Nick Clegg’s leader’s speech to the party’s Harrogate spring conference contained a section where he gave the top-end bankers a good metaphorical kicking.
Personally I no sympathy for them. We will never live in an ideal world but, if we did, people would get paid according to what they contribute to society rather than the crude mechanism of what the market dictates. By that criterion, I have always believed that bankers are paid too much. The only thing you can realistically do to mitigate that is to tax them disproportionately so that at least that money can be spent on improving public services and benefit society as a whole.
However we do not live in an ideal world, and taxing people at the top end does not necessarily deliver the extra revenue, and there is no point in taxing people more simply to punish them with nothing in return. So let’s tax the rich by all means, but lets also take into account their cunning guile in avoiding paying up.
Today we see that paying people too much is not only unfair, it is also counter-productive. So Nick Clegg received a hearty round of applause for laying into them. No doubt he was hoping his outspoken attacks will hit the headlines and bring popularity to the Liberal Democrats. I hope it does … but in some ways he is missing the point.
The reason why bankers behaved irresponsibly was no doubt encouraged by “greed” – something which we are now all firmly against, but it was also encouraged by market forces. Many people caught up in the banking shambles were perfectly decent people, but they were simply doing what everyone else was doing and did not consider the consequences of their actions.
Of course they should have done, and possibly a few did, but it was not what they were paid to do.
There had been concern about the level of debt for many years, but as the years went by and growth continued it became easier to believe that the laws of economics had changed and that it was not only possible to go for short-term profits and not worry about the long-term consequences, but that the long-term consequences could somehow look after themselves.
Even on this forum I remember debating with fair-minded Liberal Democrats who believed that the level of debt was sustainable. My own opinions contrary to that were not based on my personal genius for understanding economics, but the arguments put forward by John Gary, Vince Cable and others that, at a simple level, growth fuelled by debt did not make sense and was bound to end in tears. I was expecting economic collapse year after year, and I really wonder today why it took so long.
So blaming the bankers in some ways misses the point: the real villian is the flawed nature of free markets. Free markets often contain bubbles, and as a result are inherently unstable. The Liberal Democrats have sensibly abandoned their previous penchant for deregulation, but it is also time to follow that logic further and stop pretending that we think free markets are so wonderful.
Regulating markets by definition reduces their freedom. Free markets work in some parts of the economy, but clearly not in banking. We should look critically in all parts of the economy, for example the spike in oil prices and the knock-on effects in terms of fuel poverty.
More fundamentally the Anglo-US model of capitalism is seriously flawed. It is not easy working out what new model of capitalism would work better but that is what Liberal Democrats need to attend to now. It was done before by the Liberals when Keynes won the economic argument over Hayak in the 1940s.
What we need today is a new Keynes to do the same thing again. Keynes effectively invented a new model of capitalism which for the first time brought relative prosperity to people who were previously very poor indeed. My hope is that leading social liberal economists like George Soros and Joseph Stiglitz may provide that leadership in the economic debate now taking place.
* Geoff Payne is secretary of Hackney Liberal Democrats.
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9 Comments
1) How do you establish the worth of bankers if not through the market?
The market is a discovery mechanism for the value of things.
If bankers are over valued it is not because markets don’t work, its because markets are not being allowed to operate (mainly thanks to those who, following the state socialists and Keynes think that the superior humans in government can manage the economy).
2) I agree, current capitalism is not working, but that is not a call for more meddling a la Keynes, but for freedom and liberty and acknowledging Hayek and his work on knowledge in society.
3) Far from Keynes winning some argument over Hayek, Keynesianism today bears little relation to what Keynes actually believed (he once commented that he was the only non-Keynesian at an economics conference).
4) The state management of the economy has almost halted the progress towards prosperity. It keeps the poor poor and helps the rich sustain their position. The last thing we need is more of that. Rather we need true liberals to stand up and call for freedom, not serfdom.
5) If you wish to make this a Keynes vs Hayek thing, I’ll take the liberal, anti-authoritarian Hayek over the eugenicist, managerialist Keynes any day.
The small minority of bankers who are gravely at fault are those who set and maintained the faulty strategy of many banks. They failed in their duties of care to the shareholders, to depositors, to others from whom the banks borrowed and ultimately to us as taxpayers because we guaranteed some of their activities. These few are the people that all those they failed should hit financially. They should lose, not profit.
There are many other people in the banks who did not set strategy. Instead, targets were set for them and bonuses offered if they met the targets. These are just contracts of employment, logically and legally the same as workers’ contracts offering bonuses for meeting production targets. If other workers in the banks get paid, so should these people; even if the bonuses some of them earned were very large.
In public policy, there were three major errors. One was that the considerable efforts made to improve the regulation of the financial sector did not search for the risks of a systematic crisis; risks which were becoming very large. Second, Our public finances were let slip into substantial deficit because the years after 2004 were not identified as boom years until too late. Third, when the finacial crisis was clearly impending, for 12 months after summer 2007, nothing was done to force the banks to get their act together, face their losses and raise capital to meet them. The buck for all of these stops, in Britain, with the man who was Chancellor and Prime Minister at all the relevant times; Mr Gordon Brown.
On where we go from here, I sympathise with Geoff Payne. Keynes did not invent capitalism. (If anyone did, it was probably Karl Marx. He was the first to describe it.) Keynes invented a fresh way of looking at the capitalist system; a way of understanding the system which made it seem much more manageable. Better management followed with immensely beneficial results. (By the 1970s, we had realised that there were substantial policy problems that Keynes’ approach did not solve, but that is another story.)
We need now a new way of seeing the system, from which we can develop better ways of managing it. I think that this new view is in gestation. It will be a view which will integrate Keynes’ focus on the real flows of goods and services with the flows of money and credit. It is a view which will admit the idea that some of the inflexibilities in the way our economise operate contribute to stability; and even on occasions to economic efficiency. It is a view that a major task of governmet policy is to see that risks on particular transactions are borne by those with the best knowledge to assess the risks; and that systematic risks are assessed and manged collectively. Systematic risks will be seen to extend to matters like climate change as well as to the risks of complex interactions within the finnacial system.
This bringing of the economy into a fresh focus is the fruit of many people’s work. It is not limited to social and/or economic liberals; but adopting it for our current economic team will feel ‘like putting on an old coat’; as Paddy Ashdown put it when asked how he adapted himself to advocating our policies when he entered politics.
I declare an interest. Geoff Payne is the energetic Secretary of my local Party (though we have never met).
The problem with the ‘ordinary bank workers deserve their bonuses’ argument is that these instutitions were bankrupt.
The decision by the government to step in to stop a more widespread meltdown of the banking system was probably right, but the cost of that is to leave the banks largely unreformed with a huge cost base, based on an inflated revenue model that is no longer relevant.
For these kind of state bailouts there possibly needs to be a halfway house where the institution is saved but all contracts are open to renegotiation to protect the taxpayer from looting. Afterall were a bankruptcy allowed to happen there would be no bonuses and redundancies pay only at statutory levels which in banking salary terms is next to nothing.
Something between those two extremes would surely be better?
David, you say that the buck should stop with Mr Brown.
However, would it not be possible to say that some of the blame spreads to the other two parties? The Conservatives called Mr Brown “Mr Regulator” or something like it. Back in Nov 2006, the Lib Dems were pointing out the regulations introduced since 1997.
I love your passion Geoff, but it ain’t a free-market problem. If anyone could start a bank – creating interest-accumulating deposits out of nothing for firms and families to speculate with in the hope of paying off the interest-laden debts they accrued from their last batch of borrowing – we might see something like a free-market in credit, with excessive salaries and profits ground down accordingly.
As it is, the cartel of companies that bankrolls the world has a special arrangement with its friends in national governments that protects its privileged and monopolistic position and prevents anything like the true economic liberalism the world now needs.
Unless and until the movers and shakers (like you!) in this Party grasp the fact that it is protective regulation and an UNFREE market what got us here – and continues to enslave us all – we’re not gonna come up with the policies to sort any of it out.
The superficiality of the posturing we now hear is exemplified by calls to increase income tax on those bastard bankers. The super rich don’t pay income tax – and even if they did, it is passed on in the costs of goods and services to the likes of you and me, with greatest and most pernicious incidence on the poor. Taxing trade makes people poorer.
You are right that “blaming the bankers in some ways misses the point”. However, “the real villian is the flawed nature of”… the un-free economic system – and the inability (or total unwillingness) of those in power to accept that they, their financial friends and the system that they jointly perpetuate is what needs to change. A regulative overhaul might make some politicians feel a bit better, but more likely it will simply reinforce the state-sponsored privilege and protectionism that creates poverty and, ultimately, premature death.
“It is not easy working out what new model of capitalism would work better but that is what Liberal Democrats need to attend to now.”
Damn right. My hope is that good, well-meaning, influential liberals like you will not wait for a Stiglitz or a Soros but will work out for yourself that Liberalism is indivisible, that social justice requires true liberal economics and that we have many and much to liberate – including the unfree market.
Mr Duffield.
We have a crisis in the banking system now not at some hypothetical point in the future. Your approach – basically to just cross your fingers and hope – does not address this.
This is no time to wait. If you have some proposals ready, then, by all means, discuss them. If not, is the party supposed to read your mind?
Complacency is not a good option at this time
“Voter”
Geoff’s post was about whether we should be kicking the bankers or the free market. I believe I have provided an appropriate response to that question. I have also written elsewhere about what should be done in the current crisis – none of which remotely resembles complacency or crossing fingers, but radical fiscal and monetary reform that would deliver sustainable social justice. Key to this is socialisation of the economic rent inherent in natural resource usage and in credit creation. By capturing and recycling such unearned wealth we could remove speculative bubbles and replace taxes on productive work – setting people free, relieving poverty and securing social justice, with environmental dividends too.
In terms of the credit crunch, I would have quantitatively eased the BoE’s £150bn directly into the economy via infrastructure spending. Rather than bail-out the banks, I would have expected them to write-down their toxic assets, then hold or off-load them at their true value. The market would do the rest.
The BoE should be the sole issuer of sterling, lending to private institutions at base rate – with competition ensuring minimal interest charged to customers over and above this. The banks would be incentivised to lend (i.e. invest) on the basis of equity returns rather than the unearned interest which they currently reap from firms and families irrespective of the success/failure/wisdom of their lending. The exchequer would collect base rate interest in lieu of economically damaging taxes, which could be cut. I would start by scrapping employer’s NI to relieve the pressure on jobs.
I could go on, but it’s late and I’m sure you get the gist…
Could you do a post on your blog (called Ad Lib I see) giving your position in detail and explaining why obvious objections to your proposals do not apply? I am assuming you have considered such objections.
In order for a radical change in policy to occur, a case will need to be made and this will take time to develop if it has not already been developed.
The general feeling seems to be that it was not a lack of freedom which caused the banks to go wrong. Rather, it was because they did not understand the risks they were running, leading to a sort of casino capitalism. This is my impression formed from my following what people like Robert Peston have been saying.
You have said that freeing the banks will solve the problems but I do not see how. Human nature being what it is, free banks may be just as capable of taking huge poorly understood risks. This is the kind of objection I would want to see addressed.
Can you lay out your position on your blog?
Geoffrey, I have asserted to you several times now in the Forums and on occasions when you have commented on articles on LDV itself that the banking system as presently constituted, in which private companies (the banks) deal in “stuff” (money, national currencies) that the state implicitly offers to guarantee, cannot be a “free market”. It is shot through with Moral Hazard and protectionism from its very inception.
It is crucial. Especially if you are going to be opining about bankers or helping to set party policy as to what to do to get out of this economic situation. Churchill was quite right that it is the system we need to attack, not the individual. In this case the system is not the regulatory regime or the bankers remuneration mechanism but the money system itself. The millie in which those bankers operate, for the most part entirely legitimately.
Actually the most accurate line in Nick’s speech was when he said that “Labour had blown their hot air into the bubble”. If we do not get the causes of these conomic crises right, we will never get the solutions right.
If we are going to be better politicians than the red-blue, blue-red governments that have dominated for a hundred years we must be prepared to break open this marriage of convenience between the bankers and governments and insist, as Nick suggested but nowhere articulated on building something new.