Here’s your starter for ten in our Saturday slot where we throw up an idea or thought for debate…
Bonus for bankers are in the news once again, with talks involving the banks not yet reaching any agreement and with Deputy Prime Minister Nick Clegg keeping up the political pressure, telling the Financial Times:
“The banks should not be under any illusion this government cannot stand idly by. It is wholly untenable to have millions of people making sacrifices in their living standards, only to see the banks getting away scot-free…”
Mr Clegg, the son of a banker, said that he wanted to end tensions between the government and the City, but he added: “We can’t do that unless we have a cathartic settlement where we see visible restraint from the banks and sensitivity to the context in which they operate.”
Agree? Disagree? What would you do? Post your comments below…
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58 Comments
Agree, cautiously. It is right that the banks are reformed. The casino element is clearly dysfunctional. But a consequence of that will be some firms leaving london for more hopitable regimes. The very self-interest that caused the problem will make that inevitable. So there needs to be some hard thinking about how to replace them with other types of economic activity.
I understand that banks are still being supported through the lending markets by the Bank of England by being able to borrow money at near 0.5% rates which they can then lend on at much higher rates. Why not charge them market rates for a multiple of their bonus pool – say 25 times the amount paid in bonuses?
I think that what people fail to realise is that much of the “value” created by the casino end of the banking sector is actually based on destruction of value in the rest of the “real” economy. Mergers and takeovers usually destroy value on a net basis, creating uncertainty and forcing management to focus on short term considerations while hampering them in making long term investment. This is particularly true in the UK, where the City’s role has been to connive in the massive sell off of UK productive assets in order to gain juicy fees. Furthermore, the financial sector sucks in all the available talent from our best universities into one region (London and the South East), leaving meagre pickings for the rest.
Instead of playing a supporting role for the rest of the economy, UK financial sector is actually hugely destructive of the rest of the economy, particularly outside the South East of England. We should close our ears to any special pleading from the banks and press on with much needed far reaching reform. If we don’t do it now, we never will.
If you want the facts and are not too sensitive about swearing, here is an Irishman telling it as it is: http://www.youtube.com/watch?v=koY6kXhQDQo&feature=youtube_gdata_player
Happy Christmas!
I don’t quite understand why bankers should get a large bonus share of the commodity they deal in.
A skilled crafteman, working in gold and diamonds and making expensive jewellery doesn’t receive a huge bonus in gold and diamonds at the end of the year. The skilled workers on the Ferrari production line dont get a Ferrari as a bonus at Xmas.
They get a bonus commenserate with their salary not with the product they produce. The fact that bankers deal in money should not make a difference.
If we take this to its logical conclusion architects would receive a ‘free’ office block’ for every ten they design, or teachers might want a percentage of their pupils’ earnings.
Perhaps the Cabinet should be paying a percentage of their income to their Oxford tutors every Xmas.
The world has been conned by the bankers because they say they will only work for a percentage of the profits of the product the deal in.. They didn’t prior to the 1990s, so why should they now.
Am I the small boy who has spotted the Emperor isn’t wearing much?
There is absolutely no chance of stopping the banks in my opinion, curb the bonuses indeed, but all it means is that the banks will find a work around, we have already seen some parts that will be affected raising pay substantially, so instead of bonuses we will have performance rated scaled pay…bonuses in all but name…
The only way forward is to separate casino style banking from standard personal banking, then if investors want the higher rates these risks payout, they can choose to do so, and so those who want to take risk with savings can also opt to use casino style banks with the risks involved… as long as it is made clear the government will not bail these banks or those that choose invest their savings in them…
No come backs you want the higher payouts you take the risks… not the taxpayer
We had no choice we had to bail out the banks this time… we must make sure that the risk stays with those banks that take that choice, so if the banks cause another crash we can let the banks crash without causing anarchy to the rest of society.
If there is no separation, we the people will have to bail them out again sometime in the future… and that is so wrong…
Separation and no government/country guarantee that is the only way to force the banks into control, and one thing more make the laws for fraud and banking irregularities stronger including real long term sentences, make someone responsible; the top dog gets the top pay so the buck stops there if there is no one else he is responsible. It is time we stopped playing by the bankers rules…
Jim
Rather than targetting the bankers, I’d prefer to to see more done on establishing a direct connection between the lowest incomes and the highest incomes.
Some have suggested the highest income should be no more than three times the lowest income. That might be a bit of a shock, but I don’t think ten times the lowest income is unreasonable. It could easily be introduced through taxation initially until salary setters get the message.
Robert Peston has a suggestion on how the government could exert some pressure to reduce bonuses: threaten to do a Merkel* unless they show restraint.
*I.e. tell them that their borrowing from wholesale markets is no longer guaranteed by the government.
This is the wrong question to ask. A better question would be why is Clegg so fixated by bonuses. There is very limited evidence that bonuses ’caused’ the crisis. The only effect of reducing bonuses would be to increase banks profits – why is this better than paying bonuses? Furthermore a very large part of bonuses goes straight to the Government – on a £1m bonus the government gets around £638k.
Financial Service and the City are one of our few world class business. They contribute over £50bn a year in tax and huge amounts of foreign exchange. All of this is under threat if London stops being the second biggest financial centre in the world.
The combination of high taxes, absurd rules on bonus and hostility to financial services is putting all of this (and the £50bn a year) in jeopardy.
@Simon McGrath
There’s plenty of evidence the banks caused the financial crisis.
I’d be interested to see your evidence they pay £50 billion a year in tax to the UK.
Truly pathetic to see Nick desperately trying to be popular again by having a go at the only people in society possibly more hated than him if the polls are correct. I don’t think the public are going to buy it for a second. It’s all just so much hot air and posturing.
Unlike what happened in Ireland, Osborne will do nothing to stop their bonus bonanaza even with the publicly owned banks. This even though Osborne gave the Irish banks a £7bn bail out from the British taxpayer.
Unapologetically unrelated comment.
I am currently in the UAE and I tried to access the member’s forum, and was surprised to find that the forum is banned on the internet in the UAE! Liberal Democrats are obviously dangerous subversives.
I’d like to see an exit tax, for individuals & businesses. When you leave the country having been resident, you either you continue paying UK taxes or pay a one off levy on your annual income & total assets.
The problem is one of the hypocrisy and high hog living of `casino bankers’ whilst the remainder of the Country is suffering the brunt of the financial crisis caused by the combine of the previous Governmnent`s reckless policies that led to the racking up of the `National Deficit’ to £160B and enforced bank `bail-outs’ .
Lord Mathew Oakeshott our brilliant and admirably practical plain speaking Treasury Spokesmen has called out the bankers to stand in line and pay their part in the national recovery being led by this more progressive `Coalition Government’.
Lord Oakeshott has said rightly that bankers are a `poisonous fungus’ that `thrives in the dark’ and on Newsnight 17/12 that `bankers are deluding themselves if they think they can carry on paying themselves as they have been’.
It is clear that the L/D Treasury Team have workable solutions to offer that should be understood and applied in the light of the banking commission report in 2011.
It is expected to recommend the separation of ordinary retail banks from the high hog `casino banks’ that have plunged the Economy close to recession over recent Labour years.
Many small businesses are dependant on banks to make timely loans, especially at the start of a new year and stimulus must be seen to ensure that there is a fairer lending process and lower rate, to the small firms in the High Street.
Lord Oakeshott does not wince or mince with the horror of the `bankers bonus culture’.
The City does require and is dependent upon a stable Economy in which to do business but should take heed at the warnings as L/D`s are intent and pledged to hold them to fair account to ordinary families.
@Niklas Smith – the threat not to underwrite would be worth considering, but it will only be credible following reform so that the banks are not too big to be allowed to fail. With the current structure of the industry the banks in the UK know that such a threat is empty. Germany has, I believe, a completely different structure to the banking industry, with more smaller regional banks. It also has a different understanding of the purpose of banking within the broader economy. The banks are there primarily to provide long term funding to productive activity and to keep the real economy moving, rather than being a casino in which astronomical profits can be made withouth doing anything very useful.
My comment earlier was not so much directed at bonuses as reform to the structure of the industry. I think the comment above – that banks will find a way round whatever regulations are put in place – is spot on. The financial crisis was largely a product of financial innovation which meant that regulators (and the firms themselves) didn’t understand the risks involved and were unable to regulate effectively. Of course the bankers are clever people – they can afford to recruit the smartest – they can play with any ambiguities in the regulatory system to do what they want to do. The regulatory regime will always be running to catch up, and it won’t . The only way to have a chance of effecting meaningful change is to have very firm prohibitions that the banks cannot circumvent without clearly as a consequence breaking the law. Not unlike those that were demolished as a precursor to the recent financial crisis.
Concentrating on bonuses is a waste of time, just raise income tax.
Investment banks didn’t cause the crisis. It was reckless lending to the man on the street that largely caused it. And that was encouraged as the previous governments wanted to create a homeowner society, and wanted to create the illusion that because people had access to easy credit, their living standards were improving. Instead of building social housing for people who couldn’t safely afford mortgages, Labour relaxed the regulation that required banks to check if the people they leant money to could pay it back. Obviously lending to unsuitable people created risk for the banks, but they thought they could reduce the risk by creating derivitives, which while made them money, sliced up the debt and shipped it all over the world, and led to the credit crunch as no one knew who had what debt.
The natural reaction is to hate the banks and want to curb the bonuses, but the truth is we all played a part in this ridiculous charade, and we should learn from the lessons rather than making scapegoats out of bankers.
The coalition now has tougher regulation on who the banks can lend to, which is why the banks aren’t lending as much. In the long run that is a good thing, but in the short run it will mean less debt fueled growth.
If we tear about the banking system we will just be shooting ourselves in the foot as we’ll lose tax revenues, which will hardly help in distributing wealth to the poorest. We need to make the banking system safer with intelligent regulation, and make it so bad banks can fail without us bailing them out. We don’t need to chop off our nose to spite our face.
@Sam
That’s complete nonsense. No one forced the banks to lend. They did it because they wanted to make money. They splashed out on lavish advertising, offered free gifts, novelties and incentives. They did the same with credit cards and selling insurance.
@RichardM
‘There’s plenty of evidence the banks caused the financial crisis.
I’d be interested to see your evidence they pay £50 billion a year in tax to the UK’
If there is plenty of evidence could you give us some of it please?
the info on taxes comes from this recently published research report:
http://217.154.230.218/NR/rdonlyres/68F49A7E-8255-415B-99A8-1A8273D568D9/0/TotalTax3_FinalForWeb.pdf
The best thing to do is to make sure that if banks ever, ever need govt support, they have to give almost all the equity to the govt in exchange. Then shareholders have an incentive to control bankers. So long as bankers are not a call on the rest of us financially, then I am relaxed about how they are paid, and how much. I have the same approach to footballers and celebs.
In America Clinton passed laws to force banks to lend subprime mortgages. Indeed Freddie Mac and Fannie Mae were government sponsored banks which were designed to do just that.
In the UK, it wasn’t enforced by law, but it was definitely encouraged. The Citizens Advice Bureau complained about the government’s encouraging of reckless lending before the crash happened as they could see the destruction it was causing.
It’s naive to think that the government didn’t play a role in this. They benefited massively from the debt fueled growth of the last decade, and creating the illusion that people’s living standards were going because of easy credit. The last decade is seen as golden age by some, but for me we merely spent the decade digging ourselves into a massive hole and now tragically we have to face up to that.
@Simon McGrath
I thought that was probably your source.
That represents the total payable by banks, insurance companies, betting and gaming industry, building societies, mutual and friendly societies and even the Post Office.
And In fact the largest amounts come from employing people, and the employees PAYE tax and National insurance across the sectors.
Regardless of where they are based, the banks would still pay these taxes as a normal cost of trading in the UK market.
Many of the taxes inculded in your figure are business rates on the properties in the high street, the fuel duty for cars, and even includes the London congestion charge.
The amount of corporation tax paid by the banks is actually very small – approx £0.5 billion, NOT the £52billion you imply.
The Fannie and Freddie / Community Reinvestment Act (CRA) excuse for Wall Street’s orgy of greed is a Neoconservative fallacy just like Weapons of Mass Destruction was.
Half of all subprime loans were made by institutions that are not subject to ‘political pressure’ like the CRA. And another substantial share of subprime loans were made by subsidiaries of banks that do not fully come under CRA. The number of riskier loans banks were forced to accept by CRA were not enough to be a problem by themselves. Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending.
If the sub prime loans were such bad news for the Banks and others then they wouldn’t have kept issuing them again and again and again. They were making the Banks and those who used them in pig in a poke financial “products” (CLO’s & CDS’s) unbelievable amounts of cash in the boom times and the fact that they were a huge gamble mattered little when the gravy train rolled into town.
Lehman Brothers paid $8.7 BILLION in staff Bonuses in the sub prime boom time of 2006.
Doesn’t sound to me like they were stumbling under the weight of unprofitable risky loans “forced” on them by Politicians and the British Banks were and are still paying out record bonuses.
@Simon McGrath
Correction : The amount of corporation tax paid by the banks is actually very small – approx £0.5 billion, NOT the £50 billion you imply.
@Sam
I’ve heard all that nonsense before, Sam. First you blame Labour. When the incorrect analysis is pointed out, the finger of blame then goes to Bill Clinton. Anybody, but anybody – except the banks and their massive bonus packaged executives.
@richardsm – I agree the banks are not paying much corporation tax at the moment – they have huge losses to offset which will reduce their corpartion tax for years to come.
But the great things about the sort of financial services that are based in he City is that the employees manage to extract very large amount of the revenue as pay – which flows straight through into NI and Income tax.
Mr Clegg and Mr Cameron will do nothing about banker bonuses. Both are true Tories and neither of them are going to upset the wealthy of this country. Mr Clegg of course made all those noises before the election about “reigning the bankers” with Mr Cable, but like almost everything these men said then, it was simply to attract votes. As for Mr Cameron and “we are all in this together” …………
@Simain McGrath
You’re obviously not aware that the bonuses go into Employee Benefit Trusts set up in offshore accounts. Only the basic salary attracts income tax and NI.
It is strange how the Coalition can bring on the changes that affect the ‘ordinary folk’ overnight but curbing the excesses of bankers seem to be taking forever. We are all in this together – only some more than others.
Bonuses are not the issue and never have been. They are mere froth on the surface of the great cauldron of credit creation alchemy that is fractional reserve banking – sanctioned and licensed by governments the world over, at massive and unsustainable cost to themselves and their people. By legislating for a return to full reserve banking, control of national money supply would return to the state (with all the economic dividends that would bring) and the profit pot from which banks pay their obscene bonuses would diminish accordingly.
Check out the genuinely Liberal solution at http://www.positivemoney.org.uk/
@richardsm – people have used EBTs in the past although they have always been pretty high risk as the revenue hate them .
but the colaition have now closed them down
What should be done about banker bonuses?
I don’t care.
What I want is some way of compartmentalising the damage done when a bank goes pop, so that there will be no future trouble with bank failures. After all, there are few other industries in which people are horrified to see a competitor go bust.
@Simon
A better question would be why is Clegg so fixated by bonuses.
Politics, obviously. Bankers are not popular now, so all wise politicians will line up to attack them as long as they remain unpopular.
All I can say is talk is cheap – let’s hear what the detail of the penalty or clawback scheme is going to be for obscenely large bonuses.
But to draft a scheme the government will need to decide what is an acceptable level of bonus payments and I suspect that the Clegg and Cameron definition of ‘acceptable’ might be in a different universe ffrom the vast majority of the public.
So they make with the threatening mouth-music in an attempt to coerce the banks into self-policing the bonus levels. Well, what will the banks do? I reckon because of their fairly unique position in being able to move money about, they will find new words for ‘bonus’ and pay the amount offshore or in a way that doesn’t attract tax . And as one scheme is ‘outlawed’ by the Revenue then another will be launched and it will all be legal.
Whatever scheme they devise , I think the Exchequer will be the loser which means all the rest of us poor mortals who are on PAYE which just need to stump up more.
Yea, I’m being negative but I’m aftraid I just don’t believe that Cameron and Clegg and all their multi-millionare chums in the cabinet are actually going to attack the rest of the rich club.
I think that the 2008 financial crisis took most people by surprise – very few economists or politicians called it correctly. The irony was that despite all the free-market rhetoric from the finance industry the first thing they did when they failed was hold their hands out for public money. That rankled very much with many ordinary voters.
Unfortunately, I don’t believe that there was any alternative to the bailout at the time. However, if any government allows the banks to hold the country to ransom a second time then that government will rightly never be forgiven. It does not appear to me that the Coalition has taken the decisive action to prevent a repeat performance.- I hope for it’s sake (as well as ours) that it has done so before another crisis hits us.
There’s a lot of confusion about the crisis. In a sense, there were two crises.
The international financial crisis, which resulted in the UK government acquiring shareholdings in some of the banks which it will sell at a profit, and giving temporary financial support. The financial crisis also triggered a recession, which, among many other things, has resulted in a fall in cyclic tax revenue of about £50bn. As this is a cyclic deficit, which will go away when the economy recovers, so it’s a temporary problem.
The crisis that is hurting us now is the deficit crisis. This is the £100bn structural part of the deficit, which won’t go away as the economy recovers. (£100bn structural + £50bn cyclic = total £150bn deficit).
This was caused by Labour running a £30bn deficit in the boom, but mostly by the collapse of a debt and housing bubble, and the resultant collapse in tax revenues. The Eddie George (previous governor of the Bank of England) acknowledged this was in large part down to policies, as has Mervyn King (the current governor).
The financial crisis was serious, was a result of a combination of regulation failure and extremely serious mistakes on the part of banks, and has caused a very nasty recession.
But we shouldn’t blame the banks for all the pain we’re going through with the deficit.
I think we need to be hard-headed about the banks. We do need to work through how to reduce the risk to the UK of banks that are too large to fail, and banks whose existence is jeopardised by being linked to casino banking. Where possible, this should be through international agreement. But, if we are clumsy, we will damage the City of London, reduce tax revenue, and that will mean even deeper cuts in public services.
The issue of bonuses is a red herring. Though if it is used too much as a political stick to beat the banks, it may drive businesses out of London, which would make the present situation worse.
@George Kendall, sorry, no dice, The Tories promised to match Labour’s spending pound for pound, as a percentage of GDP, the deficit ballooned after the banking crisis, to try and absolve the banks of any blame is disingenous to say the least. We’re being conned into panic to sort this out, you only have to look at the nonsense Ireland are going through where they initially said they didn’t need a bail out and were told they were having one whether they liked it or not, to see that this is all about the banks.
@tim leunig interesting suggestion. What’s your view (and indeed any other poster’s) on Tobin Tax / Robin Hood tax as away of tackling this issue from a different direction?
@Simon McGrath
You’re slowly realising why this is an issue.
You thought the bankers were paying income tax and NI on their bonuses.
“The natural reaction is to hate the banks and want to curb the bonuses, but the truth is we all played a part in this ridiculous charade…”
How did my daughter cause it? She’s expecting to start university next autumn?
How did my aunt cause it? She’s been single her whole life, is a nurse and lives in rented accomodation.
How did my mother cause it? She took out a mortgage in 1963 and finished paying for it in 1988.
How did my postman cause it? He lives on the council estate, and has worked for the Royal Mail for 23 years.
All these people are expected to make considerable sacrifices from now on because of something that was going on in the city.
@George Kendall
How do you go from saying the deficit was £30 billion before the banking crisis – and has now risen to £150 billion, “but we shouldn’t blame the banks for all the pain we’re going through with the deficit”?
@Anthony “The Tories promised to match Labour’s spending pound for pound, as a percentage of GDP, the deficit ballooned after the banking crisis, to try and absolve the banks of any blame is disingenous to say the least.”
You’re right. For a period, the Tories did promise to match Labour’s spending plans. We in the Lib Dems didn’t cover ourselves in glory either.
I’m not making an anti-Labour point here. The Tories made a similar mistake in the boom leading up to the recession of 1990-2.
Despite the Conservatives briefly running a budget surplus in the midst of the boom in 1989, once the recession hit, the deficit ballooned to about 7.5% of GDP.
That recession was caused by the US savings and loan crisis. But the reason why the deficit was so large was the same reason why our deficit is even larger. A bubble had generated a lot of temporary tax revenue, particularly in the housing sector. The bubble that burst this time round was even bigger, partly because the boom went on so much longer.
I’m not absolving the banks of blame. Parts of the banking system behaved appallingly. Their promotion of cheap credit without conditions did make the bubble worse.
They are responsible for the huge pain of the recession. It was insane to believe that bad loans could be made safe by an system of spreading risk that was so complex that almost no one understood it. So they are responsible for the £50bn of cyclic deficit, and for the large one-off costs of bailing them out.
But while they are responsible for causing the crisis that triggered the collapse of the bubble, that bubble was bound to burst eventually anyway. And the reason for that bubble was down to policy mistakes, not just in the UK but in the US and elsewhere. A few countries responded to the bubble by balancing their budgets. They were still hit by the bursting of bubbles, but not as badly as we have been.
We’ve also been hit harder than other countries because part of the financial bubble, and we have a larger financial sector than most countries.
@RichardSM “How do you go from saying the deficit was £30 billion before the banking crisis – and has now risen to £150 billion, “but we shouldn’t blame the banks for all the pain we’re going through with the deficit”?”
A good question.
The recession caused a temporary fall in economic activity of about £50bn, which will automatically recover as we come out of recession.
The rest is the structural deficit, the part that won’t automatically recover. We already had a deficit of £30bn. So, as (£150bn – £50bn – £30bn) = £70bn. Your question is: where did the remaining £70bn come from?
If you look at the following article,
http://business.timesonline.co.uk/tol/business/economics/article5914240.ece , in 2009, tax revenues from financial companies were estimated to fall by £28 billion between 2006-07 and 2009-10. And that was just the financial companies themselves, it doesn’t account for the effect of the end of the financial bubble on other companies, nor the effect of the end of the housing bubble.
I’d suggest that most of that £70bn is accounted for by the end of the bubbles.
Now, I grant you, all these figures are very appoximate, I’ve deliberately rounded them to reflect that. And determining what is the end of a bubble and what is caused by recession is a controversial and subjective question.
It may come down to definitions. Was that loss of £70bn due to a burst bubble, or permanent damage caused by the banking crisis?
I’d argue the former, because I think it was temporary economic activity that couldn’t be sustained, and was going to end sometime anyway. And if I’m right, then politicians (of all parties) should be sharing more of the blame.
And I’d argue that those who put all the blame on the banks are absolving politicians and the Bank of England from their share of the responsibility.
@George Kendall
You’re conflating your economic figures with your deficit figures.
You identify a temporary fall in *economic activity* of £50 billion and then deduct it from the deficit of £150 billion.
I assume you can’t the question.
Typo
I assume you can’t answer the question.
@RichardSM “You’re conflating your economic figures with your deficit figures”
You’re right, it was a typo.
I meant “The recession caused a temporary fall in economic activity which led to a temporary fall in tax revenue of about £50bn, which will automatically recover as we come out of recession.
@george Kendall
So – the question remains the same:
How do you go from saying the deficit was £30 billion before the banking crisis – and has now risen to £150 billion, “but we shouldn’t blame the banks for all the pain we’re going through with the deficit”?
This is obviously a ploy.
Clegg et al are desperate to win the Oldham East & Saddleworth by-election so they’ve started to become just little bit old-LibDem because it wins votes.
Clegg doesn’t give a damn about bankers bonuses….. anymore (did he ever?).
@richardsm – lost of bankers would like everyone else like to avoid paying tax and NI. but they cant which is why the city is so good for our economy.
If people think it is just bankers’ bonuses that need addressing; they don’t understand the problem. It is the massive profitability of the financial services sector, acting as a massive multinational oligopoly, and the entire reward system for top earners in that sector. This totally distorts the rest of the economy. If we allow ourselves to be distracted from that truth and focus on mere bonuses, then, in five years time we will be in the same mess as we are now, and those who have focussed on bonuses alone will have allowed them to run rings around us again. As it is, the focus on the bonus means many have missed that fact that many senior bankers have had a substantial increase in basic pay, to allow for any apparent drop in bonuses already.
@Frank who said: ‘Clegg doesn’t give a damn about bankers bonuses….. anymore (did he ever?).’
I think he might Frank because was his dad not a banker – so the bonuses probably educated Clegg and helped lay the basis for his current millionaire status.
He will also move in personal circles where his pals get the bonuses – same as Cameron – so I find it hard to see any real crack-down. Watched Cable on Marr this morning on the issue and – as usual – no answers and no detail. Same with tuition fees and I repeat: what are the ‘exceptional circumstances’ that will allow unis to charge more than £6k.
I wonder if we’ll even get an answer to that one before Parly debates the issue again next year.
@RichardSM “So – the question remains the same…”
I did answer it, at some length. But perhaps my typo made it hard to follow. If so, apologies.
If you’re still interested, I covered this question in a lot more detail, with much more polished prose, in https://www.libdemvoice.org/opinion-we-shouldnt-blame-the-banks-21659.html
The bank crisis wasn’t just another bubble and anyone pretending it was is blissfully unaware of the activities of the banks in repackaging toxic bets as well as the reason AIG had to be bailed out and why Osborne just bailed out Irelands banks with UK taxpayers £7bn. Read up on Nouriel Roubini or Warrren Buffet warned about derivatives and securities as they foresaw the banking catastrophe unlike so many others.
@George Kendall
Sorry George, but your numbers above and in your article don’t stack up.
@RichardSM
Richard,
Sorry, can’t help if you aren’t specific. How don’t they stack up?
Surely the following is correct?
(£150bn – £50bn – £30bn) = £70bn
@George Kendall
The question was: How do you go from saying the deficit was £30 billion before the banking crisis – and has now risen to £150 billion, “but we shouldn’t blame the banks for all the pain we’re going through with the deficit”?
Of the £150 billion deficit you’ve said £30 billion was down to Labour before we hit the banking crisis.
What caused the £120 billion after the banking crisis?
Robert C (third comment) nails it.
Too much of what the banking sector does is to relocate value from the real economy into their coffers without providing much of value in return – very little funding for industry for instance.
@RichardSM
“Of the £150 billion deficit you’ve said £30 billion was down to Labour before we hit the banking crisis.
What caused the £120 billion after the banking crisis?”
Of that £120bn, £50bn was definitely caused by the recession. That’s why it’s a cyclic deficit, a deficit that will automatically disappear as our economy gradually recovers from the recession.
So that leaves £70bn. That £70bn is part of the structural deficit of £100bn, so a deficit that the OBR believes will remain, even after the economy has recovered from the recession.
Over the last decade there been massive rises in house prices and huge increases in private debt, and the two are linked. Both have stimulated a lot of temporary economic activity. But, once house prices stopped rising and people stopped taking on more debt, that temporary economic activity was bound to stop. That’s the bubble bursting. All that temporary economic activity generated tax revenue, which suddenly ceased when the bubble burst.
So does that bubble account for the £70bn? That’s a really difficult question. There are two things that could explain the £70bn: economic activity which had nothing to do with the bubble, but was lost because the crisis did permanent damage to the economy – for example because businesses relocated overseas. And the end of the bubble.
Of course it’s not easy to separate the two.
As I said above, this is a controversial and subjective question. Indeed, this whole field is controversial. All the statistics are rough estimates, and there are some who don’t even like the use of the term structural deficit.
But it’s clear the bubble was huge, and I think most of that £70bn can be explained by the end of the bubble.
As I said above. If I’m right, then politicians (of all parties) should be sharing more of the blame. And I’d argue that those who put all the blame on the banks are absolving politicians and the Bank of England from their share of the responsibility.
@Alex M:
“But a consequence of that will be some firms leaving London for more hospitable regimes”
So let them leave! Why keep such firms who are such a huge drain on the public purse in the country? Let them go somewhere else, and let some other country bail them out the next time they paint an apocalyptic “end of the world as we know it” scenario when they catastrophically fail. Perhaps then the UK will have to actually build real industries that actually produce something valuable instead of basing the economy on the “world casino”.
@George Kendall – you mention so many things that are vague and unknown or subjective. Here’s one thing I know as a hard working British taxpayer – we (the people) paid at least £850 billion to bail out the banks, and this figure could well exceed £1 trillion. And how do the banks thank us (the British taxpayer) for the bailout? By being defiant and insistent on paying themselves astronomical bonuses, to the point where the banks threatened to turn bonuses into basic salary should the government put a cap on bonuses. The British taxpayer was blackmailed by the City. Personally, I believe we should have let the mechanics of capitalism kick in and let the banks fail. It wouldn’t have been “the end of the world as we know it” (propaganda sold to the public by the banks). Every single banker who partook in the collapse of the economy or who was paid a bonus despite making the largest losses in recorded history should be hunted down like a war criminal and tried for their involvement. It’s all too easy to hide behind “it’s subjective” or “it’s complicated”.