Saturday, 5 December 2009

Bankers' bonuses - a diversion?

The obscenity of bankers' bonuses is once more in the headlines. Many pundits have, quite rightly, pointed out that their improved performance this year has little to do with their own skill, but more the result of improved economic conditions provided by massive government intervention. If anyone deserves the bonuses, it is the taxpayer!

But does the bankers' bonus issue really warrant all the attention it is getting? Is it not a minor problem in comparison with some of the major issues underlying the current economic crisis? Whilst we all need a whipping boy, from time to time, to blame for our ills, we might be in danger of missing the point. The point is that we have collectively borrowed more money than was actually in circulation, meaning that we have to repay a significant debt. Whilst the bankers (and the banking system) have not helped (and in some cases positively encouraged recklessness) this issue of over-indebtedness goes back to the Thatcher era when people were encouraged to own their own houses. Nothing wrong with that, you may think, but that is because we have got used to the idea (popular at the time) that home ownership is an important achievement to be aimed at, regardless of whether this was the best option for everyone, whatever their personal circumstances. Very attractive if you can buy your council house below its market value, but what happens when the availability of rented accommodation is consequently reduced? Well, this produces a further demand for home ownership which, in turn, puts pressure on mortgage lenders, because they need sufficient borrowers to fund the interest of depositors. They could not afford to reduce loans because prospective purchasers would normally be unable to afford mortgage repayments. Hence the boom in ridiculously generous loans (125% of value) which, ultimately, could not be repaid by the borrowers, particularly in the USA.

At the same time, the Thatcher doctrine of the individual's pre-eminence over society led to a mercenary outlook and a climate of spending on easy credit to "keep up with the Joneses". This spending boom continued in the New Labour years under Gordon Brown, when it was perceived as being beneficial to the economy. But this was short-sighted, as it ignored the greed and recklessness of individuals when encouraged to spend money that they didn't have and, as it transpires, was never there in the first place!

When I visit my financial adviser, he always goes through a list of my income and expenditure to make sure that I can afford any investment he suggests. Yet mortgage companies and banks baulk at the idea of asking similar detailed questions when loaning money for a house or credit for other goods. If this continues, then our debt burden, whilst decreasing currently, is likely to expand again in the near future, precipitating a further collapse in the economy. The restraint we need is not confined to a few bankers - it applies to us all.

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