Marx would have been proud of bankers – FT.com
If Karl Marx had been alive in 2007, he would have been working for a bank. Banks had reached a state of communist perfection. The workers took home everything; the capital holders were left with nothing. Shareholders of banks were raped by the staff, who paid themselves extravagant sums out of illusory profits. Labour had found a far more effective device than trade unions for destroying capitalists, by duping the shareholders that higher pay was essential to retain Talent. They were assisted by the accountants, who allowed them to declare profits before they received any cash. Marx would have been laughing all the way from the bank.
We should hardly be surprised that the beneficiaries of the communist banking system are squealing. There are many siren warnings of the consequences of more regulation. Don’t kill the golden goose, they say. Many in banking seem not to have noticed that they recently brought the world economy to its knees.
To be fair, the banks were not alone in their mistakes. Central banks set interest rates too low for too long; politicians believed they had abolished the business cycle and that a permanently higher level of public expenditure could be justified; too many citizens borrowed money they could never afford to repay. This type of mass self-delusion has characterised most booms in history. But it is the bankers who seem most reluctant to accept that change is necessary. They need rescuing from themselves. Counterintuitively, it is regulation that can reimpose a capitalist system on the banks.
For starters, the banks need to be humble about how much value they really add to the economy. To the extent that we export banking services, banks make a positive contribution to the economy: fleecing foreigners is fine. Even that only works if the banks have their loans repaid or avoid losing money with foreigners’ capital and ending up with a taxpayer bailout.
Banks’ most important domestic function is to channel savers’ money to businesses for investment. Only productive investment generates growth. This is a vital job. But the banks themselves do not have the investment ideas: businessmen do. The banks are just transferring money around the economy. Nor are they irreplaceable: stock and bond markets, and accumulated profits, are also sources of capital. UK businesses have never been so profitable. What businessmen lack is confidence, not bank loans; it is mostly small businesses that suffer.
How much reward should banks receive for acting as middlemen? Something, of course, but they cannot justify supernormal returns. A utility-type return would be a far superior return to recent history, and reliability is prized by investors.
This must involve splitting the banks into their trading functions and their deposit-taking and lending functions. But Northern Rock wasn’t trading, say the Marxists. True, but it was reliant on wholesale finance, and bundling loans to sell to other investors, in its efforts to reach the same (illusory) returns as competitors. Trading at other banks only appeared profitable because of the implicit (later explicit) taxpayer guarantee. Let those who wish to trade raise capital and pay the market rate for their activities. Vickers did not go far enough.
Pay remains an essential failing. Far too much of a bank’s revenue is paid to the employees. Shareholders seem to have forgotten that they need only pay the minimum necessary to keep staff: they have ceased to be rational capitalists. The idea that bankers would rush off to do something different if they were paid a bit less is intuitively absurd. Shareholders have foolishly tolerated pay schemes based on short-term results and without clawbacks. They fell for the line that each bank had to deliver top quartile remuneration, as if all bankers were above average.
Like most communist parties, the members are very good at protecting themselves from external criticism. There have only been a couple of show trials and expulsions to the gulag: Goodwin and Cummings. What about the rest of them? Britain is hopeless at disgracing its failures. A healthy, prosperous, contributing City needs more capitalism and less communism. Ignore the alarmist warnings that we are committing national suicide by regulatory interventions. Boring, profitable and reliable banks will deliver national competitive advantage in future.
Marx will have to go elsewhere.