Banks and Renumeration

I drove back from Leeds this weekend after spending the weekend at my Grandparents sliding all over the place after all the snow we've been having in the UK the past week.

So been stuck in a car for three and a half hours was probably not the time to be sent around the bend by the idiotic party political views of this Government. I am talking of course of the news today that Alistair Darling is ordering an independent inquiry into the way banks pay bonuses. I think this is a stupid decision, I don’t think it’s the stupidest, unfortunately we all take collective responsibility for that, I for not voting at the last election and everyone else for voting Labor!

I think it’s a stupid decision because it simply appeals to the people who don’t really understand what goes on in Finance. I'm not saying that they are incapable of understanding it, I'm just saying that they have not been inclined to take the time to understand it, in the same way I have never taken the time to understand medicine, I am not objectively qualified to diagnose cancer in someone, I have not taken the time to understand law and court procedures I am not qualified to comment on legal cases (more on this in a later blog).

Finance is not difficult, but the problem as I see it is that there is no minimum bar to pass before been able to become a finance professional, like a lawyer has to get called to the bar, the medical student has to become a member of, in the UK the British Medical Association, any old bucket shop can open and sell to the public (although to be fair the FSA and SEC do a good job of restricting this) the upshot of this is that everyone has a view, and whilst it takes two views to make a market, people tend to only ever buy stocks. This means that while they tend to do well in bull markets such as the one we 'enjoyed' from 2003 through to mid 2007 they tend to lose their shirts in bear markets.

I have no problem whatsoever with people losing money in the stock market, I could not care less. I have lost money previously and I have made money. What people tend to forget is that making money and losing money are two sides of the same coin. They tend to ignore that, they tend to ignore all of the other contributing factors that make a bull market, primarily a herd mentality, and blame the bankers. The politicians who in my view don’t have a clue, then try and jump on the band wagon and conjure sympathy from people who have lost their savings. It’s as if these people assume that the stock market was a license to print money. It isn’t, no financial asset is, EVERY financial asset carries risk, and the risk that others will not value the asset at the same price you do.

This brings me to why I think that the independent inquiry is a bad thing, politicians tend to be the jack of all trades and the master of none, this coupled with the fact that they owe their financial stability to the good will of the people leads then to be very partial observers of what is going on. Robert Pestilence alarmist views are testament to this.

Finance pays good wages to those who work in it, I will not go into the debate of should nurses earn more than bankers or footballers, these arguments miss the point. Finance pays high salaries for a reason; the reason is that they have a high marginal product. In a competitive economy over time person earning £100,000 brings more value to an economy than someone earning £50,000. Twice as much. Some people messed up in the past few years, and I do not defend them, they have probably (hopefully) lost their job, they are paying for their past mistakes.


The fact is that markets are efficient, and economic agents respond to incentives. The UK Government is in a mess, it now owns most of UK banking, both retail and wholesale. The Government HAD to step in to stop the banks collapsing; they play a pivotal role in the economy. They also have a significant amount of money at risk, several billion pounds, that’s alot of cash. They need high quality people to get them out of the mess UK plc is in. They cannot get these people by making statements that indicate they will not pay people well. If I can earn more money by working at a hedge fund and pitting my wits against every other idiot in the market then I can by earning the gratitude of the British people by saving the banks, I will gladly chose the former.

Voters have short memories, they forgot that we've had crashes before, money talk’s money may be fickle but it is the universal measure of someone’s ones ability and the value other place in that ability.