Brown has finally killed off New Labour
WHAT a waste; what a u-turn. For the past six months, the FSA, the Treasury and many top banks had been beavering away on innovative proposals to reform bonuses. Their idea, which had been gaining influence globally and even been accepted by the Tories, was to retain basic freedom of contract and the incentivising properties of bonuses, while making them less short-term and allowing them to be clawed back if the profits on which they are based eventually turn out to be illusory, subprime-style. The entire endeavour was a bit of a distraction given that no serious economist really believes bonuses were the primary driver of the crisis; but at least it was a calm, level-headed attempt at making financial markets function better.
All of this work has now been thrown away. Gordon Brown, who until a few days ago was an enthusiastic supporter of this measured, reformist approach, and had little time for hysterical opponents of all bonuses, has suddenly switched sides. The Prime Minister is now officially committed to crude, arbitrary limits to compensation, just as he was in the 1980s and 1990s before he grudgingly accepted capitalism. What was left of New Labour finally died yesterday.
The Franco-German letter signed by Brown says it all. “We should explore ways to limit total variable remuneration in a bank either to a certain proportion of total compensation or the bank’s revenues and/or profits”, it says. Yet capping bonuses in this way won’t work, even if every country in the world were foolish enough to sign up. Basic pay would jump; high performers would be given regular pay rises; poor performers would suffer pay cuts or be fired. Bonuses would reappear, albeit in hidden guise. Caps would severely damage efficiency and make banks even more likely to fail. Linking all bonuses to overall profit would make it impossible to reward star performers in loss-making organisations, a recipe for disaster. Even worse, the proposal would only apply to the largest banks, triggering an exodus of bankers to unregulated, smaller firms, hedge funds and start-ups.
The letter states that “our citizens are deeply shocked at the revival of reprehensible practices, despite taxpayers’ money having been mobilised to support the financial sector”, without defining “reprehensible”. Clearly, Brown and his new allies believe in the disgraceful concept of collective punishment: even banks such as HSBC, which didn’t take taxpayer cash, apparently deserve to be punished for the sins of others; individual bankers who weren’t involved in sub-prime lending or other defective practices need to pay for the minority who were (most of whom, by the way, have long since been fired). Brown used the wages and profits of the City to fuel his reckless spending spree; he now appears to consider all big bonuses, even those that don’t endanger stability, as “reprehensible”.
Many argue that nationalised banks should not award large payouts, even to key members of staff who create value for the taxpayer. I disagree – but at least this would be a principled approach. But then why did Brown sign off huge bonus schemes for RBS, a bank he owns? Brown’s inconsistency and hypocrisy are breathtaking.
He has no interest in creating an economy less prone to boom and bust; he just wants to stir up populist hate ahead of next year’s election. Let us hope the Tories have the guts to stand up to him.