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.

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When the world seems dark and terrifying, we shouldn’t feel ashamed to dream of Utopia

Right now, the future seems dark and frightening and it is precisely now that we must continue to imagine other worlds and then plot ways to get there.

There are many cruel and routine lies we tell to children but perhaps the most indicative is this: if you tell anyone your wish, it won’t come true. This parable was probably invented by parents trying to avoid the trauma of not being able to give their children what they want but we carry it with us to adulthood, when it is repeated to us by our leaders. Don’t tell anyone the sort of world you would like to see – at best you’ll be disappointed and at worst you’ll be arrested.

“We want more.” This week, exhausted by the news, I dragged myself out of the house to a book fair, where I came across a new collection of utopian fiction by radical women. That was the first line and it stopped my breath in my throat. When basic survival seems like a stretch goal, caught as we are between the rich and the rising seas, hope feels like an unaffordable luxury. The precise words I used to the bookseller were, “Shut up and take my money.”

There has never been a more urgent time for utopian ideas, precisely because the concept of a better world has never felt further away. Right now, world leaders are deciding how many cities are going to sink before something is done to reduce carbon emissions. They are meeting in Paris, which very recently saw the opening scene of a new act in everyone’s least favourite dramatic franchise, “War in the Middle East”. We seem to be living in a dystopian trilogy scripted by a sadistic young-adult author and I very much hope that our plucky young heroes show up to save the day soon, even if there’s a clunky love triangle involved.

Dystopias are easy to construct: to paraphrase the novelist Kim Stanley Robinson, you might as well pick five news headlines at random, make a collage and there’s your plot. Utopias are harder. Utopias require that we do the difficult, necessary work of envisioning a better world. This is why imagination is the first, best weapon of radicals and progressives.

Utopian stories existed long before the word was coined by Thomas More in the 16th century to mean an ideal society, or “no-place”. Plato’s Republic has some claim to being the first but there are as many Utopias as there are communities that dreamed of a better life. The greatest age of utopian fiction was the turn of the last century and it is no accident that the early 21st century is a great age of dystopian fiction. The ideology of late-capitalist patriarchy has become so all-encompassing that it no longer looks like ideology. Fredric Jameson observed, “It is easier to imagine the end of the world than the end of capitalism” – and the reason for that is not that capitalism is the inevitable destiny of humankind but that we have spent our lives being told that even thinking about any other future makes us ridiculous.

Most leftists do have an idea of the sort of world they would prefer to see. We don’t say what we want for the same reason that we were told as children not to tell anyone else what we wished for – because it’ll be awkward and painful if we don’t get it.

When I think about Utopia, I think about my grandmother. My mother’s mother left school at 13, lived through the Maltese blockade and was obliged by religion and circumstance to marry young, suffocate all her dreams of education and adventure and spend her life taking care of a husband and six kids. Half a century later, I can choose when and whether to have children. I can choose to live independently from men. I regularly travel alone and there are no legal restrictions on getting any job I’m suited for.

The kind of independence many women my age can enjoy would have been almost unimaginable half a century ago – but somebody did imagine it and that is why we got here. A great many somebodies, over centuries of struggle and technological advancement, asked how the world could be different for women and set about making it happen.

Exactly a century ago, Charlotte Perkins Gilman’s novel Herland envisioned a society of women in which production was communal, motherhood was valued, relationships were equal and rape and violence were unknown. Reading Herland today, it is striking that for every proposition that came true – women are now allowed to divorce their husbands and participate fully in political life – there are two more that seem as far-fetched now as they did in 1915. Motherhood is still not valued as work. Women are still expected to organise our lives around the threat of sexual violence. But all that can change as long as we continue to ask for more.

For as long as I have been a feminist, I have been asked – usually by grumbling men – when, exactly, we will be satisfied; when women and girls will decide we have enough. The answer is contained in the question: because the instant that we do decide that we are satisfied, that there can never be a better world than this, is the instant that the future shuts down and change becomes impossible.

Utopia is the search for Utopia. It is the no-place by whose light you plot a course through a harsh and unnavigable present. By the time you reach the horizon, it is no longer the horizon but that doesn’t mean you stop going forwards.

Right now, the future seems dark and frightening and it is precisely now that we must continue to imagine other worlds and then plot ways to get there. In the midst of multiple global crises, the only truly ridiculous proposition is that things are going to stay exactly the same.

Human societies are going to change beyond recognition and from the conference table to the streets, our best shot at surviving that change starts when we have the courage to make impossible demands – to face down ridicule and say, “We want more.”

Laurie Penny is a contributing editor to the New Statesman. She is the author of five books, most recently Unspeakable Things.

This article first appeared in the 26 November 2015 issue of the New Statesman, Terror vs the State