Bankers’ bonuses: not seeing the willow for the trees

Imagine a parallel universe where the money supply is determined by the performance of the England cricket team (I haven’t worked out all the details but please stay with me on this). In ‘Cricketworld’, the government had to bail the cricket industry to prevent financial collapse following the disastrous Ashes tour of 2006/07. Now there are indignant articles in the Guardian and parliamentary enquires into the enormous bonuses paid to cricketers and selectors following the recent Ashes triumph, with even groundsmen being paid six-figure salaries. The IEA website has articles arguing that the government shouldn’t interfere with cricket wages and that the team is immensely talented, chosen on merit and faces intense competition and therefore deserves its billion-pound salary. In our world we can see that Alistair Cook, for example, is a remarkable batsman who worked very hard to get where he is, and that is why he is paid well by the ECB. But in Cricketworld his salary is an order of magnitude too high because of its ridiculous financial system.

Now back to our world. Some time in the past, we swapped from an asset backed currency to a debt-based one. Since then, over a number of years, the issuance of this debt based currency was handed over to a small cabal of banks, who earn more revenue the more debt and currency they issue. Unsurprisingly, given that they are very smart people, this is exactly what they did in increasingly innovative ways; the result is that over 90% of the (up until recently) exponentially growing money supply was created in this way.

As predicted by Austrian-school economists we are in the end game of a disaster – and it is interesting to be a witness to the shape that disaster is taking. One of the outcomes is pay for bankers far in excess of their economic usefulness – but I fear this is the least of our worries. Successive governments have created a Ponzi-scheme economy, which will go the way of all Ponzi schemes. Worse still, because of the enormous rent that has been paid to the financial service sector, our economy has arguably become a single-commodity economy with that commodity being money/debt. The resultant FIRE economy (Finance, Insurance and Real Estate) has sucked much of the talent and many of the resources from the real, productive economy, which has been slowly dying for 40 years, so that after the next and last financial crisis there may be nothing left to take the place of financial services (since there are no more government balance sheets to bail them out).

The debate we should be having, especially on the IEA website, is whether the asset-based money system that we need to move to should be privately issued or in the hands of the government (with most of the readers, I assume, being in the former camp, although the latter is a valid position too) and how we could get there with the minimum amount of pain.

Great post Nick! You could take the sporting analogy a little further. The cricket team could be representative of people working in the manufacturing sector, or any other part of the economy that has had to make a silk purse from a sow's ear over recent years and the premier league footballers, playing for England are those working in the banking industry. Compare the relative performances of the England cricket team to the England football team in top class competition... How closely is the relative pay, bonus and earnings distribution an indicator of world class performance and results? An alternative form of capital investment from the banks into UK businesses, beyond this Ponzi lending should be sought out and implemented, as capital investment and exports are the road to economic recovery. The £7bn bonus pool would be a great place to start. Put that as capital into small and medium enterprises; match it with the regional growth fund, hey presto! It would mean a fundamental change to the way that banks invest and finance businesses, but that may be a good thing.
@Jonathan - Wouldn't somehow appropriating the bonus pool and matching it with the regional growth fund involve government officials 'picking winners', i.e. directing investment, when they lack both the knowledge and the incentives to do so efficiently.
Richard I thought you might raise that. No, the beauty of having the banks run it through an equity participation scheme is that the State does not have to pick winners. You could have decision making boards, which are run by either the banks and current or former businesses leaders, that provide accountability to the State, but enable the state to step back from picking which companies to back. In any case, £7bn + the government contribution from the regional growth fund would go quite a long way with most small and medium enterprises. There are currently about 2.1m firms in the UK. About 100,000 went out of business between April 2009 and March 2010. Anecdotal evidence suggests lack of access to capital was a key reason for this. I know personally the former CEO of a high tech firm that closed at the end of March for this precise reason. £7bn handed out equally to each of the 2.1m firms would give all about 3300 each. The small point to be overcome is that we need to be able to trust the bankers and that includes companies, who would have them taking a slightly more active and hopefully positive role in their development. The greatest difficulty is likely to be getting it past EU State Aid rules, so I guess only areas eligible for EU or UK assistance could benefit from the RGF part. Its an idea that could be deployed more widely in the EU to countries or regions that do not use this form of finance already to stimulate growth. Those that do are already rebounding very strongly economically. The question of picking winners arises arguably more significantly with the "Big Society" idea and social enterprises. You may end up promoting monopolies there. I mention not potential competition issues arising in the healthcare sector; taking over provision from NHS.

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