Socially Useless Banks Should Wake up Suggests Paul Volcker

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Macroeconomics

Everyone it seems loves taking a pop at bankers this year and Paul Volcker chairman of President Obama’s Economic Recovery Advisory Board and former US Federal Reserve chairman is no different. In an article in the Telegraph newspaper, Mr Volcker is quoted as telling a business conference in England that their industry’s “single most important” contribution in the last 25 years has been automatic telling machines (ATM’s), which he said had at least proved “useful”. He went on to say credit default swaps and collateralized debt obligations (CDO’s) had taken the economy “right to the brink of disaster” and added that the economy had grown at “greater rates of speed” during the 1960s without such products. Not that bankers have ever claimed CDO’s and the like sped up economic growth but one expects the audience got the message! Agreeing with George Soros, Mr. Volcker said riskier financial activities should be limited to hedge funds to whom society could say: “If you fail, fail. I’m not going to help you. Your stock is gone, creditors are at risk, but no one else is affected.”

Meanwhile bankers in the UK are bracing themselves today to hear what the Chancellor of the Exchequer has to say in his pre-budget speech. He is widely expected to announce a super tax on bankers’ bonuses. Although this may be politically attractive in an election year, it could lead the government into deep water. Apparently some of those highly paid bankers are on the phone to their highly paid lawyer friends seeking to invoke the European Human Rights Act to defend their right to large dollops of cash, and who can blame them. If it was written into your contract at the start of the year you would expect the same I suspect.

The UK is not alone. France has already taken some steps and even the US is looking at means to either limit or tax “excessive bonuses. All banks fear that if unilateral action is taken by their own governments, valuable talent will be lost to competitors operating in different domiciles or to hedge funds which have not been targeted in the same way even though they too have benefited from the artificially low interest rates forced on the economy by governments. Maybe a better solution would be to encourage banks to pay a greater proportion of bonuses in stocks with a three year earn out. That way, there is less instant wealth and a much greater incentive for successful traders to stay and continue to grow the share price.

–Stuart Burns

Comment (1)

  1. Major says:

    The current Washington / Wall Street entanglement has severed Adam Smith’s “invisible hand” at the wrist and substituted crony capitalism — that redistributes wealth — for the meritocracy that Adam Smith so passionately espoused.

    Perhaps it’s time to shut off the tax, regulatory and monetary subsidies — now channeled to the FIRE (Financial services, Insurance and Real Estate) industries — and redirect them as Adam Smith envisioned to meeting the needs and and wants of the populace — rather than just of the colluding merchants and the politicians they’ve bribed.

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