Economics behind excessive bank bonuses

SLUSK

I shall argue the case that the reason we see these excessive bank bonuses being paid out to employees of banks who are dependent on tax payers money is because of government intervention in the free markets.

Had these banks not been bailed out there would be no bonuses to pay out because the banks had gone into bankruptcy.

Swedish economist Stefan MI. Karlsson shows us that these excessive bonuses can go on in the case of RBS due to government intervention in the free market.
http://stefanmikarlsson.blogspot.com/2009/11/bailouts-and-bonuses-continues-in.html

What is your take on this, is the problem with excessive bonuses due to failure in government regulation or do you believe the problem to exist because governments refuse the market to work the way it should?

Flamed Diving

Both.

bladespin

Flamed Diving wrote: »

Both.

Exactly, you can't have a free market and then interviene when things go wrong, simple, if you do you'll end up in a no win situation (for the government at least).

Tricity Bendix

SLUSK wrote: »

I shall argue the case that the reason we see these excessive bank bonuses being paid out to employees of banks who are dependent on tax payers money is because of government intervention in the free markets.

I'm confused by what you're arguing. That banks that were saved would have been unable to pay bonuses is merely stating the obvious. But it does not follow that banks pay bonuses because they receive state funds.

SLUSK

Tricity Bendix wrote: »

I'm confused by what you're arguing. That banks that were saved would have been unable to pay bonuses is merely stating the obvious. But it does not follow that banks pay bonuses because they receive state funds.

We can all agree that these excessive bonuses could not continue in a true free market system, so therefore it is reasonable to say that government regulations leed to higher bonuses than in a true free market system.

Économiste Monétaire

SLUSK wrote: »

We can all agree that these excessive bonuses could not continue in a true free market system, so therefore it is reasonable to say that government regulations leed to higher bonuses than in a true free market system.

Have you regressed the $ amount of bonuses per employee against some synthetic measure of financial regulation per country?

SLUSK

Économiste Monétaire wrote: »

Have you regressed the $ amount of bonuses per employee against some synthetic measure of financial regulation per country?

Obviously such an analysis is impossible to make since there does not exist any country which operates under a truly free market. Also it is difficult to quantify the levels of regulation in different countries.

But if we use logic for a while and think about it, private gains and socialized losses encourage a culture of bonuses where they seem to be detached from reality. If the banks would have to take the full force of the free market on their shoulders they would not dare to have to high bonuses. Such banks would go into bankruptcy.

Économiste Monétaire

SLUSK wrote: »

Obviously such an analysis is impossible to make since there does not exist any country which operates under a truly free market. Also it is difficult to quantify the levels of regulation in different countries.

But if we use logic for a while and think about it, private gains and socialized losses encourage a culture of bonuses where they seem to be detached from reality. If the banks would have to take the full force of the free market on their shoulders they would not dare to have to high bonuses. Such banks would go into bankruptcy.

Err, I wasn't looking for a binary "free" or "not-free" market choice. Something à la 'corruption' and 'freedom of speech' indices, which I'm pretty sure exist for financial regulation (I think I've seen them quoted over the last year). Governments regulate financial markets, ergo banks paid high bonuses, proinde banks went bust? If this is what you're saying, I think you're confusing the 'too big to fail' problem with (basic) regulation. It would be marvellous if banks could go bust and every moron involved in the downfall got burnt, but without any of the nasty externalities like the arse falling out of the money supply.

Reading your OP again, maybe I'm misinterpreting your argument: The reason we see bonuses being paid-out in banks that were bailed out is... because they were bailed out? Tautology, no? Say, a commodities trader makes a lot of money for the bank but idiots in the financial products division realise losses for the bank as a whole: should the bank not pay any bonuses, disregard individual performance, and lose the people who are still making money for the bank?

It has a lot to do with the demand for and potential geographic mobilty of some bank staff.

A true free market system as Austrians like to think of it, is never going to exist. Comparing it to the reality of a functional economic system is pointless.

SLUSK

Économiste Monétaire wrote: »

Err, I wasn't looking for a binary "free" or "not-free" market choice. Something à la 'corruption' and 'freedom of speech' indices, which I'm pretty sure exist for financial regulation (I think I've seen them quoted over the last year). Governments regulate financial markets, ergo banks paid high bonuses, proinde banks went bust? If this is what you're saying, I think you're confusing the 'too big to fail' problem with (basic) regulation. It would be marvellous if banks could go bust and every moron involved in the downfall got burnt, but without any of the nasty externalities like the arse falling out of the money supply.

Reading your OP again, maybe I'm misinterpreting your argument: The reason we see bonuses being paid-out in banks that were bailed out is... because they were bailed out? Tautology, no? Say, a commodities trader makes a lot of money for the bank but idiots in the financial products division realise losses for the bank as a whole: should the bank not pay any bonuses, disregard individual performance, and lose the people who are still making money for the bank?

No if the bank is in a bankruptcy stage it should not pay any bonuses and obviously not with TAXPAYERS MONEY!

I do not care about any so called externalities, people who are against a free market are usually, socialists or fascists or conservatives or a mixture between these.

SLUSK

Deleted User wrote: »

It has a lot to do with the demand for and potential geographic mobilty of some bank staff.

A true free market system as Austrians like to think of it, is never going to exist. Comparing it to the reality of a functional economic system is pointless.

Yeah if it wasn't for these bonuses they would be much worse of... wait they needed government bailouts so obviously these people working in this banks were no geniuses.

Économiste Monétaire

SLUSK wrote: »

I do not care about any so called externalities, people who are against a free market are usually, socialists or fascists or conservatives or a mixture between these.

Lol, that's the dumbest thing I've read in quite a while. Congratulations.

Flamed Diving

Économiste Monétaire wrote: »

Lol, that's the dumbest thing I've read in quite a while. Congratulations.

Shuddup, you commie-nazi.

Anonymous1987

SLUSK wrote: »

No if the bank is in a bankruptcy stage it should not pay any bonuses and obviously not with TAXPAYERS MONEY!

I do not care about any so called externalities, people who are against a free market are usually, socialists or fascists or conservatives or a mixture between these.

:eek:

Assuming you don't know what you are talking about I will direct you here otherwise I believe this is what you are looking for... good luck with that... you need it.

Hasschu

The financial trading business has a low cost of entry. The barrier to entry is a customer list and a relation with the customers. If twenty or thirty traders became disgruntled with a reduction in their bonus rate and decided to set up their own financial trading business it would be a blow to their employer. In a month you can have SAP or Oracle set up your trading floor complete with Bloomberg terminals, hotlines to exchanges and a back office operation anywhere from Zurich to Mumbai. If you have a track record in the business funds will pour in and you are away to the races. The whole financial business is a scaled up bookie shop with little substance or resources. It is all about moving the money, take the cut and do that repeatedly. The stock, commodity and currency exchanges are not called Casinos without reason. A Tobin tax would cure the whole useless convoluted mess that adds little value to society. James Tobin is another one of those people of Irish extraction who was decades ahead of the herd. By the way it is in the trading area that the bonuses are excessive, the deposit and loan areas are quite humdrum and compensated accordingly.