Tuesday, September 29, 2009

Banker Bonus Bashing Continues...

Based on the attention on banker bonuses at the G20 meetings, you would have thought banker bonuses were the root cause of all our global problems - financial meltdowns, expensive oil, global warming, poverty, nuclear proliferation, Kanye West’s behaviour and the Wiggles.

The G20, a collection of the most powerful men and women on the planet, have spent a huge amount of time and conjuring up bonus restrictions to curb the “fat cat bonus” culture.

As usual, these “leaders” are way behind the curve as most banks have already changed their compensation structures, including limiting the use of guaranteed bonuses, increasing the proportion of compensation received in stock, etc. So, this work serves no purpose other than to generate hollow headlines that will resonate with the general public.

In fact, the only real impact on these restrictions is to make government investments in financial institutions worth less, and therefore, yet another drain on taxpayer resources. Restricting compensation at companies still under the government umbrella eliminates the last tool they have to attract the best talent in order to make the most money. If you can’t pay the good bankers/traders who are very successful and profitable, they will leave as there is no shortage of competitors who will be more than willing to pay them what you are not permitted to pay them.

Ask any economist, or anybody that knows anything about the financial system, what they believed caused the financial crises, and I doubt the banker bonus issue would be in anyone's top 5 causes. It’s even debatable whether bonuses had any material role in the crisis at all – a point highlighted in a good op-ed here.

Governments have a vested interest in ignoring the real causes because if they did even a cursory review of the causes of the crisis, they would end up looking in the mirror more often than not (Congress requiring loose standards for low-income mortgages via Freddie/Fannie, very low interest rates, tax credits for mortgage interest, etc.). Governmental policies had just as big or an even bigger role in the crisis than any group of bankers, traders, homeowners, mortgage brokers, etc..

Typical populist politics - why would governments criticize themselves when smashing bankers for working hard and making a good living works so well at the polls?


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