us, than despairing about the symptoms. For now, at least. Until the next wave. Until 1917 follows 2008’s 1905 – the parallel being political. I think the bankers are behaving like the Tsarists and the Russian aristocracy after the 1905 revolution: ignoring the warning signs, the evident discontent all around them, so isolated in their palaces and trading desks that they believe themselves to be immune to the consequences of revolution. So what is the cause? No marks for originality here, but I think it’s inadequate competition in financial services: creating a broken international banking system at the heart of which is our own dear City of London and its downstream overspill at Canary Wharf .
I’m an amateur economist. I don’t get paid to do economics and I’ve read only a few first-year undergraduate texts on the subject. I tend to use a notoriously unreliable method – the sample of one, myself, not picked at random, to structure my conjectures. I’m also proud to call myself a small-l liberal, which I use to mean something closer to libertarianism (a horrid word) than to big-L Liberal. In my opinion, in a free market, excess profits are the result of, and therefore an indicator of, competitive failure – or, as it is called now, “market failure”.
I think that the whole financial services sector has for a long time been generating excess profits, and by that I mean profits that exceed over the long term the average growth rate of the economy. The bankers’ obscene bonuses are strong indicators of this, and also need to be considered as part of the excess profits. However, the competitive analysis isn’t straightforward, because at many levels the financial services sector is demonstrably and fiercely competitive.
Those profits come from various sources, but ultimately from our savings. Our savings have been foolishly lent to insolvent sovereign governments like the Greeks, foolishly invested in dot.coms and foolishly lent to wastrel mortgagors on impossible multiples. At each stage, the transactions made a profit for the bankers and the traders who placed the deals (with our money), and eventually our money is lost. In Greece, it went to pay corrupt politicians and their acolytes, overpaid and underworked civil servants and some of it even trickled down to some of the rudest taxi-drivers in the world. In the dot.coms, most of it went on absurd payments to the dot.com insiders and their initial backers; in sub-prime housing, to iffy developers and landlords and their agents. A network of corruption in each case just this side of legality and so flush with our money that it created illusions of growth in the wider economies concerned.
Every time, it’s the poor bloody retail saver who got screwed. Every time, the bankers pocketed our cash before it all went titsup. Each new generation of wunderkind, bowled over by the bull market – the market powered by bullshit.
Well, it can’t go on. We, the poor bloody retail savers, are not going to put up with it much longer.
The banks must reform. Not fiddle with capital ratios (although they matter), but address commission, competition and compensation.
And how can that be done?
The clue is in the title of this blog.