Magazine article The Spectator

Why Is Osborne Obsessed with Bonuses?

Magazine article The Spectator

Why Is Osborne Obsessed with Bonuses?

Article excerpt

Allister Heath says that the Tory war on bankers is not just pointless, but allows the truly guilty men to go unpunished

It is hard to work out what the bankers did to George Osborne. Perhaps he was refused an overdraft at a formative age. Whatever it was, he is taking his revenge, saying that the large British banks should only be allowed to pay trivial cash bonuses. The plan has its political attractions - focus groups tell him no punishment is too harsh for the City of London - but also three significant economic drawbacks. It is vindictive, ineffective and it fails to address the true reason for the crash.

Let us first examine this on a practical level. Cash bonuses would be outlawed, but banks would still be able to pay their staff as many millions as they want in shares (how the Treasury would feel seeing its stake in the Royal Bank of Scotland diluted, and bankers paying low capital gains tax rather than high income tax, remains unexplained). The rule would only apply to UK commercial banks, not to pure investment banks, or subsidiaries of foreign banks (such as Goldman Sachs), or hedge funds. At the root of this is the belief that there is a moral equivalence between RBS's performance, which needed a huge taxpayer bail-out, and that of HSBC, which took not a penny from the government. Talk of moral hazard: regardless of how well you do, you will still be hammered by the government.

But like much of Tory economics, this is primarily intended to seek votes rather than to help the economy. It plays to a blamethe-bonus narrative, which is as clear as it is flawed. It goes something like this: greedy traders, incentivised by absurd short-term bonuses, took near-criminal risks with their firms, buying complex derivatives that turned out to be worthless. After being bailed out by taxpayers, they are at it again - taking renewed risks and helping themselves to the payouts.

Some of this critique is spot on. Many bankers behaved appallingly, pocketing huge payoffs for losing billions.

Not all of those who cashed in by promoting dodgy products have lost their jobs. Bail-outs are always unjust. But pinning all the responsibility for the crisis on City firms and their bonus culture is dangerously simplistic. And it allows those who are truly to blame for the crisis - especially central bankers, regulators and politicians - to escape unpunished.

The real starting point for our problems was the tidal wave of cheap and easy money unleashed on the global economy, starting in the late 1990s and intensifying in the early Noughties. City bankers had a walk-on part in this saga, rather than the starring role, which is shared between central bankers and politicians. For all their arrogance, bankers are merely the (highly paid) conduit for central bank policies. And such policies are the main motor of economic ups and downs.

The Tory obsession with bonuses confuses cause and effect. There were big bonuses because there were big profits; there were big profits because money had become so cheap and plentiful. This was the result of three simultaneous forces. First, low interest rates set by central banks in America, the UK, China and Japan.

Next was the Federal Reserve promising to bail out the markets with more cheap money at the first sign of trouble. Finally, a wall of money flooding into Western markets from China and the Arab world, bidding up asset prices and pushing interest rates even lower.

One can add to this list of forces blowing up the bubble. Washington's desire to promote home ownership at all costs led to the subprime disaster. …

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