Friday, 27 January 2012

Traditional Forms of State Regulation of Banking - Worth Another Try?

Enough of this wimpy stuff about bonuses. Bonuses aren't the point. How a given individual's remuneration package is divided between base salary and add-ons is a detail. The point is how large the overall payment is, and what the payment is made for. & payments to senior staff in state owned banks should be made for benefiting society -say by increasing lending to small and medium sized enterprises -   not the remaining private  shareholders of the bank.

Bonuses are a particular application of the whole performance related pay idea, which, as Tom points out, is looking  increasingly  untenable even to ex-heads of the CBI. There is also an argument about 'aligning incentives' of senior managers with shareholders to , er, prevent them stealing a firm's assets as they are otherwise thought likely to do. This is known as the 'agency problem' in corporate governance theory.  But its never been an argument I've understood: if you think someone may steal from you why give them a job which allows them to do so and then pay them what amounts to protection money?

So I think it may be time to return to a more traditional form of motivational incentives for senior bank executives.  Michael Hudson points out that,

"....banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. .....

Relations between banks and government used to be the reverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing the Knights Templars’ wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices."

Worth a try?Just a Modest Proposal.


  1. Generally speaking one an arrangement that once existed has been cast aside by history, it can rarely be gone back to. Even more rarely is going back to it, a good idea, or progressive. Look at Lenin's response to the idea put forward by Kautsky of trying to break up Monopolies to go back to the kind of small scale, free competition that existed before, and which Marx showed inevitably led to Monopoly. It was precisely because of the latter that Lenin correctly argued Kautsky's idea was both utopian and reactionary.

    In fact, when the US did break up the Monopolies at the end of the 19th Century, they simply became even bigger as separate companies! And, regulation generally is a reactionary and regressive move, as well as being Utopian. One of the most progressive aspects of Capitalism for Marx, was precisely that it did away with regulation through Competition. Regulation, implies having a regulator, and who exactly are they accountable to? it implies bureaucracy, inefficiency, and even greater potential for arbitrariness, corruption and everything that goes with it.

    Regulation was introduced via New Deal politics in the 1930's as an attempt to rescue Capitalism. When all of the politics and economics that went with it collapsed in the 1970's when the Long Wave Boom ended, and those measures were seen as no longer able to save Capitalism, regulation was swept away by history. The US was forced to close the Gold Window, and the attempt to control the US Money Supply simply led to the creation of the Eurodollar Market, which led effectively to the privatisation of the global Monetary system, sweeping away Bretton Woods.

    Capital and Capitalist States may well try to once again rescue the system by regulation, but it will certainly not be in Workers interests. Cameron and Co. have come out several times, and referred to the fact that Worker Owned companies are more innovative, more efficient and more profitable than privately run companies (though as Engels pointed out, the large companies are not privately run anymore). That is true. Worker owned companies continually outperform their Capitalist counterparts - by more than 10% over the FTSE 100 companies last year.

    As Lenin said, the solution is not too look backward to Capitalist solutions - and regulation and State control is more like Feudal solutions with all the paternalism that goes with it - but to look forward through what exists to socialistic solutions, based on workers ownership and control. As the establishment of the Eurodollar markets shows, in a global Capitalist world, national solutions are not likely to work, and international solutions are difficult to achiev because of divided interests continuing between states. Worker ownership cuts through all that crap. Worker owned Banks in the UK would have an incentive to lend to worker owned businesses in the UK, and so on. They would not have the drive of profit maximising that leads to Capitalist businesses locating wherever in the world that can be achieved. And worker owned enterprises today, as much as when Marx described it in Capital, have little difficulty in employing the necessary management for their more efficient businesses without paying the kind of huge salaries that Capitalist Big Business offers.

    The best form of regulation is that which comes from direct democratic control at the workpalce level, and that can only arise on the back of the workers in those firms directly owning the business themselves.

  2. Hi Boffy,

    Good to hear from you.

    I should just point out I was joking: I don't really think executing bankers on charges of devil worshiping is a particularly good idea*.

    As you know, I am immensely supportive of the idea of worker controlled enterprise. But it is not a universal panacea.

    In many ways, the problem we currently have in the financial sector is that the 'workers' - or at least the top echelons of employees - are robbing the rest of us blind. In the phraseology used in mainstream discussions there is a 'principal-agent' problem and the danger is always that the 'agent' - the senior execs, but also the 'star', 'alpha generating' traders and other technical specialists - simply plunder the business, a good proportion of which may often be formally owned by large pension funds representing the retirement savings of millions of people. Now, you, as a Marxist, might say this is simply them appropriating a slice of profits, and they are in effect capitalists (e.g. de facto owners and controllers of the enterprise) , not employees but I don't find this especially convincing.

    We need someway of controlling this segment of society. A greater involvement of lower graded staff in enterprise decision making may help, but I think some external compulsion will also be necessary. You can call this 'regulation' or a new legal framework or whatever you like - I have no magic formula in my back pocket- but I'm fairly certain finance capital isn't going to be controlled unless a very powerful force stands up against. & I can't imagine any such force being assembled which doesn't include the State or, more likely still, an alliance of States.

    *Well, except after a couple of pints....

    1. There was an alternative presented on the Keiser Report today. It came initially from of all places City AM. They argued that these investment bankers were rather like lap dancers (Keiser chose instead street propstitutes in Amsterdam). Peter Stringfellow requires the lap dancers in his club to pay a house fee of over £100, to have the right to earn their bonuses. The prposal is that Bankers shoudl enter an auction. paying for the right to make money in bonuses. pesonally, I don't think its any more of a solution than Regulation udner Capitalism would ever be.

      On the substantive point I would indeed argue that investment bankers who earn large amounts of Money are a form of "Complex Labour" as Marx described its. Its their Labour-Power (even at these large salaries) which is exploited by Money Capital, not them exploiting everyone else. The same is true about footballers, pop stars and other such celebrities. Reducing their huge incomes would only increase the even huger incomes of the real Capitalists who own the Capital, which exploits the Labour Power of these people. The main thrust behind the demands for control over High Pay is just a front to cover the control over ordinary peoples wages, whilst the profits of the Big capitalists continue to expand as a result.

      Of course, because of the way capitalism works, and because of the existence of monopolies, rigidities and regulations some of these high salaries etc. are bound to occur. If people object to the high salaries and bonuses of footballers, made possible by the high cost of season tickets, and the cost of Sky Sprts subscriptions, and feel the money would be better spent on Nurses wages, they can of course, decide not to have a season ticket, and instead nip down to their local park to watch people playing football because they enjoy it, rather than because someone is paying them a lot of money, and could donate the savings they make from doing so to their local hospital.

      But, of course, they don't, which is one problem with the idea that you can simply replace the choices that people make in how to spend their money through the market, with some kind of State decision making on their behalf. It generally results in the creation of monopolies, restricted supply, and black market prices.

  3. The real rip-off of people in Financial Services comes through their lack of control over their Pensions. There is £800 billion in workers pension funds in the UK. Enough to buy up lock, stock and barrel a majority of the companies in the FTSE 100. In fact, that is where a lot of the money is invested. But, control over that investment is not in the hands of the workers whose money it is, but of Pension Fund managers, and the Banks. That is why private Sector Pensions are so bad. Panorame last year showed that around two-thirds of workers payments into these schemes went not into the purchase of their pension, but into paying the Commissions and other rake-offs of the Fund managers, at various stages, who made their decisions not on the basis of where the best returns could be obtained, but on the basis of who would give them the biggest commissions.

    But, who can beleive that the capitalist State would be any better? It has not taken any action to control these private schemes, and the State pension is just as bad, as the recent decisions for Public sector workers, and on State pension Age demonstrates. By contrast, the Pension Scheme run by the Mondragon Workers Co-op Federation pays workres an average pension of around £13,000 p.a., and has twice as much coming in in income as it pays out in Benefits!!!

    The real answer to the agency question is not bureaucratic regulation, but democratic workers control, and for now so long as capitalism exists, a good dose of Competition. Competing Financial Co-operatives, confronted with powerful Consumer co-operatives, who purchased services collectively would not be able to extract surplus profits from workers. If they extracted surplus profits from Capitalists and the rich, so be it. That is not our problem.

    I have also suggested some time ago, that Marx's solution of Co-ops being part of a Co-op Federation, which acts like a Holding Company, is also the solution to this problem. Of course, such a Federation can easily be extended to cover a European or wider basis, rather than just a national basis.

    The idea goes like this. Every Co-op, and its workers needs an incentive to be efficient and creative. So each should be allowed to retain a portion of profits to be distributed amongst the workers of the particular Co-op. But, the majority of profits go to the Holding Company, which in turn finances Capital investment, and the development of new Co-ops. It does so at a low, fixed long-term interest rate.

    But, other portions of the profits of Co-ops within the Federation go to other Funds, to cover, Pensions, Sickness, Unemployment etc. Finally, all workers within the Federation get a share of the total profits.

    See: Economics Of Co-operation

  4. A final point. Hollywood is once again seeking the introduction of a similar kind of State Control and regulation over Copyright Piracy i.e. opposing greater competition that would undermine their monopoly. In fact, the Internet shows the real soution for now to these high salaries, precisely in the sense that it does facilitate greater competition, and helps break down Monopolies - whilst building up others of course, such is the nature of Capitalism. Louis CK decided to by pass Digital rights management, and the big companies, and put his show directly on the net inviting people to contribute something for watching it. In a matter of days, he made $1 million, but the cost per individual who watched his show was minimal compared to what the big companies would have charged.

    The costs of media production equipment is now minimal, meaning that huge numbers of people can do the same thing by putting their material directly on the net. Consumers of these services will then have the opportunity to ditch the high cost provision of the existing media monopolies, who will have to reduce their charges, and likewise the ridiculous payments they make to the "celebrities".

    Investment bankers are only the same kind of celebrity in another guise.

  5. Charlie, I was thinking rather of a Worker, and Allotment Holder Inspectorate to bring the bankers and anyone paid over £250,000 year before the Public Safety Committee for the Prosecution of Economic Crimes and Sabotage.

    1. No surprises there Andy: you East Anglian Allotment Holders were always renown for your dedication to the principle of "the Earth is a common treasury for all(except slugs and bankers)"