Bankers' pay is high because there's too much money in the finance sector

The EU's attempt to cap banker's bonuses trundles on. But it's misdirected, writes Alex Hern.

As predicted, George Osborne made a last-ditch attempt yesterday to prevent the EU's cap on banker's bonuses being institutedtelling the convention of finance ministers that he "cannot support the proposal on the table". Despite the suggestion from Germany of a minor tweak to the proposals, apparently to give Osborne the chance to claim he'd won concessions, the Chancellor continued with his opposition, and so Britain remains the only EU nation not in favour of the cap.

There is still some fine detail left to be negotiated over the next few weeks, so if Osborne doesn't want to make the politically significant choice of being explicitly out-voted by the EU for the first time on this issue he could change his stance; but, as the Guardian's Ian Traynor writes, "there was no doubt that the central decision, to clamp down on bonuses, was irreversible".

Now that victory is within their grasp, some in Europe are looking to the next battle. The Telegraph's Louise Armitstead and Bruno Waterfield report that Spain's finance minister, Luis de Guindos, is looking at applying the same rules to salaries overall:

“We are very much in favour of the limitation on variable remuneration but that’s not the only issue,” he said. “The question is also the entirety of remuneration, which is sometimes more important. And Spain’s position is that shareholders’ meetings must have a major involvement and should decide the overall remuneration of bankers.”

De Guindos' plan hints at the real aim of the bonus cap. As I wrote last week, there are a number of possible targets, and the cap is flawed at achieving any of them. It will do little to affect the balance of risk in the system; little to affect the overall remuneration of bankers; and, since bonuses are more of a historical artefact than a considered motivation to action, there's not really any reason to think that they actually have any effect from the start.

It's clear from de Guindos' words that at least some of the support for capping bonuses comes because it's seen as an easy way to reduce the pay of bankers; and that now that that's done, the salaries should be next in line.

But as the Guardian's Zoe Williams discovered, the money has to go somewhere. Tim Simons, "who works in operations for a government-owned investment bank", makes the point to her:

"When a bank makes money, it either pays to its employees; or it pays to its shareholders – the wealthy, I call them."
"But aren't the employees wealthy too?"
"No, traders aren't wealthy, they're just well-paid."

For similar reasons, I've heard bankers refer to their profession—with tongue firmly in cheek—as the ultimate victory of Marxism. It is, after all, an industry in which the workers have successfully captured nearly all the surplus value they create.

Simons seems correct that the trade-off the banks face is between handing money to employees or shareholders. Take this, from 2005 but still relevant:

During in the past four years, securities firms in the US paid $7bn more in bonuses than they made in profits, $3bn more in 2004 alone… And compensation stays high even when profits are down. When J.P. Morgan admitted to bad bets last month, it slashed its net income for the second quarter. But during the same period, it paid employees more than $4bn, as it has in each of the past four quarters. On average, shareholders got just one dollar $1 for every $4 paid to employees.

But what that highlights the real problem for people who feel that bankers' pay is inequitable, distortionary, or in some other way problematic: ultimately, the pay is just a symptom of the fact that banking is an extraordinarily profitable industry.

In the US, finance accounts for just 8 per cent of GDP, but almost 30 per cent of corporate profits:

Noah Smith, examining why that might be, suggests that banking as a sector has naturally enormous economies of scale, and very few diseconomies. Put them together, and the tendency toward monopoly in finance is even greater than it is in capitalism generally. And so banks gain monopoly (or, more accurately, oligopoly) status, and can extract monopoly profits.

That even fits with what Simons told Williams. His dichotomy— "money goes to the employees or the shareholders"—misses the fact that banks could use that money sloshing around to boost the amount they pay savers, lower the interest rate they charge on loans, or reduce the fees and charges they levy on customers. (That applies just as much to investment banking as conventional retail banking). In a competitive industry, that's what would happen; but finance isn't a competitive industry.

The vast sums of money floating around the system have to exit it somewhere. High pay—and high pay in the city particularly—has a corrosive effect on the nation, but to tackle it without addressing the anticompetitive nature of the finance sector overall is prescribing painkillers to heal a broken arm.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

David Cameron attends a press conference with Portuguese Prime Minister Pedro Passos Coelho earlier today. Photograph: Getty Images.
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Cameron rules out military action in Syria without Labour support

A downside of Corbyn for the Conservatives.  

Many have written that Jeremy Corbyn's likely election as Labour leader will give the Conservatives free rein to pursue their desired politics. But with a majority of just 12, their room for manoeuvre is more limited than suggested. In an Evening Standard column in July, I noted that Corbyn's success could deny David Cameron the Commons majority he needs to extend military action against Isis to Syria. 

Speaking in Spain today, where he is discussing his EU renegotation, Cameron said that he would "only pursue going further on this issue if there is genuine consensus in the UK". That is a signal that military intervention would require bipartisan support. The Prime Minister is still stung by his defeat over the issue in 2013 - the first time a government had lost a vote on a matter of peace and war since 1782. Having previously opposed the extension of air strikes from Iraq to Syria, Harriet Harman said in July that Labour would look "very, very seriously" at any proposals to "tackle the growing horror of Isil".

But Corbyn, to put it mildly, does not share this view. Asked during last night's Sky News hustings by Liz Kendall whether there were any circumstances in which he would approve the use of armed force, he said: "Any? I am sure there are some. But I can’t think of them at the moment." He went to argue that interventions required UN backing to be legitimate: "We should have stuck with the UN and given far more support to the UN," he said in reference to the Nato action in Kosovo. "Surely we want to live in a world that is based on the rule of international law. the UN is quintessentially part of international law." 

As well as the potential that a Corbyn leadership has to shift the terms of debate leftwards, forcing the Tories to adopt a more centrist position, this is another reason why not all Conservatives relish the prospect of his victory. 

George Eaton is political editor of the New Statesman.