Banks, Bailouts and Bonuses

Last year, the taxpayer was forced to bail out the banks with a total of £117 billion spent on government buying bank shares, because they were ‘to big to fail’. This means that every British family paid £5,530 for the banks. A stupid amount of money. But the figure becomes more frustrating, when you discover that the banks could have easily bailed themselves out, by putting aside its bonuses ready to be paid for employees last year. Is this act at all justifiable? That we, the taxpayer, have to bail out the banks, for putting us in recession for there careless, misjudged handling, to which those responsible receive these bonuses still? Let us not forgot RBS Chief Executive Stephen Hester who is receiving a £10 million bonus, when the taxpayer bailed out his bank, Lloyds TSB and HBOS for a total of £37bn.

So why are the banks to blame? Irresponsible lending. The banks are able to lend out money, in line with the current amount of capital it has. A lack of regulation caused banks to start lending out more money than they could afford, immorally enticing those that could never pay the banks loan back, for example, with a mortgage. Those economically worse off would generally take a bank loan, if the bank was offering it to them. It is desirable to always be at the same level as the mid-class of society; to be able to own a house, to even have a bank account and surely if the bank states you can afford a mortgage, chances are it will not be turned down. The bank would know best after all, about how much you can borrow and your ability to pay it back. But the banks knew that these consumers would not be able to pay them back; this leads to asymmetric information, a form of market failure.

This false sense of security for the lower economic class meant banks were able to pass some of the blame onto them, for irresponsible borrowing, completely turning the tables on the reckless lending the banks had ensued.

Not only that, but set out to make even more money. They bundled these loans into separate packages; those who have a good credit history will be put together with those with a bad credit history, to balance it out. These bundles were then sold on to other banks, to which because on the surface the credit rating for the bundles was good, due to the balancing out effect, they were bought. But these bundles were sold on again and again, to which it came to the point, where nobody knew how much the packages were worth anymore. Toxic loans were being passed around, which had much less value than originally thought. Banks had no idea how much money they had, and with overspending more than their capital was worth, this became a huge problem. Consequently banks stopped lending out, because of the toxic bundles and caused a freeze in the flow of money in the economy. This was a major cause of our recession; it led to a huge confidence loss in the economy, which meant everyone began saving their money rather than keep spending it because of the risk that they may never see their money again.
As a result, demand for products went down and with no demand, less products need to be made. Workers have to be laid off, due to firms being unable to pay for wages anymore, due to a lack of output.

Thus the longest recession since the war began in the UK. Even though announced today we are out of a recession, it is only by 0.1%. A very poor and weak figure, far lower than expectations, and makes the possibilities of more economic growth less promising, due to VAT rises again, alongside post January blues, of spending money at Christmas. It could still only be a small blip, to which may go straight back down again.

So is it fair banks are able to pay out these huge bonuses to their employees, to which they could have bailed out themselves with, instead of the taxpayer?

Economists, bankers e.t.c. who work for these banks are some of the brightest economic minds in the whole world, even though it may not appear like it from this article. Their skills are necessary in order to keep the sophistication of Britain’s financial tertiary services worldwide. So what can we do about the bonuses?

Taxation? If a person is earning more than £10 million in bonuses, to you and me,
£5 million left over, after a tax of 50%, is still more than enough to be getting on with. But the risk is our will bankers travel and stay abroad, so that they can avoid being taxed. We are then left lacking the crucial skills needed to run our financial services. Personally, taxation is definitely a strong method to use, however it should not be used discriminately on the banks; the banks are actually taking government to court for this reason. A steady rise in taxation for the extremely wealthy and high earners, for a greater distribution of wealth is the only way to keep our country strong and efficient; more tax revenue means a greater health service, better public transport, for example. However the opportunity should be taken, to not only tax those earning a filthy amount of money in a bank through bonuses, but highlights the need to reform the tax system to which will be more beneficial to those on or below the poverty line in this country.

Capping? By capping the bonuses, the money will only go back into the system, without the benefits of distributing the higher taxation. From a Marxist view, it is better to give the workers money they have worked for. However this money could have been used to bail out the banks themselves.

What should be done about the banks in future? The most important thing that needs to be made sure is for the tighter regulation of bank borrowing and to see that lending is fully enforced, which is not to be lapsed under any circumstances which caused this recession in the first place. But dealing with bonuses is a rickety situation to be in, but moving the taxation amount on higher salaries up, would mean a better distribution of wealth, to which big bonuses will be able to have a greater effect for all classes of our society.