TOPIC GUIDE: Bankers pay
"The UK government should impose limits on bankers’ pay"
PUBLISHED: 01 May 2009
AUTHOR: Alex Hochuli
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Financial services are under a huge amount of scrutiny for their role in the Crash of 2008. From anti-G20 protestors [Ref: Guardian] to mainstream commentators [Ref: Guardian], many hold the City of London and Wall Street responsible for the current situation and there has been widespread slamming of ‘greedy bankers’, who earned enormous bonuses by risking and losing huge amounts of other peoples’ money. The former head of RBS, Sir Fred Goodwin, became the target of popular disdain for initially insisting on keeping his £700,000 a year pension (which was contractually his) despite overseeing the downfall of the bank [Ref: BBC News]. ‘Fred the Shred’ had the windows of his Edinburgh home smashed by anarchists [Ref: Sky News] and was deemed ‘obscene’ by Lord Mandelson [Ref: Guardian].
The condemnation of bankers seems more overwhelming still when even the financial sector accepts a degree of culpability [Ref: Goldman Sachs]. Indeed, bankers have become such a target of moral opprobrium that Gordon Brown accused the sector of operating outside of everyday human values and principles. Public ire has pushed some commentators to suggest that the tighter regulation of banker remuneration is what is needed. But critics warn that we should be extremely wary of this kind of moral condemnation. They argue that arguments for docking pay are at best an example of cynical political opportunism, and at worst could exacerbate our economic problems. Has the time come to rein in the greedy bankers? Or are we in danger of misdiagnosing the problem and stigmatising success and risk-taking more broadly?
DEBATE IN CONTEXT
This section provides a summary of the key issues in the debate, set in the context of recent discussions and the competing positions that have been adopted.
They gain, we pay?
The rage directed at bankers and their bonuses stems from the fact that while bankers benefited greatly during the boom – disproportionately and unfairly, according to some – it has been the taxpayer who has most suffered in the downturn, with the state bailing out several major financial institutions. Many people from across the political spectrum see this as a case of private profits and socialised loss: ‘they gain, we pay’. Further, the ‘bonus culture’ itself is seen to have precipitated the crisis by encouraging risky, even reckless, behaviour, with massive rewards for success but few penalties for failure. Consequently, many are calling for an overhaul in bankers’ pay so that pay and performance are more closely linked, with some demanding that a maximum wage should be implemented. Some go further still by suggesting that income inequality has grown massively over the past decades and needs to be corrected – starting by targeting the fat cats.
Is there more to banker bashing?
However, several commentators – on the political left as well as right – have argued against what they see as facile ‘banker-bashing’. They suggest that the vitriol directed at bankers is a distraction from the real fundamental economic problems we face today. Pointing to the sluggishness of economic activity in the Western world over recent years, some say that the source of the crisis lies with the atrophy of the real economy, reaching back as far as the 1980s. Financial journalist Daniel Ben-Ami argues that it was this economic sluggishness that led to a bloated financial market, making it more lucrative for firms to play the markets, rather than reinvest productively. In their failure to grapple with, or even acknowledge, this long term economic trend, he suggests the political elites must take some responsibility. In these circumstances scapegoating the bankers (especially when done by the governing politicians) [Ref: Telegraph] shifts liability away from others who are also responsible, such as the government. A number of writers have also expressed concern that the recent attacks on ‘greed’ - today personified by bankers - feed in to a broader culture of low horizons that is ambivalent towards ambition and the pursuit of prosperity. This, they suggest, doesn’t only impact on failed bankers, but has far reaching implications for us all.
How should remuneration work in the financial sector?
Banks have defended the bonuses paid out to bankers on the basis of ‘incentivisation’. Bankers’ salaries are often relatively small compared to that earned through bonuses with the latter used to encourage productivity. However, commentators such as Martin Wolf have pointed out that the size of bonuses encouraged bankers to take on excessive risk in financial dealings. Many agree and have put forward proposals to limit banker’s pay; in the United States President Obama has said that firms that receive government bailouts will see salaries capped at $500,000 (to be removed once government funds are repaid), a tiny fraction of their formal levels. Countering Obama others claim that introducing caps will be counterproductive, ultimately working to discourage the kind of talent needed to contribute to and ultimately repair the economy.
Taking risks or playing safe?
The argument for long-term restriction partly hinges on the view taken on what role financial services should play in the economy. Now that a number of banks in the UK are partly or wholly publicly owned, some argue that the state should have a say in setting remuneration systems. Restricting pay therefore implies that banks should be reined in by the government with risk-taking discouraged – a ‘safe and steady’ approach whereby banks operate more as public utilities. But others are concerned at the direction of such a move. Despite the sector’s recent failures, they suggest that financial services expertise is crucial to the UK economy. A move towards utility only banking would not only hinder its recovery, but could kill it off altogether (Ref: Lex vs Wolf Blog). A number of commentators are now reemphasising the important role that banks must play in taking risks in the allocation of capital for investment in the interests of rebuilding a healthy, productive economy. Allowing banks to return to private sector ownership, they argue, will enable them to start doing this. The role of the state is fundamental to this question, with many asking whether it can continue to intervene whenever something goes wrong.
Make the pips squeak?
Critics of bankers’ pay nevertheless claim that it is an injustice that some should earn millions a year whilst many essential workers, such as nurses, are paid a fraction of this and feel that bankers’ wealth should be channelled to more needed areas. A similar argument is made in relation to Premiership footballers [Ref: Debating Matters Topic Guide]. Practically no one would argue today that bankers haven’t made grave mistakes or that top bankers’ earnings aren’t enormous. But it doesn’t necessarily follow that it is a political imperative to limit their pay. Attacking the bankers can be seen as a cheap, populist gesture, rather than a serious attempt to deal with the recession. Some commentators have noted that anti-banker sentiment is informed by a ‘politics of envy’, wherein ‘equality’ comes to mean ‘sharing out the pain’ of the recession, rather than achieving more for all. Hence, some radical critics have warned against banker-bashing for focusing on the superficial element of bankers pay, rather than on what they see as systemic problems – namely, that the capitalist system is prone to periodic crises of the sort we are witnessing now.
It is crucial for debaters to have read the articles in this section, which provide essential information and arguments for and against the debate motion. Students will be expected to have additional evidence and examples derived from independent research, but they can expect to be criticised if they lack a basic familiarity with the issues raised in the essential reading.
BBC News 27 February 2009
BBC News 9 February 2009
Paul Krugman New York Times 27 April 2009
Rem Sikha Guardian 15 February 2009
PollyToynbee Guardian 7 February 2009
Martin Wolf Lex vs Wolf blog ft.com 2 February 2009
New York Times 19 September 2008
Andrew Simms Guardian 6 August 2003
Daniel Ben-Ami spiked 7 May 2009
Economist 2 April 2009
Brendan O Connor Irish Independent 15 March 2009
Rob Lyons spiked 3 March 2009
Jo Johnson Lex vs Wolf blog ft.com 9 February 2009
David Buik Guardian 6 February 2009
Anatole Kaletsky The Times 27 April 2009
Phil Coggan Economist 2 April 2009
Eduardo Porter New York Times 9 March 2009
Anindya Bhattacharyya Socialist Worker Online 27 January 2009
Definitions of key concepts that are crucial for understanding the topic. Students should be familiar with these terms and the different ways in which they are used and interpreted and should be prepared to explain their significance.
Useful websites and materials that provide a good starting point for research.
Michael Scott-Moore Spiegel Online international 23 March 2009
Edward Carr Economist 22 February 2009
FT Blogs 9 February 2009
Lloyd Blankfein Financial Times 8 February 2009
Populus Polls 1 February 2009
BBC News 2008
Office of National Statistics 14 November 2008
Dolan Cummings Battle in Print 29 October 2008
Socialist Worker Online 23 September 2008
Goldman Sachs Public Policy
Links to organisations, campaign groups and official bodies who are referenced within the Topic Guide or which will be of use in providing additional research information.
IN THE NEWS
Relevant recent news stories from a variety of sources, which ensure students have an up to date awareness of the state of the debate.
Guardian 7 May 2009
BBC News 30 April 2009
Guardian 22 April 2009
The Times 6 April 2009
Guardian 31 March 2009
Bloomberg 26 March 2009
BBC News 24 March 2009
Daily Mail 8 March 2009
27 February 2009
BBC News 15 February 2009
BBC News 14 February 2009
BBC News 10 February 2009
Telegraph 4 February 2009
New York Times 4 February 2009
BBC News 31 January 2009
Financial Times 16 November 2008
BBC News 8 October 2008
Telegraph 29 August 2008
The Times 25 April 2008
Nick Robinson and Robert Peston Today Programme, BBC Radio 4 10 February 2009
Sky News 5 February 2009
Will Hutton Dispatches, Channel 4
Will Hutton Dispatches, Channel 4
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