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The punishment of banks: To whose benefit?

By Michael R Czinkota and Charles J Skuba

Large banks are under siege by governments. There are widespread cries of outrage as banks announce their bonuses for 2009 performance. In the UK, Alistair Darling, the finance minister, already revealed a 50% “supertax” on all UK bank bonuses above 25,000 pounds (about $40,000). France has announced that it will enact a similar tax.

In the U.S., President Barack Obama has announced the imposition of a fee on large finance firms to “recoup” public funds spent in the Troubled Asset Relief Program, irrespective of whether the banks wanted to participate or not. There is talk of breaking up large banks in order to avoid ever again the problem of institutions which are too large to fail.

Two key economic concepts are under attack by governments. First is the principle of comparative advantage. Ironically, in light of British government action, the term was popularized almost 200 years ago by Briton David Ricardo. There seems to be a great willingness to extinguish the value of this advantage overnight. It took decades, in spite of significant competition from other financial centers such as Frankfurt and Singapore, for London to develop financial operations superior to others.

That leads to the second concept under attack – clustering. Since birds of a feather flock together, good performers have been attracted to a few locations of financial excellence. The existence of a comparative advantage of the financial sector attracted related and supporting industries as well. London and New York therefore became key markets, attracting key players who were paid top rewards. Quite a perpetuum mobile if not disturbed!

However, disturbances did occur as was evident in the last two years. Markets were not as successful as one would like them to be. There were large losses due to opaqueness in corporate activities and high risk exposure. Are we now seeking to find ways to reform finance in order to offer more transparency and better risk management?

Apparently not. The UK government seems to believe that curtailing the work of markets will improve conditions. Even conservative-led governments in France and Germany are leveraging public opinion to increasingly tax the banks. When public anger is high, it can easily be used to support political action.

Taxation is an easy recourse, but is it the right course? Finance employees in are angered by any “supertax.” Many view the action as unfair and pandering to short-term populism. In a business where individuals can generate millions of pounds worth of profits (and losses), a trigger amount of 25,000 pounds seems very low. Critics also fear that special taxes and fees would damage the attractiveness any current financial center.

In a global environment, one can expect bankers and banks to look at alternatives such as Hong Kong, Singapore or Geneva. Some governments might well see new opportunities to attract financial businesses and shift comparative advantage. Perhaps Silvio Berlusconi, with visions of renewed Medici splendor, might offer Milan as the bank friendly city? Could Chancellor Angela Merkel of Germany reposition Frankfurt as the new Mecca for financiers? Is this the time to see Shanghai emerge as the global super banking center?

So far, governments reject any criticisms of their special assessments as humbug. They justify the “one-off” tax with the argument that banks were able to realize profits, and subsequently pay large bonuses, in large part due to the government’s “bail-out” of the banking system. While there is merit to this argument, we advise a more prudent approach supportive of a renewed and thriving financial system and limited in its imposition of pain on high performing financial executives. We should not punish excellence.

There have been corporate compensation structures that rewarded top executives at levels beyond their contributions to the firm. Reform is needed. While a forceful counterpunch against an industry and its employees may lead to short term popular contentment, one should bear in mind that in the long run, there is little support for high levels of taxation. As we pursue needed reforms, let’s not put a desire for retribution over good business sense.

Government actions can have significant indirect effects. We are reminded of the Empress Dowager Tz’u-hsi. In 1896, in order to finance the renovation of the summer palace, she impounded funds that had been designated for Chinese shipping and its navy. As a result, China’s participation in world trade virtually ground to a halt. In the subsequent decades, China operated almost in total isolation, without any transfer of knowledge from the outside, without major inflow of goods, and without the innovation and productivity increases that result from international exposure.

A few locations have laboriously built comparative advantage for their financial sector. Prosperous financial firms provide treasure and opportunity to the fortunate societies in which they cluster. Given today’s mobility of both industries and employees, banks that are convinced of their righteousness, can fight back and move core units to business friendly locations.

Businesses, in general, need to remember that they are but one integral component of society. The level and structure of their profits and executive compensation should reflect a firm’s long term best interests within an overall societal context. MBA programs without an emphasis on such context and proportionality, must revise such shortcomings in their teaching. Legislators and government in turn need to recognize the direct and indirect effects of their actions on global conditions. While reforms are good and necessary, the breaking up of a comparative advantage and successful clusters without a productive replacement is a risky strategy.

_Michael Czinkota researches international marketing issues at Georgetown University and the University of Birmingham in the United Kingdom. (czinkotm@georgetown.edu)

Charles Skuba teaches international business and marketing at Georgetown University.(cjs29@georgetown.edu)_

© Japan Today

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Tax on banks will not solve anything. The local markets need confident customers. We'll have less and less of that by outsourcing everything to places like China and India. We cannot keep up the current standard of living by eliminating local jobs. The world needs a wake up call and I think we are just getting one.

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It is no longer cool that few men who call themselves elites or smart guys and collect millions (yens, dollars, euros) while their subordinates and surrounding society suffer all kinds of financial lacks. Is feudalism still strong or it is needed to be changed?!

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Japanese banks need to be taken to task over how crap they are

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We have given far too much power to banks and corporations. Their collective collapse over the past two years meant that we, the working people, took most of the hit. While the captains of industry carried on with only a little less, many people have gone without for a long hard time.

I agree fully that companies of any kind must be a part of society and not the point of society. They should exhibit responsibility for the communities and societies where they do business. And I am not talking about token philantropy. I am talking about committment to jobs, to support for community objectives and the welfare of the public.

We have allowed companies to grow too large. Once it was ok to be a small reasonably profitable company that could sustain itself. Now, thanks to makets and investment banks we only value companies with stellar ongoing growth. Otherwise good companies fail because they can't keep their greedy stock holders happy. All of this is selfdestructive for our planet and our society.

Workers are getting less and less while banks and brokers keep getting more. This must stop! I hope to see the break of too big to fail banks and companies. We should work towards sustainability that re-localizes more industry and production. This is beneficial to local communities and to workers.

Most of all we should change our thinking about what constitutes a successful bank or company. If an entity can be profitable within reason, stable year to year, keep people employed, serve the community and provide quality in what it does, we should see that as success. The days of requiring exponential growth and profit must end in favor of environmentally and socially sustainable commerce.

Tax the bonuses and recoup government funds. Let the bankers bleed along with the rest of us for a change!

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In Japan's case, how will a bonus tax stop Japanese banks from readily investing Japanese savings overseas while rarely approving loans for Japanese small enterprise and consumers?

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Let the bankers bleed along with the rest of us for a change!

Im pretty sure that Lehmann brothers staff, and many others - did bleed along with the rest of us. I agree that there is a lot of greed in the bansk and there are many there that deserve punishment that they will never receive. Its not just the bankers though, 'the rest of us' spending more money than we have on credit helped bring about the sub-prime crisis which started all of this off. We ALL need to be a bit more responsible.

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dbung10. True that Lehmann staff have bled with us. But they are the exception. And again it was mostly their normal working staff and not the decision makers that bled with us. The top levels just move on to the next gig.

And true we must control our spending. But we must equally change and control our expectations. If we expect more, more, more then we set ourselves up for this kind of economy and risk. If we think solely about having a sustainable and stable economy then we have to change how we think about the stocks we support, the investments we make, the expectations we have for business and corporate responsibilities to community.

Once upon a time laws prevented corporations from existing beyond a specified period or goal. This protected us from these entities becoming too powerful. We should rethink how we allow companeis to participate in our societies and what our expectations of their role and responsibilities are instead of being subjected only to their goals. They should be equally subjected to ours.

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Get used to seeing a lot of this kind of stuff - "punishment of banks", "public anger", "populism" etc. The propaganda wars have just started.

This article makes sense only if you buy the nonsense that "Prosperous financial firms provide treasure and opportunity to the fortunate societies in which they cluster." The greatest period of real economic growth (mid 1940's to mid 1970's) happened when banks and the financial sector was at their WEAKEST. Any profits in finance above what they receive for their role as intermediaries between savers and borrowers is just wealth redistribution from the non-financial sector to the financial sector, and is of zero (actually negative) benefit to society. Somehow, being opposed to wealth redistribution is now portrayed as "populism" and "public anger" when it goes from the bottom to the top. The poor masses who just don't understand!

And the reason that London and New York have a comparative advantage in finance is simple. It is because their supposedly "free market" economies do not have free markets in the only market that matters, the market for money (and therefore have a free market in nothing). Interest rates are manipulated by the Fed and Bank of England and set at artificially low levels for political reasons (to create the illusion of prosperity) and to enrich the financial class who control the system. The banks then combine their cheap money with the magical money laundering machines of globalization and securitization to completely distort and destroy economies while they siphon out the wealth.

The only reason people have to not be angry is that they don't know or understand what is happening. But don't believe the propaganda, they are just trying to keep the gravy train rolling as long as possible.

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Let me introduce the authors to another term: "Moral Hazard".

Why is it that banks are all in favor of capitalism on the way up, but like socialism on the way down? They want to keep their profits and pass their losses to the taxpayers. Screw them....

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Imagine how your job will suffer if the rich bankers leave town for greener pastures. First to suffer would the the real estate market. That's you buddy. That piece of land that you and your Mrs. bought just got devalued and you're still paying the mortgage you locked into at the peak of the market. Then next to go is the service sector, which accounts for most big city jobs. That's malls, restaurants, consumer electronics, cars, etc. And no loans or new mortgage either. Cause all the banks tighten credit in view of higher taxes. Then manufacturing, due to the slow down in demand.

There's never been an Utopian society that tkoind2 spoke of through human history. What makes you think this taking from the rich will actually benefit the poor? At best it subsidises for some public welfare for a year. And then you run out of other people's money.

People keep talking like they are miserable and suffering like peasants. But how worse is it compared to the early last century. People today have rights, travel in cheap fast transportation, have access to safe drinking water and food, and yet they bitch about what other people's money.

Communism and socialism doesn't work because it can't foot its own bill.

If we're going to tax banks, we should tax all the industries -airlines, car manufacturing, etc that's been receiving bail out money for the last 3 decades.

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Junnama, Banks are not in favor of socialism, ever. They sometimes borrow but almost always pay back their debt, unless its a government bank, like LTCB or Nippon Credit. Governments want to control banks, because banks are big, safe money makers and they can finance & extend their political ambitions through them.

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Imagine how your job will suffer if the rich bankers leave town for greener pastures.

There are no more greener pastures, that is the whole point. The business model of infinitely expanding debt is dead, because the world economy can't take on any more debt. Only governments can take on the debt to feed the banks and hide their losses, and create the imaginary profits needed to pay the bonuses. Real estate, services, manufacturing are all going down, but not because banks tighten credit. They will go down because the demand for credit is falling as debt is paid off or defaulted on. It's a demand problem, not a supply problem (although most banks probably don't really have any credit to supply anymore anyways).

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Junnama, Banks are not in favor of socialism, ever.

Yes, they are. Many of these banks shouldn't even still be in business. They were bailed out.

And just so you know, the odds of the US recevering all the TARP money are pretty much zero.

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Let us also forget where they stand right now. Financial crisis leading to 10% unemployment. Everyone else suffers for that but the big banks are back to business as usual. Anger at the banks is justified - they're tone deaf fools.

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drink more milk. No one said anything about Utopia. My parent's generation were happy to see the corner shoe shop stay in business for 100 years serving their community. The local staff working there raised their kids in that community too. They paid taxes, employed young people over the summer to give them experience. The shop hired new people who made life long careers of working there. They made decent ok money and the community supported their business because they were good local people and their products lasted and they served their customers with honor.

Then along came the mall and cheaper products and more glitz. Everyone started shopping there and buying shoes that lasted a few months but cost 1/2 the price. Soon the local shops closed up. Their employees gone and their jobs replaced by minimum wage, no benefits unstable positions in the mall.

But in time the chain shop was gone too. Bought out by someone and closed because this location didn't earn enough. That left the community with no local downtown shoe shop and no jobs. The old business was killed off and nothing left to replace it.

The banking and financial world have sold us a story that everything must be profitable, growing, raising the bar and that we should expect that everything should be vastly available and cheap. Yet in the past that was not the case. Locals provided great jobs and reasonable supplies. People were ok that it took time to order something because we knew the quality was great. And we liked the people who knew us since childhood helping us choose something new.

We traded in stable sustainable business for the lie of globalization and the whole imaginary market of the financial industry. And what did we get? Our jobs shipped abroad, local business killed off and then a mass of welfare begging epic companies too big to fail and too screwed up to survive.

Declining oil supplies, increasingly damaged environment and other causes are going to kill off the rabid consumer market no matter what we do today. The only intelligent thing to do is to start the long hard change to revisioning economics now. Sustainability, local production, accountability and social intergration of business is the only answer. The epic banks are a barrier to this change and must be changed first.

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One more thought. It is all about expectations. If we expect more, more, more then the unleashed power of banking makes sense. But if we recognize that this thinking is self destructive for community, family, long term sustainability and the enviroment, then we have to change our expectations.

This is hardly Utopian. What it is, is inevitable.

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Junnama, Most of the major banks paid back TARP money, with interest. The loss of is with the likes of AIG, which is not a bank. In any recovery or recession, banks lead the way. Before anyone has heard of the credit crisis or the sub prime crisis, the banks were already suffering and cutting back on staff and bonuses. Hence, a bank recovery heralds a real economy recovery one year later. You should realise by now that all of our fortunes are interconnected in the global economy.

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tkoind2, I don't disagree with anything that you've said regarding globalisation and the demise of local/regional economies. But what has that got to do with taxing bankers? If I want to borrow money from you, are you obligated to lend me? Its the same for banks. Banks are happy to lend money if they can get paid back with interest. However,if the borrower cannot repay the money, then the banks have to right to take a look at the business. Sometimes it makes sense to re-work the business, sometimes to sell it. In any case, the burden lies not with the lender but the borrower. I don't see how its everyone's else's fault (the bank, the consumers etc) when a business goes under. Hasn't it occurred to you that maybe that the service or product being offered is unwanted? Anyhow I think this line of argument is tangential and irrelevant. Simply put: Big banks got in trouble because they lent money to people who can't pay back. The effect got multiplied through credit derivatives. Everyone wanted a piece of the pie so the effect is multiplied by hundred fold. By everyone I mean, everyone. Big and small companies, mom and pop, saving bank. I think you are a bit idealist. Everyone, you and I included, inherently want to better our lot by making a bit more money. Companies, banks and governments are the same. The silly bit is voters are so willing to lend their vote to government to transfer money and power from banks to government. Of which, none of the voters will ever see a cent of.

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Then the government should not be in the business of providing a safety net to the banks, let "The Global Economy" do it. Oh wait they wouldn't do that would they?

Where are we at now? Banks won't lend, but continue to give out big bonuses. Banks are directly responsible for the current economic situation, but continue to give out big bonuses. Screw them.

Now I'll untune the emotion and ask you to explain why the banks took advantage of the "lender of last resort"? We've been heading this way for quite some time: ever growing financial scandals. The fact is the banks knew they would be bailed out and took ever growing risks. There need be a big stick used on them to prevent this from happening again or every central bank will be trappe in this "moral hazard". If we don't say "no" this time, how much bigger will the next crisis be??

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Banks are not in favor of socialism, ever.

They most certainly are. What else do you call public funds - funds culled from taxpayers - going to benefit a select few?

These banks should have been allowed to fail. If they are the engine of capitalism then should thrive or die by capitalist principles.

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GJDailleult, <The business model of infinitely expanding debt is dead, because the world economy can't take on any more debt.> You can't be more wrong. It's not dead. I would agree that it's folly but its hardly dead. US has just announced another record deficit. (what do you expect of socialist? Someone else will foot the bill) The Japanese government has stopped the postal saving bank privatisation so that they can continue to make them buy Japanese Government Bonds. (they cant force a private company to buy JGBs can they?) There's going to be another 5-7 years or record deficit. Japan will be robbed silly by these politicians.

You are deeply mistaken. Demand for credit is very, very high in Japan. No one wants to lend. Just ask any fudousan or small business. They can't borrow. Even Japanese government bond auction was lack lustre. No one wants to lend anymore.

Why do you think Singapore and HK are booming? All the credit, hedge funds and banks have migrated over.

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I think you are deeply mistaken. While I agree that the perma growth model and exponential debt model is unsustainable, I'd like to point out that Obama and the Hatoyama administrations have just issued record debt to fund their welfare programs. So the deficit and debt is going to get bigger. They have recently stopped the postal saving bank privatisation because that's the biggest buyer of the Japanese Government Bonds (JGB). If private, they would buy other assets/investments other than JGBs. So in summary, the Japanese government is raiding people's savings to fund their programs. I think you also misunderstand credit. The supply of credit is the problem. Companies want to borrow. But no one wants to lend. That's the fundamental problem facing Japan in the last 20 years after the bubble burst. Japan's an asset trap.

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Junnama, I think you, like most people, have a deep misunderstanding of what banks does. Is understandable since it's all very convoluted and inter-connected. The banks handing out big bonuses are not commercial and retail lending banks, but investment banks. So if a bank tightens credit, it's got very little to do with the investment banks. Retail and Commercial banks are typical banks and do not pay their staff astronomical bonuses. Assuming that you are Japanese, your government lent no money in bailing anyone in banking out. So there's nothing to argue. However, Japanese mega banks will be subject to taxes in the US & UK, even though they accepted no bailout money. Fair?

If you think you're badly off, imagine what would happen if banks pull out.

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pawatan, I agree, those banks should have been allowed to fail. The repercussions would be huge though. You and I most likely join and soup line. I'd also like to add that only some banks would've failed. Also, the government stepped in for self interest. Healthy banks mean a healthy economy which translates to jobs. They are also trying to prevent bank runs, by setting aside TARP money to g'tee people's deposits and savings.

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You can't paint banks as victims in their loans over the years. It was not you or I who invented variable rate loans that made so many people default. It was banks who saw the opportunity to make money and their corporate partners who wanted to rush through developments and the banks again who made a killing on those projects.

Same goes for default swaps and derivatives. You or I didn't invent these imaginary products. Banks did. Why? Profits. Plain and simple. They knew that there were risks but were too short sighted to really weigh them. And they are still not looking far down the road to avoid the next set of risks.

The financial industry is all about profit. They don't care about your business beyond its ability to earn commissions. They don't care about your community beyond its ability to supply money for development or people to buy products. They don't care about labor beyond the headcount numbers and efficiency. And they don't care about government beyond their ability to influence it.

These are hard facts that you can't hide from. Banks did much of this to themselves. And we as workers got pretty much nothing from it. But we had to pay the tax dollars to bail them out. Money that should have gone to health care, education and jobs.

Now the same people want to pay out bonus payments that are more than many tax payers annual salary. And we are supposed to just smile say ok?!? No bloody way. First they can pay back the money loaned out. Then they can start to make changes that make them more responsible to the public. And finally they can stop dreaming up imaginary markets that exceed global GDP and return to more rational down to earth banking.

As for loans. They seem perfectly happy to loan when it means profits for them. It is time they became equally comfortable with socially responsible loans that enable small businesses to operate.

One more thing. There is a fact that overides everything else. Global energy supplies are diminishing. We are past the peak for most supplies. This means declinging supplies with no current viable replacement.

Why is this most important? Because the current economy lives and breathes on exponential and unsustainable growth. Remove the energy and your kill off the capacity for this to work much longer. If we do not radically change how we view economics then the recent crash will be nothing compared to the coming crash once energy demand drives prices beyond the capacity of most people and producers to afford it.

And we are not talking about years into the future. We are talking about changes that will be felt within our immediate life time.

Changing banking is critical and must start now. These taxes clearly send that first message.

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No one is painting banks as victims. And everyone, is interested in making some money. How can you fault something as basic as that. You might as well fault babies for greenhouse gases cause they fart. Having a higher tax rate merely means the government has more money, everyone else have lesser.

Everything is diminishing in life. The only way to solve it is human population is reduced dramatically. Care to volunteer?

So much of this rhetoric sounds like just angry people wanting to do something for the sake of doing something, regardless of impact or consequence. Tax the bank unreasonably, and they'll take the business somewhere else. It's already happening. Tokyo has seem so many business HQ, plants, finance companies move to Singapore China and HK. It's because the business environment is not conducive. If Japan were smart, they'd offer the rich bankers in LDN and NY some lucrative tax breaks so that they can set up home and office here, and give you and me some work.

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Large banks are under siege by governments. There are widespread cries of outrage as banks announce their bonuses for 2009 performance. In the UK, Alistair Darling, the finance minister, already revealed a 50% “supertax” on all UK bank bonuses above 25,000 pounds (about $40,000). France has announced that it will enact a similar tax.

In the U.S., President Barack Obama has announced the imposition of a fee on large finance firms to “recoup” public funds spent in the Troubled Asset Relief Program, irrespective of whether the banks wanted to participate or not. There is talk of breaking up large banks in order to avoid ever again the problem of institutions which are too large to fail.

We're talking about this. Not small mom-and-pop retail banks, so I don't know what you're on about. Oh, and I have a very good understanding as to how the banking industry works, don't worry.

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drink more milk. There is a difference between wanting to make money and wanting to do so with such passion that you forget everything else. that is where banking had gone to before the collapse.

We know for a fact that many of the products that caused the crash were never sound in principle or reality. How can something exceed global output and be real? And where were the enlightened bankers who said "Wait, what happens if people who take these variable loans are unable to adapt to higher interest rates down the road?" The first time I heard about that loan type I thought about the obvious risk.

Banks knew the risks and ingnored them in favor of greed. Plain and simple. These are not just members of society. These are large entities that live and breath to make a lot of money with little regard to any other objective. That makes them more dangerous than beneficial.

The next time their products crash it could mean a global depression. And that does not mean lower money or higher taxes for bankers. It will mean lives lost world wide. It will mean whole communities upheaved into instability and risk.

So who makes the decisions that endanger so many people? do you? Do I? No. The banks and corporates do and they do so without mandate from anyone but a small percentage of the global population who have any kind of vote in their actions. And they do so with the corrupt support of politicians who are in office for them and not for us.

This is a new kind of tyranny that is far more insideous than we like to believe.

I favor strong regulation. Limits on the size and scope of banks. Strong bonus and pay restrictions. Stronger still monitoring and oversight. And apply this to corporates of any signficant size not only banks. And apply it globally so they don't just move to somewhere less regulated to do their damage.

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If you tax talent they will move else where. But, they would not have had a job or bonus if it were not for the bailouts. Tough decisions here.

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So tax talent universally and they will have nowhere to move to.

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tkoind2, we should tax you too since you're pretty smart and talented. The reality is, you can't tax them universally. so there are only consequences.

junnama, read my post properly before replying. I wasn't talking about mom and pop retails banks. I was talking about mom pop businesses. Also I want to clarify that you are willing to pay US taxes? If Japanese banks get taxed, that means less money for the Japanese economy. Do you think?

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I just want to clarify that bankers already pay up to 45% taxes on their income in usual times. What these new socialist are suggesting is an additional tax as "punishment", regardless if you caused the troubles, or if you accepted bail out money, or pretty much whatever. How is that fair? And exactly how does that help the global economy?

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A lot of the shareholders of the public companies that the investment banks make their money out trading of are pension fund holders and investment vehicles that people are relying on for their own futures and pensions. They need growth, deposits and loans, and profits to sustain these.

Hitting the banks for more taxes, whilst morally satisfying, is likely to come back and bite you.

However, for the work that they do and the bonus culture that they enjoy; bankers and traders do seem to be the most overpaid people on the planet, along with celebrities, TV anchors and hosts, and actors/ actresses.

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How is that fair? And exactly how does that help the global economy?

I've got to say this is perhaps the most arrogant article I have read in some time (even Toyota's hubris doesn't compare).

Let's run through what happened:

Big banks take on huge amounts of risk though a variety of methods. Bubble bursts and bankers come screaming for bailouts (Dick Fuld: Where was Lehman's bailout?). Government goes into the public till and bails big banks out. Government resorts the finance playing field to make it easier for banks to make money so they can recoup bailout cash and help the banking sector out of its troubles (loaning at essentially 0% for example). Big banks use the new rules to make good profits and then resume paying out their big bonuses. Public says WTF and demands action. Government asserts there will be a tax on the big banks as punishment (mind you, a big bank could borrow cash at 0% right now, turn around and by government bonds and make a killing with pretty much no risk, but hey, so what!!). Bankers respond to the new tax by saying: either you lift it or we'll head to other markets and do our business.

I just wonder how stupid big banks think the public at large is? The more I look at this nonsense the more I wonder if we're reliving the 30's. We all know how that turned out...not good.

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Banks that are owned by the Bank of England will profit handsomely and buy out the smaller troubled independent banks. That is the socialist model you have when you have a banking cartel. You pull back on the money supply to give your banks opportunity and trouble the independents.

JP Morgan Chase/Goldman Sachs (Obama) in the U.S. --> all part of same banking cartel/Federal Reserve owners. Bank of England is the same group.

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to the benefit of who??? to the benefit of everyone except bank staff who get overinflated bonuses for not producing anything..

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Splitting up banks, limiting or taxing bonuses and all the other things which have been discussed here, for sure make sense on a theoretical level. I think most people here agree that the status quo cannot be maintained. But on a practical level, how are voters or government bureaucrats going to decide which limits make sense? What are the criteria? If the criteria make sense for our world today, how can we make sure that they continue to work tomorrow without stifling the economy? On an international level, how can we make sure that other countries won't use weaker rules, creating banks or corporations which again become too big so when they fail will still have fatal impact on the countries which apply strict rules? Difficult questions, and I haven't seen any convincing answers yet.

Let me throw in some thoughts.

In general, when something has a too high public risk, insurance becomes mandatory. Therefore, most countries already have funds which cover creditor's deposits when a bank fails. But what we have seen in the recent crisis was that these funds quickly become too small when a lot of banks fail simultaneously. As a countermeasure, these funds should be increased. I want to suggest that the contribution does not depend linearly on the capitalization of the banks, but e.g. exponentially. Although there is no hard limit, it will put an automatic limit to the size of banks.

Regarding derivatives, I don't want to demonize them in general. But too many of them have been used not to balance risks but to disguise risks (which we often would call fraud in other contexts) or simple gambling. I think two measures could be effective to overcome the problems: limit derivatives to first order derivatives like bundling of credits, investment fonds etc (are there any higher order derivatives which really make sense?) as a measure to improve risk visibility. And strictly prohibit banks from owning derivatives issued by other banks.

The financial markets have the purpose to provide risk money for investments into productive sectors of the economy. When we remove the gambling incentives from inside the financial markets themselves, things like bonus payments will not be important enough to require regulation and can be left to the banks themselves.

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You know folks if the market system really worked then Wall Street wud/shud be one of the poorest nations on the damned planet.........

But it aint, because you know what THEY DONT LIKE TO PLAY BY MARKEY RULES

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I think you also misunderstand credit. The supply of credit is the problem.

I get why you say that, because that is the conventional wisdom. But it confuses cause and effect. Of course, there are many credit worthy businesses starving for credit because banks are not lending, but that is an effect of the crisis not the cause. The cause is the bursting of the debt bubble and the debt deflation that has followed. Banks can't lend because of losses suffered and coming in the future when the old debts are defaulted on. And they can't make enough profit on new loans to cover the losses because the demand for credit is falling, so they have to hold on to their money and end up not lending to anybody.

As for tkoind2's shoestore, the reason it has disappeared is because of unequal access to credit, and the unequal price of credit that exists between the financial industry (banks, private equity, hedge funds,etc.) and everybody else. If the owner had been able to borrow from the Fed at 0% he would still be in business. But then that would SOCIALISM, and we all know America is a FREE MARKET economy he he! If anybody wants to see an easy to understand example of how this inequality works, just look at what has happened at Manchester United FC. The richest, most successful team in Britain is on the verge of bankruptcy, all because some American "financiers", and the banks and hedge funds that back them wanted to get their hands on the cash flow. Then multiply that a few million times and you will see why we are in this mess.

Basically, the US/UK model of deregulation and "free markets" for everybody except the financial sector, and deregulation, central planning, and socialism for them, has seriously damaged everybody's ability to make a decent living. And for those still making a decent living (including bankers), damaged their ability to continue making a decent living.

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GJDailleult. Agreed. Access to credit is a key issue here. Free Markets imply some degree of a level playing field where creativity, good service, reliability etc... play into the survival of a producer. But what we have today is a market that is based purely upon speculation and unreasonable growth expectations. That means perfectly good companies fail because market forces don't see them as good enough.

The financial sector has far too much power over the course of commerce. And the people who work in it are motivated not by common sense or human values, they are motivated purely by numbers. I know I work with these people from several large institutions and it is all about money, bonuses and raising the bar. Long term thinking is not something they do a lot of beyond maybe a five year distant objective. Otherwise how could a perfectly successful company go from ok to dead literally overnight? Why? Because speculation can undermine confidence and wipe out an otherwise fine entity. This is organized insanity. A form of gambling that can no longer be tolerated.

The industry must repay public funds, take on more accountability and monitoring, be more heavily regulated and have earnings caps to assure that people think about consequences as well as profits.

This can and must be done by having national, regional and global laws passed to control these giants and to force some of them to break down into more stable smaller entities.

Call this socialism if you want. But I call it common sense. Workers and ordinary people need to have more control over their economic well being and not leave it to extra-governmental entities and corporations.

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"Workers and ordinary people need to have more control over their economic well being and not leave it to extra-governmental entities and corporations."

I think this statement pretty much sums up what you want. A level playing field for you, probably at someone else expense. It's a foolish notion to assume that governments work for the well being of their citizens. Your own government is a fine example of that.

GJ, Individuals and smaller companies in Japan have always had difficulty getting credit. That's why so many consumer finance companies were born. As for the US example, I believe the investment banks have repaid TARP funds with interest.

Junnama, That cut and paste argument is both emotional and not very logical, but I get your point. The sub prime market caused the credit crisis, not large bonuses. Innovation comes from risk taking and the prospects of rewards. While I'm not saying that banks are without fault, I am arguing that we need to apply the right medicine to the disease. Otherwise, we worsen the situation. A blanket tax for banks and bankers solves nothing.

As wanderlust pointed out, what feels like the right thing to do would have inadvertent consequences. Take Japanese Public Pension Funds for instance. It's been so badly mismanaged that our generation (30-40's) would have less than 10 years worth of support after we retire. Hence, an investment bank can help them improve yield and optimize their balance sheet so that you and I can retire gracefully and with some dignity.

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"I think this statement pretty much sums up what you want. A level playing field for you, probably at someone else expense."

Poor assumption on your part drink more milk. My situation is fine. I have more than an ample advantage to achieve my life objectives at the expense of no one.

Why is the last refuge of the greedy to point out how someone wants something from someone else? You like to see yourselves as victims. Well I have bad news for you.

See many of us know that the financial people live off wealth at the expense of others. It is their decision making that earns profits for them while robbing others of jobs. It is their speculation that undermines confidence in some companies leaving people out of a job and often out of their homes.

It was the industry's greed that got so many people into bad loans that should never have been available in the first place. Loans that made the financials a lot of money and put the entire economy at risk.

So don't talk to me about someone benefiting at the expense of someone else. The financial class and wealthy classes have been leeching off the hard work of the working class for as long as human's have had social structures. And the modern bankers bleed off money with little or no regard for anyone other than their own greedy objectives.

So go play your pitty show to someone else. We just don't buy into it any more. You don't produce anything, your products put jobs at risk, you ignore the obvious benefits of less speculative thinking in favor of profits and you cut jobs and lives down with little regard to anything other than the numbers you want to see.

We should tax the hell out you and teach you to do business with the interests of society in mind and not just your bonus targets.

I am from the intellectual class of people who don't need to beg anything from anyone, but who lack the corruption and insensitivity to dismiss the plight of the working and poor classes. We stand by the ideas of sustainability, of valuing small business, of forcing industry to care about and contribute to society rather than just taking from it. Get used to this thinking because there are more and more people who share this ideology and the days of unrestricted corporate cowboy behavior is coming to an end.

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Junnama, That cut and paste argument is both emotional and not very logical.

Really, I think it's quite logical and succinct.

Profiting out of a situation you create at the people's expense (via the government) is innovation we can do without.

I believe the big banks had quite accurately judged the risk of bailout and resulting punishment. The punishment for such has been quite light, if there is not sufficient punishment the next crisis will be much bigger. Oh and it is not a blanket tax. It is targetted at big banks.

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dude... its a blanket tax. All banks, regardless of their involvements in the sub prime or if they've received government money will have to pay US taxes, if their US assets are over USD50bn. Almost all the banks targeted by the tax have paid back the money they owed. Some of them paid back even more. Goldman Sachs, for example, repaid its money with a 23 percent return to taxpayers. Indeed, the part of TARP that went to banks is not the part that has lost money. That would be the billions in loans to the auto industry, AIG, and smaller banks across the country, as well as to mortgage foreclosure mitigation efforts. The big banks, by contrast, have been responsible debtors. (After the crisis started, that is.) Why target them? What about people who borrowed money and defaulted. What about unscrupulous real estate companies that exploited the situation? Moreover, the banks will merely pass the cost over to end users. So let's be pragmatic about this.

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tkoind2, I'm not in finance. I am just calling it as I see it. You wanna tax the hell out of someone else, and think they are going to just sit there and let you do it? Funny how it's always the "intellectuals" that cause societal downfalls. I'd assume you're some guy on a salary who have no concept of the idea of personal risk and responsibility. I am all for letting the bad banks fail. But the government called the shot. The way I see it, it's the government's fault. The pertinent point here is does taxing them help in any way. To me, it's just revenge, not justice. People getting paid up is the first step to an economic recovery.

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How many banks have 50 billion in assets in the US? Not very many and I think you know that (maybe 25-30). Further these are the banks that have benefitted the most from the resorting of the financial playing field. These are also the exact same banks that have decided to go back to business as usual.

AIG and the rest have already taken their medicine many time over.

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"These are also the exact same banks that have decided to go back to business as usual."

Junnama. Very true. They are talking about reviving many of the product types that led to the collapse. From where I can see, they have not learned lasting lessons.

The problem that caused this still remains. If people are motivated only by their capacity to earn, then their values shift to pragmatic means of achieving their goals and securing their bonus payments. It taints decision making to view only those choices that result in income as valid and desirable. When in reality there may often be decisions that would result in far more conservative evaluations were money not so prominent in their thinking.

We still live under the threat of what credit default swaps could do to our global economy. And we are still living as if energy and natural resources are endless, ignoring the very real facts of declining reserves and growing negative environmental consequences. Why? Because the people driving the world economy only care about profits. And their vision is limited to next quarter to five years down the road. They don't take responsibility for a decade or two from now, which is where their attention really should be.

We should be thinking about long term prosperity of the many and not short term proseperity of a greedy short sighted few. Perhaps taxing and regulating them more severely will result in their learning how to properly view the world and make better decisions.

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drink more milk. You make a lot of foolish assertions about people you don't know. And clearly about an industry you have never worked in.

I have spent the better part of 20 years working in banks and financial institutions. I am relating first hand experience.

When in history have the intellectuals had any power to raise or collapse the global society? Your comment "Funny how it's always the "intellectuals" that cause societal downfalls." has no grounding in history. Show me some examples.

History is full of examples where greed and ambition have destroyed societies. Where fear and the inability to embrace change have resulting in consequences that have brought down cultures. But where have you seen intellectuals crushing society?

Personal risk and responsibility are something I know a great deal about after two decades of political activism, volunteer work and participation in issues facing my own country and on behalf of other countries. Your insight here is off as well.

Personal responsibilility means choosing to care more about the ordinary worker, the poor person, the politically or economically oppressed or the people who need change to achieve better lives. It is not about trying to uphold your annual bonus at the expense of others.

What do you know about responsibility? You seem not to even understand the economics you are talking about. How can you miss that the behavior of the banking industry led to the collapse? How can you miss that it meant the loss of jobs, dreams and hopes for so many people around the world. Did you miss that it resulted in people starving in some places around the world where it hit already poor people? Have you missed that many of the resulting unemployed still have no work? And that many have become homeless? Not to mention the suicides.

The greed of these men have consequences. Real and often severe consequences for the people they impact. Joe trader says X company is not as profitable as it should be and investors flee. The company fails and real people lose their jobs. When maybe a more conservative review would have encouraged a much longer term view.

Investment banking cares about making money NOW, TODAY. They are not incentivized to think about ten years from now. And not managed to consider the human consequences of their actions.

We have given far too much power to the non-intellectual corporate world and allowed it too much influence over politics, the economy and our future. Taxing them is square one for taking a lot of that power back and putting it back in the hands of more responsible people.

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Bankers taking personal risk and responsibility...??? Whaaaa...?

People are clearly mistaking capitalism for banking.

This article is inane and I honestly have no idea what it's doing on JT. Filler anyone?

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I have spent the better part of 20 years working in banks and financial institutions. I am relating first hand experience.

That reminds me of my own first hand experience. Many moons ago I worked on the floor of the Toronto Stock Exchange, back when they still had floor traders. I was a computer operator for the TSE, putting the bids and offers in. One day when things were really slow, I was talking with the old geezer trader leaning up against the trading post, guy who had been there for 40 years. Suddenly he said, "You know kid, a lot of people will try and tell you what we do is the investment business, but it's not. It's the gambling business, and don't ever let anybody tell you otherwise."

True story, and that gambling business has got about 1000 times bigger and more dangerous in the meantime.

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I have heard similiar comments from the older traders. Maybe humility sets in with age after years of reality wear down the fantacy and selfimportance of ego.

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Banks and bank employees are also taxpayers, in most cases huge taxpayers compared to other corporations and people. One copuld argue that the bailout - for those who took it - was just them getting back something on what they paid. As for the low rates and state support for the economy helping banks make money, that is incidental. The Govt. isn't keeping rates low to help banks but to help voters (homeowners, employees, etc).

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Tkoind2: Intellectuals (if communists and marxists can be called that) destroyed Russia. Cambodia. Plenty of African countries....... And you say you worked in banks for 20 years. But you also lay into bank employees with a vengeance. Not all bank employees are involved in lending or trading or selling. Many are in IT or HR or whatever - to them the bank is just an employer like say.... General Motors. Oh, wait, GM also took state money. TAX em all.

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Wakarimasen's comments are very scary. Not because he says anything stupid, but because what he says and his logic are so typical. "That guy's world view is different from mine so it is wrong". "I am not aware of any problems with how the financial system works so there are no problems." "I don't like communists or government or taxes so I will talk about that."

He is one of the billions standing on the beach, and when they see the tide suddenly go way, way out, stand there going "wow, cool!!!!" They are all completely unaware of and unprepared for what may be coming next, and that is what is scary. The governments and media (outside of parts of the the financial media) have done an extremely terrible job of communicating what is actually going on, in most cases they don't even know. All makes for a potentially very dangerous situation.

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bankers remind me of the charlatans in the emperor's new clothes. what do they actually sell? what do they actually do? get a real job! banker is no more a job than scam artist or confidence man is. roll up your sleeves and learn a real trade!

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tkoind2, I've taken an effort to explain products and the sub prime in earlier post. If you're discredit me, do it on a point by point basis. So far, you haven't pointed out a single thing fact, just general rhetoric. Just because you worked in a bank means nothing. You could be a bank teller. There's no point also telling us how generous or smart you are if you don't argue in a smart way. My previous post are factual post - who took TARP money and why this blanket tax may be a bad idea. Where's your factual points? More "lets just get them rich bankers cause they are greedy" arguments? If bankers broke the law, then we should punish them and exact justice. If we apply the rule of law frivolously, then the very same laws can be used against us.

There is no moral authority in an argument that takes liberties with someone else's money. Before you argue that banks gambled with others money, I need to remind you again that investors do understand the down side of investing. No one argues that stocks or security products are another form gambling.

Please argue coherently. It's nonsensical to speak of things like suicides when Japan has the highest rates globally, even before the crisis. I could go on pointing out the fallacy in your arguments but you don't seem to be giving any coherent argument or valid facts whatsoever.

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DMM - the facts are simple.

Banks are alive because of government support.

That support takes many other forms than just the TARP money.

All bank bonuses are the result of the transfer of money from the public to the banks.

While some individual banks may be financially sound, the system both in the USA and the world is bankrupt and survives only through government intervention.

Nothing has been done about the underlying problem of debt. Debt is money. When debt can no longer be serviced and is not paid back, or even is paid back but not lent back out, money and "wealth" disappears.

The world is entering a spiral of debt deflation as governments run out of the ammunition needed to hold it off. How far things will fall is unknown, as the degree of damage and distortion done to the real economy over 25 years of debt inflation is unknown.

Most people do not know or understand any of that. They spend their time worrying about whether bankers should be taxed and shouting about government "deficits".

It is going to get ugly.

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