Why Bankers’ Bonuses Matter

It is barely four months since Bob Diamond’s BBC lecture about how banks might restore public trust, which he acknowledged was then sadly lacking. He avoided discussion of excessive bonuses for doing not very much, and also the casino banking which got us into this trouble and for which he was responsible at Barclays. His lecture hardly revealed a man of super intellect, rather one who happened “to have been in the right place at the right time” (see http://www.gordonpearson.co.uk/06/talent-for-being-in-the-right-place-at-the-right-time/). Now, here we are again with bonuses being declared, but with Bob still being coyly reticent about his own take.

According to Peter Drucker, when bosses over indulge themselves at the corporate trough, they lose the respect of people within their organisation. Yet, while paying himself around £5.4m the previous year, Bob lectured that “if you can’t work well with your colleagues, with trust and integrity, you can’t be on the team.” Bob adopts the long discredited ‘rewarding success’ and ‘departure of talent’ defences of banker’s bonuses. He clearly doesn’t recognise Drucker’s ‘hatred, contempt and fury’ among his people at Barclays. Presumably that’s because he doesn’t see much of them, or because those he does see have their trotters in the same trough.

The really important question is whether the bonus culture matters in the outside world, beyond simple questions of fairness. Clearly, the general public has been hugely exercised about the outrageous inequality and unfairness of these payments. And it was no doubt that apparent ‘contempt and fury’ which persuaded the RBS boss to renounce his million pound bonus. But is it only the unfairness that matters?

These massive remunerations are just the visible tip of an enormous ice-berg. The important part, which lies beneath the surface, is what holed the global economy. One aspect of that enormous block of submerged ice is the Friedmanite fixation on making as much money as possible for shareholders having no regard to social responsibilities of any kind. In his lecture Bob endearingly confessed to Milton Friedman being ‘one of my favourite economists’! That probably says more about his understanding of the economy, or lack of it, than a million words of tightly written prose. The quickest way to make money for shareholders is to invest in the opaque derivative and synthetic ‘products’ that Bob and his investment banking colleagues have favoured with such enthusiasm, rather than to invest in the real economy which he claims to espouse and which quantitative easing is supposed to support, but quite obviously doesn’t.

Bob’s heart-warming words about trust and integrity, even if they were genuinely intended, could have no impact on the ice-berg, merely on public perceptions of its visible tip. And if, with their nice words, Bob and his colleagues were successful in moderating the public’s ‘hatred, contempt and fury’, the Friedmanite folly would be resumed and we would be back to business as usual. It is the iceberg itself which has to be dealt with.

The ‘madmen in authority’ including the Governor of the Bank of England as well as the Chancellor and Prime Minister, do not distinguish between the real and the speculative sectors – something Friedman also never did. But that distinction is essential if we are to progress. The only way the real economy will be supported is by making speculative investment less lucrative. There has been no shortage of suggestions from many quarters as to how this might be done (for example, see http://www.gordonpearson.co.uk/22/the-road-to-co-operation-escaping-the-bottom-line/). But the ‘madmen’ have led our economy to being so dependent on ‘investment banking’, they simply daren’t act.

Not only have they done nothing to constrain speculative returns, they’ve underwritten speculation’s risks at taxpayer expense. And by adopting the ring-fence idea, look determined to continue doing the same. Their claim to be business friendly is absolutely and obviously untrue in relation to the real economy.

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