Morning:
13°c
Maybe politicians say exceptionally silly things in party conference week, or maybe they say them all the time but there are more of us around to hear them at this time of year.
Either way, the comment by Yvette Cooper, the housing minister, on the lines that there should be a mechanism to monitor and if necessary cut “greedy” City bonuses was right up there with the daftest. But, daft or not, it was a sentiment loudly reinforced by Chancellor Alistair Darling yesterday — which has at least half the country roaring in agreement.
The fact is that this scary financial crisis of recent weeks has caused a huge shift in attitudes towards the financial sector. Those who have always distrusted it now have a coherent reason to turn their distrust into dislike. Their place in the ranks of the untrusting has been taken by those who were neutral but who heartily resent the fact that their lives have potentially been turned upside down because of the irresponsibility of the banking community. Even those who support the City and see the good as well as the bad that it does think this is no time to stand up and be counted, because even they are a loss to justify recent events and some of the behaviours revealed.
The pressure for an attack on bonuses — the dishing out of obscene amounts of money to people whom it now appears qualified for such rewards only by taking wholly unreasonable levels of risk with other people's money — is a measure not just of resentment at the wealth of a few but of a much deeper unease towards the whole financial services phenomenon. People don't like what they don't understand, even when it is said to be good for them.
They were just about willing to tolerate the gulf in incomes and the gulf in values which the City promoted when it appeared to be the engine bringing growth and prosperity to the whole South-East. They were just about willing to suspend their disbelief that the entire UK economy could be turned into a hedge fund where no one seemed to make anything but we all got richer just the same. Now so much of what appeared substantial has collapsed in a heap, and it is retrenchment, not prosperity, that beckons, their doubts have resurfaced. Actually it is more than that: they want revenge.
It is understandable if all this energy goes into bashing bonuses — but it will also be a waste, because that bus has already left. The much abused regulator, the Financial Services Authority's Hector Sants, announced a move against excessive bonuses six months ago, though no one outside the financial pages took much notice. Mindful of the fact that there is no law which allows an outsider to take away money lawfully given to a recipient — a detail Ms Cooper glossed over — the regulator was instead putting pressure on the banks to cut the levels of reward on the grounds that too much money was likely to encourage people to take too much risk and put their organisations in jeopardy.
In effect he was on to the fact that the prospect of unimagined riches corrupted people's judgment and overwhelmed their normal healthy scepticism, making them instead pursue every half-mad idea regardless of the consequences. He had even devised a way to hit the banks in their pockets if they did not pay attention.
So while the new chairman of the FSA, Lord (Adair) Turner, yesterday went on TV to make bonus-bashing sound like a major new initiative, don't be fooled. It has been policy for months, and a remarkably prescient one as things have turned out, though unfortunately the implementation came too late in the day to stop events unfolding as they have.
But it would be more valuable in the long term if Lord Turner sought to cool the debate rather than ride with the lunatic fringe — because we do badly need to keep a sense of proportion in coming to decisions about the future shape of financial services and the way they should be regulated.
The fact is that even after this upheaval and even if investment banking shrinks to the size it was 20 years ago, finance will still be hugely important to this country. The fact is too — and this really is not sufficiently appreciated in the wider world — that investment banking is only a small part of a financial sector which stretches from insurance through to fund management and from legal services to commodity trading.
The vast bulk of these activities and the tens of thousands of people who work in them carry no responsibility at all for the current troubles. Indeed, even within the investment banks, the real excess was perpetrated by a relative few — although it is perhaps not wise to press that point too hard. The culture of greed and excess is such that one suspects the others would have joined in too had they had the chance.
The real risk to the country is not the prospect of economic slowdown or mild recession so much as the danger that collective voter fury and political opportunism will lead to the throwing out of the baby with the bath water. The danger is that by a mixture of regulation and opprobrium we will stifle the financial services industry, discourage people from going into it and deprive ourselves of benefits we would all derive from an honest and well-run system. There is a risk, even if we avoid the most draconian ideas for regulation, that we create a climate where international firms feel they are no longer welcome and move their activities to another jurisdiction.
Our problem, should this happen, is that we would be several parts short of a complete economy. It is a pipe-dream to think we could replace all the City jobs with extra manufacturing, especially in the face of the decline in North Sea oil. We can't all become hairdressers and taxi drivers — certainly not at the same time — and there is no other activity which could absorb all those who would be displaced. It is not just foolish to pretend otherwise — it is dishonest.
Of course it would also be foolish to pretend that a crisis like last week's could never happen again, whatever regulation is put in place — because it will when enough people have forgotten what happened this time. Pinning our future to financial services is a bit of a Faustian pact. But, unlike Faust, we don't really have a choice. The brutal truth is that we need financial services because without them, these islands would simply not generate the wealth to keep us in the style to which we have become accustomed.
Reader views (6)
The worst scenario would be if there has been no auditing or risk assessment of the credit swaps between reinsurers, banks and investment companies. A trail of spoofed up value that does not exist sitting on everyone's books. It would be almost impossible to undo. Rather like if two people wrote IOU's for a million pounds to each other.Does it make one of them a millionaire just because they fail to honour the IOU they wrote. It certainly does not mean two millionaires. But if it is true the figures involve run into thousands of billions of pounds involving thousands of questionable transactions,I cannot see a rapid bail-out working. The better answer is to force those who transacted to hold up what they have transacted.If a huge net loser is XYZ but only as a result of ABC bundling on excessive dodgy value credit swaps, then there is a case for not letting XYZ go to the wall but only by drawing back some of the value from ABC. It will take a long time but it would be fairer for taxpayers.
- Nick London, London UK
At last, two readers who know what they're talking about. Harry and James are a rarity. Most people commenting on the recent crisis are either ignorant or plain thick. Joe Public never asked himself who was paying for all those hospitals, schools etc...
- Alex Balfour, Hong Kong
Few can doubt 'The City's' contribution to the economy. It has certainly driven growth in the capital for many years. The difficulty arises when much of the wealth has not been generated by real entrepreneurialism but simply by profligate risk taking with other people's money. The bonus culture has certainly played its part. How many of us would love the adrenaline rush of playing in a Las Vegas poker tournament when we can keep the winnings but let someone else (taxpayers) pick up the tab if we lose. It's the lack of downside for the bankers that most people find distasteful. The losers should do the honourable and quit the game,not go whining to the government for a hand out. Then again I guess honour is unlikely to be found in this generation of bankers where entitlement seems to have become more inflated than house prices.
- Paul, Kent
The growing popular anger against the bonus-makers would be considerably allayed if one or more of the former masters of the universe would step forward to explain how it is that the banks are suddenly unable to value their erstwhile AAA assets. It is not about blame or envy. It is not plausible to blame a market correction of this magnitude on the failure of mortgagees in Louisiana or elsewhere. A simple tale of over-reaching this may be, but there is a big black box in the middle of it that needs to be exposed to the light of day.
- Blackstone Coke, London
Envy and ignorance. The reality of the current crisis is that only a tiny handful of people in the City and Wall Street had anything to do with the housing loan crisis. Central bankers failed to control lending and Joe Public did the borrowing. It is defaults by Joe Public which has caused the current mess, not the bankers.
- James, New Malden, Surrey
No mention here of the failure to realise what was going on from Gordon Brown.
After seven and half years of a Labour Government (Dec2004) we had had:
Inflation (fiddled), total over this period of less than 25%
GDP increased by around 30%
Housing Debt increased by around 110%
House Price Inflation increased by over 170%
Signs that the housing sector was getting out of control. Where were the brakes in 1975? The economy was starting to creak as it was.
Instead we had the Euro migrant worker floodgates opened,
which increased demand for housing and created another 3 years of alarming house price and housing debt growth.
Governmental failure to deal with all inflation, index linked benefits and pensions etc head on, both here and in the US is the underlying cause of our problems.
The packaging up of housing debt and selling it on was necessary to maintain the supply of money for mortgages. Central Banks including the Bank Of England should have had the power, in the absence of leadership from Government, to step in and say "Enough is enough.
Unfortunately we have had to wait until the mess has become unavoidable and possibly unmanageable before anything was done about it.
If we need any idea as how much of a clue Gordon Brown had of this looming disaster. We need look no further than his failure to call an election last Autumn. Had he any idea of the problems on the horizon, as he should have done. There is no doubt that he would have gone for an election.
- Harry H, London UK
