The whole bank thing

So... recently we've been seeing a lot of news articles about how the British government wants to tighten up the laws about bankers and their bonuses. Oh those naughty bankers, paying yourself a lot again are we? Cant have that.

The thing is.... it smacks of misdirection to me. Last year we had that huge banking crisis. What caused it? Irresponsible regulation and credit instruments that were poorly understood. Huge bonuses were not a cause at all, but a symptom.

This, as I see it, is the government's attempt to convince the people that they are Doing Something (tm), and the problem is that the something they are doing has nothing to do with the cause, neither will it be for the best interests of either the bankers or the population in general.

Right... why do I say that? Because banks are supposed to operate in a free market, with competitive forces that form what I would liken to natural solutions. Banks that compete well survive, and their business strategies, and indeed often personnel, are used by other banks in an attempt to survive. Banks that dont compete well, go under. At least, thats how it should work. In reality, because of regulatory capture (which is the real problem), banks that took on too much risk and went best were rescued by their buddies in government. What does this mean? It means that the best way to run your business is now not to out compete your rivals but to take huge risks and make sure you have friends in high places. They survived, so obviously its a strategy worth using.

Now hold on a minute you say, if the government had let those banks fall, liquidity would have stopped and we would be carrying trollies full of money to buy bread. Well yeah, that was the risk, but there were other options. Some smaller banks should have been allowed to go under with taxpayers savings guaranteed in some form, larger banks perhaps sold to other banks, and the largest maybe propped up by a system of loans.

As for regulating risk.... I'm a fan of small government, and I think this is one area we shouldnt interfere. Businesses know all about risk, they pay people to evaluate it for them. Those banks that went bust - do you think they wanted that? Nobody in either the government or the private sector saw it coming - why would the government stop it a second time? There should be some regulation, I agree, but not too much. Too much will slow growth down.

And as for bonuses, again, only businesses that do well pay good bonuses, because otherwise shareholders get angry, and thats bad. Why regulate that? If the economy hadnt been doing great, they wouldnt have paid good bonuses. Simple as that. When times are lean, bonuses are crap. If a company is laying off employees to save money while giving its execs huge bonuses, okay we have a problem.