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Unfair? We may have to hope so

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Stephanie Flanders | 15:30 UK time, Monday, 9 February 2009

If you think bank bonuses are unfair, then hold on to your hats. It's a sad fact about life after the crunch that the best-case scenario now for the global economy may be the unfairest.

The most obvious example is that of savers versus borrowers. Already savers are getting some very unjust deserts. But for the world to recover, that may have to continue.

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If you saved for the future during the boom years, the chances are you are now being hammered. Indeed, the Spectator just dubbed savers "the new underclass". Your pension may well be worth less than what you've contributed, and the interest rate on your savings account is now barely visible to the eye.

Even before last week's interest rate cut by the Bank of England, half the variable rate savings accounts were paying interest of less than 0.5% - while many borrowers are seeing a big cut in their monthly costs.

Of course, prudent home buyers who didn't take on enormous mortgages can enjoy the fact that they are not now sitting on negative equity. And the shrewd renters who saw this all coming know that their reward is on its way in the form of lower house prices.

More generally, net savers might hope to gain from the deflationary future now being painted for the major advanced economies. It's not just houses that are getting cheaper. In a world of generalised price falls, every pound of savings will go that much further. And every pound of debt is cause for that much more regret.

That's when savers do get their just rewards, and borrowers are sent to deflationary hell because the real value of their debt keeps on going up.

But, lest you forget, this deflationary scenario is precisely the one that the major central banks are all hoping to prevent. The authorities are (understandably) scared of a repeat of the 1930s - or Japan in the 1990s - when falling prices led to a prolonged period of stagnant demand.

So in the best scenario savers will not get much reward in this life, while borrowers will enjoy extremely low interest rates and even some erosion of the value of their debt by inflation. (If they're really lucky, they could even get hyperinflation, which would wipe out savings and debt alike, but that's a subject for a future post).

And there's likely to be plenty more injustice to go around.

We don't yet know quite how the fiscal costs of cleaning up this mess will be distributed - but it's a fair bet that young people will end up paying higher taxes to clean up after a boom they didn't enjoy.

When it comes to the financial system, it is possible that the banks who were prudent in the boom years will come out ahead. But those same prudent banks could question whether the institutions who took colossal (and foolish) risks are going to come out sufficiently behind.

It's been the same problem since the credit crunch began. If governments are going to restore confidence in the financial sector and so revive lending to the broader economy, they're going to end up 'rewarding' a lot of bad behaviour and effectively punishing those who abstained from it.

Seen in that broader context, the mega-bonuses for bankers might look like a drop in the ocean.

Yes, it's all very unfair. But it may be our best hope.

Comments

  • Comment number 1.

    Sorry for repeating myself, but I'm sticking to my view that Britain is experiencing asset price deflation (falling value of property, dividends, share prices, pensions, savings, etc), while at the same time experiencing consumer price inflation (weak sterling means a cost increase for imported goods, including food, clothing, electrical goods, cars, fuel, etc).

    Many British importers and banks have so far hedged their currency exposures, but these hedges will expire in July to September 2009, leading to imported inflation. Therefore, it is best to buy your imported necessities now before the prices go up.

    Also, the fall in commodity prices has stopped, and this will cease to be a factor in pulling down the calculation of consumer price inflation.

    There is a battle between deflation and inflation at present, but inflation will start to return in the middle of 2009. It won't be hyper-inflation, but if CPI is 2% and savers are only earning 0.5% then the real value of their savings will diminish.

    Let's just hope the QE doesn't go completely wrong....

  • Comment number 2.

    Stephanie,

    All very grim reading especially as I am one of those who have saved some money in a pension pot that is now likely to be less than the amount I've contributed (I haven't checked recently but know that in one year to last October it was down over 40% ). Thankfully I haven't contributed for the last 4 years otherwise it would be moeny down the drain.
    My first mortgage was when rates were over 15% so that led me to be cautious with future mortgages. I hate the word prudent as Brown hijacked and destroyed it but I guess I, unlike him, have been prudent and it has not done me much good.

    I've been monitoring Lloyds bank online loan offers and the rate seems to have been stuck at 7.9% since before at least the last two base rate cuts - I thought the idea was to entice people to borrow. Why don't they drop it??

    I think one of the few ways of savers making some money, if they can stand a bit of risk, is to buy and sell shares within an ISA. Currently waiting form LBG to drop back before buying in again. Fingers crossed.

  • Comment number 3.

    Stephanie - I may be missing something in your blog, but you start off asking the question perhaps making the statement that some of us may feel that the bank bonuses are unfair and then at the conclusion of the blog you state they are unfair, but you never actually state why you think there are unfair?

    I do think there are unfair - if only for the reason they messed up so why should they get a bonus for that? same as many directors often get golden hand shake when leaving companies which are in a worse state then when the director first started.

    Perhaps you said why you think they are unfair in a previous blog? If not, why mention it and then not really answer the question you pose?

  • Comment number 4.

    Lets not feel too sorry for every saver. They come in many shapes and sizes.

    Lets take a typical old fearful granny with £200k in the bank. Chances are she is claiming that she needs to turn off the heating and cut back on food because her interest has vanished. Left to her own devices she would die with every penny unspent and virtually no pleasure obtained from it. It would simply be redistributed via taxes and inheritance anyway.

    What about the fact she owns a house that has quadrupled in value over the last 15 years and has been the big winner in the 'hyperinflation' of house prices. It is high time she contributed some of her wealth to the young she has dispossessed of any equity in their society.

    The old have grabbed way too much and now expect a diminishing number of young to pay their pensions until they are 100.

  • Comment number 5.

    At some point in life one realises that the best you can ever hope from prudence and moderation is that you get to be the one who takes the hit for everyone else's stupidity.

    It's called growing up.

  • Comment number 6.

    The words HELL and HANDCART come to mind.

    If I'm going to lose my savings because some prat wanted big bonuses and others wanted to shop till they drop then bring it all on - and I mean NOW.

    The only comfort will be mass line outside of the Jobcentre, record bankruptcies and mass homelessness.

    So bring it on - I'm out of here for 6 months!!!!!!!

  • Comment number 7.

    OK, as a saver, I may not like the unjustness of what is required, but I can at least understand the need for a viable wider-economy.

    However, I can't see how that plays into justifying mega-bonuses for bankers. How does that help the wider-economy?

    One defence I've heard is that bonuses are needed to keep the brains in the City - but those are the same brains that got us into this mess, and anyway, where else are the bankers who sulk at not getting a mega-bonus going to go exactly?

    Bankers should be paid what they're worth in the real world as it now stands, and let them complain that, "it's just not fair".

    Sorry Stephanie, didn't mean to rant :-/

  • Comment number 8.

    Unfair, indeed – and an excellent article.

    Yet another reduction in interest rates (which is unlikely to be passed on to consumers and mortgage holders but will certainly be passed on to savers) is unlikely to have significant beneficial effects on the current financial crisis. It will, however, significantly contribute to an increasing polarisation between those who thought that a lifetime of hard work had provided for their future and the terminally reckless who chose not to bother.

    Many people who have worked hard and have accumulated savings are being savagely punished in order to save the skins of the profligate, the imprudent and the downright greedy who are finding themselves to be in considerable difficulties in the current economic climate.

    Extreme efforts are being made by the present Government to protect the excessively indebted from their own folly and one of the reasons is that the Government itself is one of them.

    It is hugely unjust, it rewards incompetence and it destroys any incentive to work hard for the future. These are the seeds of future social conflict. The legacy of this current Government will be a very black one, indeed.

  • Comment number 9.

    What savers are about to do may seem very unfair too, Stephanie, but the government's and compulsive debtors' profligacy and disdain for us leaves us with no choice.

    This is the scenario you failed to mention, that savers get the right hump about being forced to carry the feckless...and begin withdrawing our savings en masse to demonstrate that we are not as powerless as you imagine.

  • Comment number 10.

    Our fate is always in the hands of others, be they bankers, politicians or generals. Part of the answer has to be the withdrawl of temptation and greed from the equation, whilst at the same time keeping sufficient carrot available to keep them working on our behalf.

    The prime minister doesn't receive a prohibitive salary, compared to banking bonuses at least. His reward theoretically comes after serving in office through public speaking, book deals, directorships, historical kudos etc.. If he performs badly whilst in office the rewards aren't his (misery memoirs excepted of course).

    For a world that can come up with hedge funds, quanatitive easing, securitized mortgages and their ilk, surely we can frame a better scheme for rewarding success than cash bonuses and share options that are tantamount to a 2 year I owe you.

  • Comment number 11.

    Well as to the prudent banks being punished this is really just a re-statement of the biggest problem with the government plan, huge moral hazard.

    And this will exist unless they retroactively confiscate bonus' for the irresponsible bankers. Otherwise future generations of bankers will see that generating system threatening risks whilst pocketing huge payoffs is a great risk free method of making money.

    As it seems our government is too spineless to do this without prodding, join this group and popularize it to help: http://www.facebook.com/group.php?gid=51818722129


  • Comment number 12.

    Unfair? Yes. Necessary? By no means. We need a recession to shake out the activities (and level of activities) which would not be undertaken in a sustainable economy. What we have is not what we can afford. A sharp recession is essential so that we can get back onto a sustainable path as quickly as possible. Propping everything up and incurring vast debts for future generations is about the worst thing to do. But politicians look only to the short term, and the next election.

    If the UK is now such an adapatible and flexible economy (as we are told), especially compared with the Eurozone and their high levels of social protection, then it would weather the recession and come out of it better compared with its neighbours. Better to have 3-4m unemployed for a year or so than 3m unemployed for the next decade.

    We need policies that prepare us for and embrace the recession as the essential medicine it is. We won't get better without it. Current policies are still aimed at ameliorating the symptoms of the problem.

  • Comment number 13.

    I think Stephanie is ignoring the reaction from a vast majority who did not take massive bonuses for being clever but not trustworthy or and did not borrow lots more than they could repay regardless of a downturn in the economy. 'Nothing you can do about it' - is a stimulus to react. We need someone who we can trust with our money. The bankers will have to work hard to regain the trust they need to function. The Government supports them because they think to rescue the economy it is essential. Why? Do we trust politicians - I doubt it; especially as it seems inevitable that we shall have serious inflation in the not too distant future to reduce our assets even more. The PM being angry is meaningless. Having bought a bank for us he should act like its owner. He should recognise that money is in short supply and offer sensible interest for deposits. That might restore some confidence in banks. 0.1% on a savings account is a sick joke.

  • Comment number 14.

    The Bankers don't need bonuses if they are in so much demand let them go and take up all of the banking jobs that they're being offered.

    Destroy savers and you send a message to the country that it is not worth being prudent in the future which will be a complete disaster.
    If savers don't save where will the future credit come from?
    I don't think you will see the Chinese throwing anymore of their good money after the bad they have already lent us.

    This over inflated economy was built on wholesale cheap credit that has disappeared. Where are the necessary new lines of credit going to come from to keep it inflated?

    There is only one way out and this government is too cowardly to take it.

    Slash spending and increase taxes.

    If they default they will take pensioners with them and who will then have to support this growing demographic section of the population once they have been raped of what they have earned.

    You destroy pensioner’s savings at our peril as they are now too big to be allowed to fail as we can’t afford to support them.


  • Comment number 15.

    I'm sorry Stephanie, but you are wrong, wrong, wrong.

    Economists have never been any good at talking about 'justice' and 'fairness'. It is time we tried to be better at it.

    There comes a point where inequality and injustice becomes not only politically unacceptable and socially harnful, economically dysfunctional, and we have reached that point.

    The tone of your blog is that we might as well not bother to do anything, 'twas always thus, it's the ways of the market, and the usual complacent drivel that the comfortably off can use to excuse the ways of the City. It's no longer good enough.

    The bankers, hedge funders, and short sellers have become symbolically disproportionately more destructive than even their already serious financial misdemeanours would warrant.

    As an economist and political scientist I intend to use any platform that I can to support measures that ensure that the financial sector is brought to book, regulated, and made accountable.


  • Comment number 16.

    Stephanie,

    "Already savers are getting some very unjust deserts. But for the world to recover, that may have to continue."

    You are precisely wrong in that your definition of 'recover' is not one that is the one that most people think of as a recovery.

    If you are your depressive wrongly educated economist chums think that you can mislead the general public into putting up with this nonsense you are mistaken.

    The only definition of recovery that makes any sense is one that has savers and investors getting a fair reward and borrowers paying a fair cost - this is a recovery.

    It is precisely not a recovery when all that you and your fellow travellers in the duff economics departments of the universities manage to do is to re-inflate the credit bubble. Try to understand this that you were all following a false god. Your god is dead. Your situation is pitiable but nevertheless still wrong.

    A definition of recovery that does not result in a set of economic circumstances that returns to sound money (see above) is not a recovery.

    The savings ratio must be increased so savers must be given an incentive to save. If the savings ratio is not increased then we will not have recovered, by definition, so your quoted (comment above) is by definition wrong.

    Please stop peddling this nonsense in support of the failed economists, failed Bank of England management, failed FSA and the failed HM Treasury.

    It will not be a recovery unless the savings ratio improves to long term trend levels. Savers and investors must therefore receive a reasonable return and borrower should expect to pay a reasonable cost.

    No system of economic decision making for corporate investment can cope with zero interest rates - there is simply no point in investing or borrowing to invest as the demand falls away and new investment is pointless. This is not about fairness, but about economic rectitude.

  • Comment number 17.

    "If governments are going to restore confidence in the financial sector and so revive lending to the broader economy, they're going to end up 'rewarding' a lot of bad behaviour and effectively punishing those who abstained from it." - Stephanie Flanders

    How is rewarding bad behaviour and punishing good behaviour going to restore confidence? There is a glaring contradiction here. What does this mean for the cost-benefit analysis of ANY current or future investment?

    I am a saver without debt. The velocity of my money beyond the spartan essentials is ZERO and sitting in cash (and some financing the government - for now). Tell me what I have to gain from further participation in this rigged game, given you have just told me the house is loading the dice.

    How can you take it for granted that people will accept this outcome at the ballot box? Even if it is the best case for someone else, it may be the worst case for them. No-one will vote against their own interests. What makes you think people will choose to see beyond the "unfair"? You can't pay the bills with hope.

    I look forward to your thoughts on hyperinflation, especially how it works out when in the absence of effective collective bargaining it cannot be translated to wages.

  • Comment number 18.

    #1. MrTweedy wrote:

    "Many British importers and banks have so far hedged their currency exposures, but these hedges will expire in July to September 2009, leading to imported inflation"

    Take a look at the latest catalogue with 'new reduced vat prices' from a leading catalogue and on-line vendor, and if you haven't thrown it away, compare it with the previous one - you will notice significant price increases already! We are already importing significant inflation due to sterling's performance against the US Dollar. (But I guess the ONS will manage to fiddle the CPI, yet again.)

  • Comment number 19.

    It is the perceived unfairness which will drive politics and public policy in the future.

    This is where it will all get very ugly!

  • Comment number 20.

    The problem isn't lack of lending but lack of borrowing - specifically borrowing by private citizens (I refuse to refer to people as "consumers", however firmly the lunatic priests formerly known as economists are hooked on that world view). Sure, the plight of credit-starved SMEs is real enough but a debt-led "recovery" for the UK would have to be driven by personal borrowing.

    Unfortunately for our hapless Government, the majority of British people now fall into one of four categories: already maxed out; feeling too vulnerable to borrow more; congenitally non-disposed to borrow in the first place, and absolutely unwilling to borrow in order to perpetuate the existence of a banking system that has in recent years utterly abused its privileged position as creator (through lending) and owner (through the money-as-debt system) of 97% of the UK's money.

    People understand the banks' culpability for the credit binge and present bust instinctively. You don't need to know the rules of baseball to know who won the World Series. People know that they were conned into massively overpaying for houses (ludicrous prices + mortgage interest) and new cars (overpriced extras, plummeting residual value at the best of times + loan interest), thus remaining cash-poor while the bankers partied on at the expense of their customers' pensions and our children's standard of living.

    Are people saying: "Let's hold our noses and pay these bankers' bonuses, lest all this "talent" we need for things to get better goes elsewhere?" Hardly For one thing, the "talent" has nowhere else to go.

    Effectively, there is a debt boycott developing - "can't borrow, won't borrow." Preserving the existing banks in the face of mounting public anger will only make matters worse.

    If the PM really wants to prove that he is something more than a remote-controlled frontman for the Square Mile, he might consider forcing the banks to hand over control of the payment clearing system and then use it to set up a completely new national bank unencumbered by toxic assets. The existing institutions would, of course, sink or swim according to the degree of buoyancy bequeathed to them over the past eight years by their very wonderful, hugely bonus-enriched "top talent" .

    Another advantage of starting a new bank would be the opportunity it would allow to reform the debt-money system - at least to the point of rescuing the UK from its current predicament of having to try to restart private borrowing as a way out of Depression - a sure-fire death spiral if ever there was one.

  • Comment number 21.

    Today's Evening Standard suggests that Stephanie Flanders could replace Justin Webb as North America editor. Her CV is almost perfect as far as the BBC's traditional left-liberal tastes are concerned: Clinton administration, New York Times, United Nations (all that's missing is a stint as a community organiser in Chicago). Here's a suggestion - how about the BBC goes against type and gives the job to someone with similar experience but without the predictable leftie background? Someone who, like Stephanie, has written for the New York Times and was employed by the UN, but worked for the Bush administration rather than the Clinton one. In other words, someone like John Bolton.

    John Bolton For BBC North America Editor!

  • Comment number 22.

    9 - Those with debt could do the same - withhold repayments, then we'd be in a real mess.
    What would savers do with their savings if no-one took on debt?
    What is saving for anyway?

  • Comment number 23.

    THE BIGGER (HIDDEN) PICTURE

    Impusivity and lower intelligence appear to be correlated (self-control requires delay of gratification and an ability to plan ahead, or at least, to do without now in order to put something aside for unforseen circumstances in the future). What's being described by many as the 'feckless' and 'profligate' are those who do little of this, and who are now being rewarded, or at least, not having their impulsivity constrained, because this dysgenic lot comprise the majority.

    Is it any wonder that smarter people are now having less children, and that Western Europeans will soon be in negative population growth like Eastern Europeans (and European Americans by 2050)?

  • Comment number 24.

    Aren't there any moderators working tonight?

    On here; Nick Robinsons and Bob Peston's blog there are over 2 hour delays.

  • Comment number 25.

    I'd say the whole mess has discredited the concept of Anacho-Capitalism. The long held belief (and it is simply an article of faith) that the market will always select the 'best' solution has been disproved time and time again. If that was the case, we'd not need anti-monopoly and anti-cartel legislation.

    A bail out was needed to prevent the financial services sector becoming a monopoly or small cartel. However, the companies are, to all intents and purposes, victims of their own venality and greed. The 'market', which used to be defined as the customer, was really just a bunch of banks in a ponzi scheme, all desperate to deny the Emperor was naked and all wishing to pass on the package before it stopped ticking and blew up (to mix metaphors...) In the end they screwed themselves, and it's all their own greed and ineptitude. There seems to be a tendency to blame the 'product' being traded in this closed market (people's debt), rather than the way the market was trying to sell scrag end as prime fillet.
    If the banks, now they're floated, can afford bonuses to the executive end, then we've givene them too much money. The want Chicago-Austrian school, then they can have it... cut the loan until they can't afford the exec bonuses, and then they have just enough to relaunch or die.

  • Comment number 26.

    TOPSY TURVY SOCIO-ECONOMICS

    John_from_Hendon (#16) "If you are your depressive wrongly educated economist chums think that you can mislead the general public into putting up with this nonsense you are mistaken.

    The only definition of recovery that makes any sense is one that has savers and investors getting a fair reward and borrowers paying a fair cost - this is a recovery."

    Well said, but I fear many of them won't hear/have it as they don't appear to have any conception of how things really were back in the allegedly dismal days of the 70s (and earlier). So many trained in economics in the past 30 years appear to genuinely believe the anarchistic nonsense they've been taught, i.e. that they were liberated from serfdom by Hayek and Friedman, that those who take risks are justly rewarded, that the market alone determines value, and so those who look after themselves first are rational etc (all pretty much a description of narcissistis and psychopaths - see Robert Hare on 'Snakes in Suits'). #

    You're right, recovery for them means re-establishing the very status quo which led to all this - the alternatives being statists, protectionists, 'nationalists' or worse - plus ca change. Rather ironically, see the way the Israeli polling is likely to go.

  • Comment number 27.

    Reading this latest blog, reminds me that economists and politicians understand so little about the real world.

    By the way, was this blog another piece of propaganda? or designed to elicit public reaction before our useless government make a move?

  • Comment number 28.

    Savings are the seed capital of ALL lending.

    That is ALL lending unless you wish to run infinite leverage.

    Borrow short, lend long, is that not how it works? No savings means no capital means no lending. No surplus, no credit. Inflating away the debt entails eating the seeds of recovery.

  • Comment number 29.

    Stephanie

    I dont go along with this virtuous saver versus bafoonish borrower malarkey. Take savings, much has been done to create tax efficient vehicles to promote and maximise saving income. I would imagine that the biggest gripe over the years for those at an age where they have put by for their retirement is what has happened to state, occupational and private pension funds and capital erosion through equity unit investments and the like. The intermediation of their money through the City etc and Government choices.Those who escaped to warmer climes with their occupational final salary pensions have done very well, taking uk property equity with them.

    I agree that the vulnerable who rely on savings interest should be helped. As for those baffoonish borrowers, their consumption-generating indirect and stamp tax revenues have funded social schemes to support much of the safety-net plus society in which we live.

    OK, we should now not consume but save our way out of trouble or reinvent ourselves as widget makers to the world - another debate I suppose.

  • Comment number 30.

    Stephanie is just looking at this from an economic stand point, that's her job. But savers outnumber borrowers by a factor of seven. That's seven savers against one borrower, or to put it another way, seven voters to one.
    In a democracy, which we're told we live in, politicians depend on votes and hammering seven voters to save one looks like a surefire way to oblivion for politicians.

  • Comment number 31.

    I wasn't shore if I should post this here or on Peston's blog.

    Tonight Sarkosy announced a rescue plan for the French car industry on condition that the French manufacturers did not close any French production plants.

    OK so I don't know the full details but, on face value, that decision would appear top contravene EU Competition Law and identify a major flaw in the ECB policy. I don't blame the French president. If the UK still had a domestic car industry I would be suggesting the same approach. However, there are major ramifications.

    Sarkosy has shown that he will take action purely in French interests. I strongly doubt that he even intended to consult his 'partners' This now leaves the other mebers free to adopt their own protectionist policies with more vigour.

    Where does that leave the ECB? If Euro countries do follow the French lead then there is no strength to underpin the common currency. A weak Euro will have major implications for the £.

    Sorry to take this post off topic but I needed to share it.

  • Comment number 32.

    Nobody knows where house prices are headed. All we know is that for many years we've not permitted the construction of enough homes to accomodate the growing numbers of small households. Since the supply so obviously lags demand, it might be that house values will continue to rise.

    Nobody knows when foreign banks will resume lending into the UK, or how quickly UK banks can grow to take up the domestic slack. Because nobody knows how to value CDOs yet, we don't have a handle on any of that.

    So we could each be talking ourselves into ever gloomier predictions. Me? I've good cause to be optimistic - I don't have to write news blogs!

  • Comment number 33.

    Where does the real economy figure in all this. Our productive resources did not suddenly 'crash' or crunch.

    The crisis demonstrates the obvious inherent instability and inefficiencies of the finance capitalist system. We are all (well most of us) going to become poorer because the finance tail is wagging the industrial and manufacturing dog.

  • Comment number 34.

    "If they're really lucky, [borrowers] could even get hyperinflation, which would wipe out savings and debt alike".

    Yes, marvellous hyperinflation. When the over-borrowed are dying of cholera and can't get any care because nurses can't afford to travel to the hospital any more, I'm sure they'll be thanking their lucky stars that they don't have such a large debt in real terms.

    If the government goes down the path of hyperinflation (as Lord Turner of the FSA, Robert Peston, and other government sources have been hinting at), they'll destroy all confidence in our national institutions, and after the civil war we'll have to start from scratch. Can anyone think of a case where hyperinflation has not ended in disaster?

    We're not going to get out of this recession/depression without a lot of pain being felt, no matter what Gordon and Peter would have us believe, and I suggest that it should be felt much more by those who lived the high life on credit than those who saved for the inevitable rainy day.

  • Comment number 35.

    Today's Evening Standard suggests that Stephanie Flanders could replace Justin Webb as North America editor. Her CV is almost perfect as far as the BBC's traditional left-liberal tastes are concerned

    Why o Why o Why can't the BBC show balance?

    Why can't we just clean out the editorial team and start again?

    The country is falling apart yet the BBC continues with it's left wing bias

  • Comment number 36.

    One thing to keep in mind in relation to bonuses, is that the perceived problem (ie that they reward short term risk taking not long term growth), is wholly the result of current government tax policy.

    Consider the following alternatives. Firstly, company X pays its employee a cash bonus of GBP100,000. In this case, the bonus forms part of gross pay one month, and is taxed via PAYE. So the employee receives GBP100,000 gross, pays GBP41,000 tax/NIC, and ends up with a net GBP59,000.

    Now consider what happens if the employer gives the employee shares worth GBP100,000, but with a clause that they cannot be sold for some specified period, eg 3 years. In this case, the employee receives no immediate cash payment but, as far as the Revenue is concerned, they've still received remuneration of GBP100,000. So the employee now has an immediate GBP41,000 tax/NIC bill and no cash to pay it.

    In this situation the employer will either pay the tax on the employee's behalf, or (more likely in the current economic situation) lend the employee the money (probably interest free) to meet the tax bill. However, this makes the long term share incentive scheme more expensive for the employer. If they do nothing for the employee, then the scheme is hugely unattractive to the employee (they are left GBP 41,000 out of pocket for three years).

    Paying large cash bonuses to reward performance that, as we've seen recently, can reverse very suddenly, is clearly dumb. But then so is a tax system that encourages firms to adopt this structure. Of course, what drove the government's thinking until recently was getting in lots of tax to pay for all the shiny new public sector "improvements", whilst maintaining the myth that this could be paid for without increasing taxation. Just consider the tax on non-received remuneration as another stealth tax. And remember, that these bonuses that Brown is now apparently so angry about, he was very happy to share them 59/41 with the recipients while he was Chancellor.

    I'm afraid this is just another sickening display of hypocrisy from Brown and Co. If he was worried about excessive risk taking and the impact of remuneration structures on it, he's had plenty of time to fiddle with the tax system to encourage a better way of paying people. Incidentally, the FSA has had the power for years to consider remuneration structures' impact on financial firms' risk taking. Might be an idea to ask them why they never used the powers. I think you'll keep coming back to all the lovely income tax Gordon was getting from these bonuses, not to mention the Corporation Tax paid by City firms (25% of all such tax receipts). And we won't even think about the stamp duty on expensive house purchases made from these bonuses, or the VAT from recipients' excessive lifestyles.

    This problem begins and ends with Brown's need for ever more tax, and the City's seeming ability to pay ever more. Now, however, the illusion has hit home with a vengeance. But let's make sure we focus blame on where it is deserved, namely the government that failed to utilise the regulations that it had already put in place to control this kind of thing. Financial services firms, and their staff, simply played the system the way they've been encouraged to do so. Brown is in no position to moan about it now, I'm afraid.

  • Comment number 37.

    Interest rates need to rise to at least 4% as soon as possible.

    We need a new central clearing bank, and let those banks who have accumulated bad debt go to the wall.

    The courts should also enforce the ruling regarding bank charges, and make them settle those debts too.

  • Comment number 38.

    The government is right to characterize this depression as bigger than the 1930's. The financial system has collapsed and there is no political answer either left or right wing. What will happen is that the economy will collapse and then society will collapse. One can only hope that what arises out of the ashes has some hope in it. Bonus culture will soon be gone whatever the banks are paying now. You can fool all of the people some of the time or some of the people all of the time. Information is now free so that this aphorism for administrators no longer holds. They quite rightly shut the refinery workers up pretty quickly but its going to get harder and harder to keep the lid on. I'd invest in home security firms myself, the profits are about to go stratospheric.

  • Comment number 39.

    Nonsense. Time to bring back the pillory, quoth Rahere. Nick was suggesting head-hunters. A colleague can find some professional ones if required.

  • Comment number 40.

    Put it this way. If they play that game, what's the point of saving? A quick boost to the economy and then a decent bottle of whisky and a bottle of pills. That's what this government has brought us to.

  • Comment number 41.

    #37 Secret Love wrote: "Interest rates need to rise to at least 4% as soon as possible."

    On our present course, they will, in the fullness of time. And they will not stop there. Not even close.

  • Comment number 42.

    Hi Stephanie

    Have you considered that continual unfairness and ignorance of moral hazard might over time changes people's behaviour? As it gets ever plainer that the prudent will be punished for the imprudent's mistakes then the rational answer is that in the future nobody should be prudent.

    What sort of world will that be when there is no-one left who is prudent? The whole pack of cards will tumble. So we are potentially storing up bigger problems for the future.

  • Comment number 43.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 44.

    Interest rates should've been nudging 10% or over in 2006 to damper the house price boom. That would've had the knock on effect of making people wary of the debt mountain they were creating in general. But the Golem at the Treasury kept harping on about how great low interest rates are and kept house price inflation off the BoE's agenda when it came to interest rate policy. It was a recipe for disaster. This disaster, to be precise.
    Now the BoE has no room for interest rate movement, will start printing money, stoking the embers on inflation into a raging fire. It's insanity. If I had the money I'd follow Jim Rogers to Singapore.

  • Comment number 45.

    so what is the point of banks now. i get hardly interest so i might aswell stash it in a biscuit tin for the future. what is wrong with reverting to a cash based economy where it costs exactly 1GBP for 1GBPs worth of goods and services - not £1.25 because i paid by cheque or credit card

    i have NO confidence in banks now. i see them as conniving institutions socially and morally bankrupt and really don't want anything to do with them whatsoever. their contempt for us know no limits and will continue forever.

  • Comment number 46.

    My mother told me years ago that a bank is an institution that will lend you and umbrella when it's sunny, then demand it back when it starts to rain.

    I wish I'd listened to her more closely.

    My father used to say that banks didn't trust people, that was why they chained up their pens.

  • Comment number 47.

    Today Ed "whatever his name is" called this a worst depression than the 30s. Given he is one of the chief architects of the credit crisis there is little point in giving credence to his views, likewise the treasury, the BoE's and most of our banks. These guys thought 10 years of 15-25% per year house price rises was supported by wages going up just 2-4% per year. They believed house prices would rise for ever. Clowns.

    They don't live in the real world. And just like they couldn't see the problem develope because it was making them rich or getting them re-elected, their policies to solve the problem concentrate on keeping them in power and keeping them getting huge bonus'. They really are useless. We are entering a super broadband world. We need fibreoptics to every home and business. The govts plan is to fund slow old broadband. It's like building canals when the railways are taking over. It's dumb.

    The recovery is already here. Cash rich firms are already buying assets and building relationships with other firms for the take off. The Baltic Dry Index, an index of the cost of shipping things like iron ore and coal, has been on a strong upward move since 5 December 2008 and has been rocketing since 3 February. That means iron and steel works with orders. And once the steel is in sheets and rods it's off to the engineers in preparaton for the car plants and building sites. And unemployment is a company acting to controll it's costs so that it can grow in the future. Yes it's hard for the unemployed, so give them proper training and living benefits, not the waste of time on offer now.

    Take one thing we all know about the UK. There aren't enough cheap family sized homes with decent gardens around london. House prices are falling. That means it's a great time to build. The number of people who can afford to buy a home is growing everyday. Building workers are cheaper than they've been for years and so is suitable land. The big over-borrowed builders are trapped with expensive assets and loans. so forget them. It's the perfect time to open up the planning rules and let losts of small and single developments start up.

    None of these things can happen in the UK because our credit market is packed with bust banks. RBS and HBOS should have been put in to recievership and their current account facilities and some branchs nationalised. We could have had Lloyds, HSBC and Nationwide as creditworthy banks to build with. A channel to allow government to put in place an effective stimulus. Instead we have all these bust banks sucking up our taxes to pay off their foreign debts. That is a waste of our money. Particularly when we need it.

  • Comment number 48.

    Can someone please explain to me why we should not be raising interest rates at the moment?

    The pound is massively down against virtually every currency, which means we will very soon be importing inflation.

    Cutting interest rates has had no effect on the propensity of the banks to lend.

    The banks have kept interest rates on loans high and slashed savings rates, so all the IR cuts has done is to line tha banks pockets.

    Why not raise interest rates and bypass the banks and let HMG lend to the electorate directly? Mind you, if you were going to do that you could have saved the odd 20bn and let the banks go bust in the first place.

  • Comment number 49.

    No. 36 JayPee28bpr wrote:

    "Now consider what happens if the employer gives the employee shares worth GBP100,000, but with a clause that they cannot be sold for some specified period. In this case, the employee receives no immediate cash payment but, as far as the Revenue is concerned, they've still received remuneration of GBP100,000. So the employee now has an immediate GBP41,000 tax/NIC bill and no cash to pay it."

    Interesting point. However, it's worth bearing in mind that approved Share Option Plans allow GBP30,000 worth of shares to be exempt from income tax and national insurance. Enterprise Management Incentives allow shares up to GBP120,000 to be tax free.

  • Comment number 50.

    I haven't read quite such a depressing post in a while, however real and close to the truth of the situation it actually is. (i.e. good analysis and reading of the info Stephanie IMHO.)

    All it really states is the obvious that all the governments, banks and financial authorities are trying to do is work out how to go back to all the old ways as quickly and 'painlessly (for them)' as possible.

    There is no search for a new paradigm, no looking for a 'New Economics', no Capitalism mk2, no serious attempt to address how not to do it again or do it differently.
    Just how can we return to 'normal' because when we do all the debate over bonuses, savings, borrowings etc. will disappear as normality returns.

    The coterie of politicians, bankers, lawyers etc. controlling our economic system are incapable of thinking outside their own narrow frames of reference. They are incapable of empathising with the general population any longer - they don't know who 'we' are anymore (if they ever did). Hence we get Jacqui Smith seeing her 2nd home claim being perfectly OK - it's not illegal so it's OK (it isn't OK it's just not illegal).
    Precisely the same thinking that gave us the banking crisis. It's not illegal so it's OK - wrong wrong wrong!

    They do not get that an increasing proportion of the population are not happy with the previous status quo being accepted as the future state of affairs.

    They are looking for something better, something more equitable and fairer. There is no clear consensus what this should be hence you have no largescale movements organising rallies or proposing alternative systems. No one has thus far provided an proposal for today, old solutions have too much baggage.
    The small predictable rise of right wing nationalism and other distractions are all symptomns of this.
    They are looking to past solutions and academic works to provide an answer - the Marx, Smith, Keynes etc. of our age is not yet apparent. Someone to synthesise the old with the now into a clear vision of how it might be better in future. Maybe the information age makes this impossible - time for long thought, discussion and analysis doesn't exist any more.

    Brownism is not something that will live as anything other than a footnote in economic history or as a 'how not to do it' example. His legacy is cast in stone now - the man who broke Britain.
    What history would call anything Ed Balls has to say is fairly obvious.

    Perhaps there will be none and the old ways will be the best solution we have and so the next cycle will proceed much as the last by default.

    Time for my pills now.

  • Comment number 51.

    There has been more unfairness. There has been a great transfer of assets from the young to older people.

    Young people have had to take out very large mortgages of several times their income just to buy an ordinary house.

    Older people's houses until recently have gained value much more than the rate of inflation.

    They paid very low real interest rates in the early days of their mortgages. They only paid 2% in reality if interest rates were 15% and inflation was 13%.

    If your savings come from working hard and saving, I have every sympathy for suffering low interest rates. If savings come from your house 'working hard' and some young person paying far too much for it, then I don't.

    (I'm one of the 'older people' but we haven't sold our house yet!)

  • Comment number 52.

    I do not see how inflation will help us to lower our debts if our wage rises are not in line with inflation?

    In my workplace for the past ten years our net wage rises are at least 20% behind inflation, by that I mean that if inflation was at 4% we were getting wage rises of 1-3% year on year. (no rise at all this year)

    This has been a major factor in why the country is in so much debt. Once you start to borrow and prices go up, wages are effectively lowered year on year and you have less and less money to live on. It then becomes a struggle to pay back the debts.

    If the government would change the rules on credit card rates or maybe offer us a government credit card with sensible rates that encouraged paying off of debts, then we might all be better off.

    I would rather pay my money to the state and feel like the profits would be used to help the country.

  • Comment number 53.

    "If they're really lucky they might get hyperinflation"?? Is this an example of "Stephanomics"??

    If you don't want to become the laughing stock of the country, I suggest you stop making stupid remarks like that. Hyperinflation is no joke - it would lead do complete social and economic collapse and probably political collapse too, as in Germany in the 1930s. NOBODY would be "really lucky" to see that.

    As a country we spent the 1980s battling to control the inflationary monster before it destroyed us all. It cost a lot of people a great deal of suffering. We don't want to go back there even. Which is why it is so heart-breaking to see Gordon Brown's reckless and incompetent government taking us down the same path again, with their hyper-borrowing and money-printing. And the Bank of England colluding in it by keeping interest rates too low.

  • Comment number 54.

    49. MrTweedy wrote

    "it's worth bearing in mind that approved Share Option Plans allow GBP30,000 worth of shares to be exempt from income tax and national insurance. Enterprise Management Incentives allow shares up to GBP120,000 to be tax free"

    I don't think the SOPs are large enough to cover most of the people we're talking about here. The SOPs schemes are used (and have been very attractive) for more junior staff.

    I don't think most of the financial services firms qualify for the EMI scheme, do they? I thought that was aimed more at smaller, privately owned firms.

  • Comment number 55.

    Re: 4 Johnboy911.

    Now that's a very interesting post... I think that I generally agree too!

    As as far as fairness is concerned, I believe that a little perspective is helpful - we should be grateful that most people are warm, fed and healthy. The most important elements are the human ones, namely love and freedom.

    Personally I am more concerned with the attacks on our freedom under the current goverment than the economic issues, but that's maybe for another blog, don't you think, Stephanie?

  • Comment number 56.

    Stephanie,

    you wrote

    'Already savers are getting some very unjust deserts. But for the world to recover, that may have to continue.'

    Why would it be a 'logical' conclusion that savers must be slammed for the world to recover ?
    It simply does not follow.

    Economics is supposedly based on neutral analysis and viewpoint. Political Economics isn't.

    Yet you appear to be accepting the political view of slamming the saver, rather than resisting that political view.

    Similarly you appear to be ignoring the economic viewpoint whereby interest rates held at a reasonable level of competitive stimulus encourage investment and circulation of money etc.

    By accepting the political and MPC stance of slamming savers, you appear to be endorsing the greater hardship theory imposed on those of the 12 million pensioners who might have a few savings; as well as hitting the standard prudent saver. Together they form a large proportion of the population.

    Both of these categories are to some extent reliant on a reasonable rate of interest for both their basic and their discretionary expenditures, even if the latter may be of 'small amount expenditure'

    For savings rates to be trashed for 12 million pensioners plus other savers, for a reason that the world can be saved is simply political and rhetorical nonsense.

    Should you wish to turn the economic spotlight on something then perhaps the light should be shone on the performance of the Bank and the MPC who are quite happy to pull levers to import inflation, trash the Pound and hurt savers, without any real expectation of acheiving their salvage 'goals'.
    As follows

    The BofE News Release regarding the Asset Purchase Facility (as identified in your previous blog) plans to transfer a further 50 billion Pounds to Banks

    However, the BofE expectation of 'success' is based on one 'COULD' and two 'MIGHTS' which is hardly a sound basis for producing another 50 billion out of hat

    quote as follows

    ''...Purchases of assets by the Bank of England COULD help to improve liquidity ......
    This MIGHT stimulate further issuance of some credit instruments by corporate borrowers and (MIGHT) encourage the resumption of capital market flows”.

    For a taxpayer future debt creation of 50 billion, the realisation of APF goals is uncertain.

    But what is certain is that Savers are being politically mugged.

    It would be appreciated if you could help expose the nonsenses behind the actions excused by the BofE and the Treasury in their pronouncements that

    'We haven't been here before, so we don't know how to fix it'

    The world was ever thus.

    However it is preferable to have a modicum of thinking, planning and an understanding of consequential action within the Bank and the MPC, rather than their adoption of knee jerk politically influenced reactions which impose difficulties on large sections of the population.

    Savings rates need upping.

  • Comment number 57.

    Rewarding bad behaviour and punishing those who abstain?

    Yep, that seems about par for the course for Labour.
    - 18 year old single mother with 2 children and a heroin addiction - have lots of money and a home.
    - 20 year old student - we're going to charge you top-up fees after we told you we wouldn't.
    - Earn less than £10,000 and don't claim benefits - we're going to hammer you by taking away the 10p tax rate and calling it a 'tax cut'.

    Maybe their slogan should be 'Vote Labour - other people will pay for your vices'.

  • Comment number 58.

    I do not understand the unpleasant attitude towards savers.

    I agree with no 9 Liberty Rose, they do have a choice and are exercising it.

    Nationwide are predicting that there will be less mortgage money available as savers take their money out of building societies and banks and invest elsewhere (corporate bonds etc). There is also evidence that people are spending less. If your savings are depleting daily you are hardly likely to rush out on a spending spree, so that has not worked. It is not very bright to take the interest rate down at such a pace before measuring the impact. It is just a knee jerk reaction.

    So far we have seen the price of assets fall in every area. There is talk about deflation and preventing it. If it happens it will not be for long. We import our food, fuel, and most of our utilities belong to foreigners. This is not a pretty picture as we are not in control of our daily needs.



  • Comment number 59.

    58. 2trueblue

    Good point re corporate bonds. There is a lot of anecdotal evidence now that people are moving out of Cash ISAs into Stocks and Shares ISAs specifically so they can invest in corporate bond funds. These are yielding up to 6% now. What does this mean? Well, as you imply, banks may well be losing cash deposits, and people are buying "riskier" assets. Except they're not really riskier. It's the banks that have needed rescuing, not AAA-rated non-financial corporates.

  • Comment number 60.

    Supplement to #26 This is Behavioural Economics I submit, although not as many currently know this, as the operant work of the originators (e.g. Herrnstein) is still in the wilderness for very suspect reasons best known to acolytes of the Austrian/Chicago Schools

  • Comment number 61.

    No. 54 JayPee28bpr wrote:
    "I don't think most of the financial services firms qualify for the EMI scheme, do they? I thought that was aimed more at smaller, privately owned firms."

    I think your are right - it is aimed at companies with assets of up to GBP30m.

    The big financial insitutions are masters at avoiding tax. In the past they have paid people in gold to avoid national insurance, set up shell companies and used them to pay dividends, and many other complicated ways of tax avoidance. Just as HMRC closed one loophole, the financial institutions found another way round it....

  • Comment number 62.

    I was reading a history of the netherlands in the c18th, (not as dull as it sounds), and a quote from John Adams, (the future president and at that time ambassador to the Netherlands), struck me as quite aposite.

    Im afraid i cant quote it for other contributors, but it gives a stark illustration and warning of Britains future.

    As im sure a lot of contributors will be aware, the Dutch created a trading empire in the c16th and c17th after a bloody war of independence with the Spanish. However by the time of the mid c18th the Netherlands had stagnated to a severe extent, This, John adams subscribed, was because they had put Trade (read investment banking) above everything else, defence of empire, strategic alliances, the political system and regulations.

    This is modern Britain, unless we are prepared to learn from history we will suffer the same (in proportion) result.

    Loss of trading partners, (as opposed to empire), loss of sovereignty ( the dutch empire was subsumed into the french empire and called "the batavian republic"), loss of self respect and apathy and ignorance will rule.

    There must be a better solution to the current crisis than is posited by the BOE and HMG. We are rewarding mediocrity and punishing rectitude and moral courage.
    People who stood against the prevailing moral quagmire are being punished to reward people who benefitted from the self same fetid slime.

    The choice we are being given is no choice at all, and i for one want the option to stop this government before we reach the tipping point. I guarantee printing more money either through "quantitive Easing" or some other misuse of the English language will lead us to disaster.

    This is what happens when we vote a government in who have no respect for history.

  • Comment number 63.

    Doesn't the concept of deflation apply to interest rates, in the same way it applies to prices? We defer purchases if we expect prices to fall in future. We presumably do the same with borrowing (and have done), when we expect continued falls in interest rates.

    The fact is, all the interest rate reductions have made no difference to consumption at all. They have, however, screwed everyone who has savings. This means that:

    a) the savings ratio is nowhere near where it needs to be

    b) banks now reliant on domestic deposits (rather than borrowing from foreign banks) have insufficient capital

    c) the moral hazard argument goes out of the window - why be 'prudent' if you just end up picking up the cheque for the profligate?

    The problem of the last decade has not been that credit is too expensive. The opposite has been the case. So why is the answer that credit should be made cheaper? Answer - it is simply the stupid, do-something-whatever-it-is, grab-any-lever mentality of the government.

  • Comment number 64.

    On bankers' bonuses:

    Isn't this now convincing evidence of the Selfish Gene? That homo sapiens will take the money and run, and let bank fall?

    It is wrong, but it is rational.

    To take a twist from Smith, 'It is not from the benevolence of the trader, the structurer, or the risk manager that we expect high returns, but from their regard to their own interest.'

  • Comment number 65.

    TWO SIDES OF THE SAME COIN?

    benito_benito (#64) Our maximum security prison system contains only a few thousand offenders, and amongst those are rapists and other sex offenders, probably less than many appreciate. One way to think about them is that they take what isn't theirs to take. The reality is that they are a minority (although such people are more prevalent in some groups than others). It is also a fact that a small number of individuals account for a disproportionate amount of offending behaviour in any society. What one needs to remember is that most don't behave this way, it's alien to them. Sadly, in our Liberal-Democratic systems we have been promoting high risk takers, often those with least conscience. Many are said to benefit from these high financial risk taking/spreading people just as many are said to suffer from a small number of high criminogenic risk individuals. Crime peaks in the late teens, and is predominantly a male behaviour, so is financial risk taking, although the mean age of the latter is higher.

    As our Liberal-Democractic culture has grown, so has the crime/incarceration rate and the financial risk taking/spreading. The only difference is that those hurt by the latter don't see it, as the hit has been more cleverly hidden and has been legalised. Look at how nominee accounts have been (ab)used.

  • Comment number 66.

    JadedDean (#65),

    I'm suggesting that we cannot rely on conscience to prevail, particularly when large sums of cash are involved, and we need a better scheme to reward bankers, such as:

    http://news.bbc.co.uk/2/hi/business/7790695.stm

  • Comment number 67.

    And now a $1.5 trillion bail out package in the US - Obama and the Golem at No 10 seem to think they're playing with Monopoly money. And Monopoly money might well end up being worth more than the dollar and sterling as the printing presses get cranked up to full speed.

  • Comment number 68.

    benito_benito (#66) Maybe. Banks tend to value numerate people, and the bottom line is that numerate people know why there's no such thing as a free lunch. This past behaviour was premised on venal exploitaton of human inequalities, inflated by immigration and skewed birth-rates. The consequenes were surreptiously securitized and dumped on the unwary who had been lied to for well over a generation in order to disguise what was being done. That's my view on the raison d'etre for political correctness.

    It's all now going to unravel, for the greater good I suspect. But watch the verbally profligate past beneficiaries try to desperately re-establish the status quo. They are smart, but they are venal.

  • Comment number 69.

    Don't pity anyone who has cash to invest in equities now. In the mediun to long term, they can expect to do very nicely.

    But if I were being forced to take my pension as an annuity now, I would fight that as an unjust contract.

  • Comment number 70.

    #69 Diversities:

    Equities remain overvalued, the market has not yet priced in depression.

    Also, let us not count our chickens just yet, if Steph were to get her way, the government would push the monetary reset button and leave us all with a big zero and a boulder to push up a mountain. It would be unfair, but it would be equal, eh Steph?

  • Comment number 71.

    #69 Diversities

    Ha Ha Ha don't put your faith in equities. Their shuddering decline is only just about to start.

    Just watch the FTSE and DOW etc. go into freefall.

    The only problem is that many many firms are going to fail because of it. therefore we can expect 4+ million unemployed by end 2009

  • Comment number 72.

    The low interest rates are a way of trying to ensure that borrowers have enough cash flow not to have to pass on their losses to the banks via foreclosures or repossession. Negative equity isn't a problem as long as one doesn't have to sell and can afford the interest payments. Positive equity doesn't benefit prudent home owners because they can't actually earn from the equity.

  • Comment number 73.

    rodonn # 25

    If you took the time to read what the Austrian School are saying about this current economic crisis, you wouldn’t be so quick to associate them with it. Oh, by the way, the Austrians do not hold the same economic views as the Chicagoans if that was your inference.

  • Comment number 74.

    LibertarianKurt (#73) In the final analysis they agree on the main, de-regulative, anti-statist, agenda though. The Gold Standard etc are distractions from their common pragmatic theme of letting the markets determine value with no Big Government 'interference' on the grounds that this can't be done without going down the road to serfdom, National Socialism, Socialism in One Country - cue images of genocide, police-states, ranting baby-eaters etc.

  • Comment number 75.

    Here's another suggestion.

    Some traders take excessive risk, spurred on by excessive compensation. Why is it unfair?

    The trader makes a bonus if he makes money, and makes zero if he loses money. The worst case is he loses his job, but no money. This is known in the derivatives world as a 'free call'.

    I suggest that the call option should not be free; the trader pay for this call. Or at least if it is 'free' he should be taxed on it.

    Here's a simple calculation. Trader is given capital of £25M. He has 1 year to make money. The volatility of his trading strategy is expected to be 30%. Assuming interest rates at 1%, a Black-Scholes valuation of this is £3.1M.

    If the trader is in an upper tax band, he should pay 40% of tax for this free call, or £1.2M., to the tax man.

  • Comment number 76.

    JadedJean # 74

    Thank you, as an Austro-libertarian myself; I am fully aware of the similarities and differences between these two schools of thought. However, it would appear that rodonn # 25 - to whom my post # 73 was originally aimed at – does not. Moreover, he/she seems to think that that laissez-faire capitalism is the primary cause of our present economic woes; by using this contention, he/she could not be more wrong.

    Nevertheless, your post was welcomed in that it not only highlighted the distinction between the Austrians and Chicagoans, but because of the anti-statist, pro-market approach of the Austrians (I cannot really speak for the Chicagoans, but I’m sure some of them would agree), it precludes their association with the present economic mess that essentially the anti-market statists have created.

    I, of course, always hope that there will be more astute comments such as yours that will illuminate the less informed about the direction in which we seem to be heading: Cue serfdom and images!

  • Comment number 77.

    LibertarianKurt (#76) "...it precludes their association with the present economic mess that essentially the anti-market statists have created."

    You have got to be joking! He's right.

    New Labour's the most Neo-Con hands off, let it rip bunch of anarchists we've had in Westminster that I can recall - they even top Thatcher's lot. They have done more to erode the state than she ever did, surely that's what Lisbon (and the Socialist International) has been all about? They want us to become a bunch of EU NUTS (Regional Development Agencies/Assemblies) all about the size of Scotland, London, Finland etc - i.e. statelets as I see it. GOSPLAN (the Civil Service) has been clobbered first by the Conservatives and then by New Labour. They have just spun it to appear otherwise. The statists are fond of family values, keekping their women off the streets (and their clothes on on TV) and reproducing themseles at home e.g. the islamo-fascist 'terrorist' Muslims ;-)

  • Comment number 78.

    I second the above comments on the Austrian school. I find it interesting how a mythical free market capitalism is still being blamed for this crisis, when all empirical evidence points to senior government and regulatory figures having had a micromanaging finger in every single pie through their entire time in public office. Now the government recipe is to add more fish.

  • Comment number 79.

    "when all empirical evidence points to senior government and regulatory figures having had a micromanaging finger in every single pie through their entire time in public office."

    They've done exactly the opposite, just as Clinton did, i.e. they legislated to deregulate. Any 'micromanagement' ws to ensure that nobody got in the way of naked capitalism. That's why RBS, Barclays and HBOS shares soared.

  • Comment number 80.

    #79:

    There was government interference in the market at every level. "Deregulation" is a catch-all term that explains nothing and can create the misleading impression the market was left to its own devices. Nothing could be further from the truth. What actually happened was a removal of risk controls, insolvency and law enforcement processes, all of which are necessary for free markets to function and none of which are one-off acts - their suppression requires upkeep as people are naturally inclined to question.

    Under free market capitalism, administrators would have been appointed years ago. There are zombie institutions trading today whose names have yet to grace a newspaper. Under free market capitalism, they would have been broken up and sold already. But no-one has been free to fail as well as succeed for many years, until cash flow, which never lies, told the story.

    Contrary to popular prejudice, capitalism is not lawless. It cannot function without law. Capital needs a consistently applied legal framework to feel safe. It is why some people are taking to storing cash outside a bank, a small illustration of that general principle.

    None of this happened because the government walked away. It walked in, removed the safeties, was complicit in what followed and took a windfall rake. And it worked like a workaholic at it.

  • Comment number 81.

    JadedJean # 79

    And your solution to "naked capitalism" is?

  • Comment number 82.

    JadedJean # 79

    “They’ve done exactly the opposite...i.e. they legislated to deregulate.”

    That is an interesting statement to make. Well, let us have a look at how New Labour has “deregulated”, shall we?

    Since May 1997, the government has created 3,605 new offences; that is an average of 320 a year. These include 1,238 passed as primary legislation – that means they were actually debated in Parliament. Also included in the overall figure are 2,367 brought in as statutory instruments or orders in council, which means that they were NOT debated in Parliament (I doubt that very few of the MPs that claim to represent us ever read any of these documents at all).

    Specific government departments that created the most offences are - in the lead - the Department for Environment, Food and Rural Affairs with 852 new offences. Running a reasonably close second is the Department for Business, Enterprise and Regulatory Reform, and its predecessor the Department for Trade and Industry, which between them created 678 offences. Meanwhile, the Home Office was responsible for creating 455 offences.

    Here are some of the more bizarre offences created in the last five years and include: disturbing a pack of eggs when instructed not to by an authorised officer, or offering for sale a game bird killed on a Sunday or Christmas Day.

    Funny how all this “deregulation” seems to have created so many offences doesn’t it. I mean, one would rationally think that deregulation would mean NOT to create new criminal offences through legislation. I wonder if you can provide any of your own specific examples of “deregulation”?

  • Comment number 83.

    WeringtonSilent (#80) "What actually happened was a removal of risk controls, insolvency and law enforcement processes, all of which are necessary for free markets to function and none of which are one-off acts"

    Which is what I said, i.e. they surreptiously legislated to deregulate. They also tried to ensure that ombudsmen, inspectorates, regulators etc were re-structred to render them ineffective - they failed in the Lords with Criminal Justice amalgamation of the 5 inspectorates. It was going to be a bottleneck.

    LibertarianKurt (#82) "Funny how all this ?deregulation? seems to have created so many offences doesn?t it. I mean, one would rationally think that deregulation would mean NOT to create new criminal offences through legislation. I wonder if you can provide any of your own specific examples of 'deregulation'?"

    New Labour has indeed put a lot of new laws on the Statute Book(s), but a) some laws work to just cripple the existing sytsem (think of the Human Rights/Equality Acts and how this really works) b) the other side is enforcement. On the Home Office side the vast majority of offences which are not against the person, go undetected - elsewhere, New Labour's concentration on Every Child Matters etc has just meant that where crime starts to peak (peaks in males in late teens) they are given warnings or cautions - which keeps the statistics down but the trouble in communities up. You list a few odd offences but why not list the legislation which effectively reduced risk management control as it did in the USA? I don't think you see how cleverly New Labour has gone about this. Following some of the primary legislation through the houses can help. They have been breaking up the regulative system, i.e The Civil Service, in favour of the Private Sector/Third Sector for years. Anything which helped in that process was done (they've clobbered Probation, The Armed Forces, you name it). Legislative anarchism one might call it. For their most 'destructive' influence outside Finance, see Education standards (and, along with the Conservatives) female HE expansion, and SATs feminisation (although you'll have to go back through the Newsnight archive to find the details).

 

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