Let Banks Choose: Bonuses or Bank Charters?

Now here is the best idea we have seen yet. Britain’s Financial Services Authority has come up with the ultimate response to bank claims that they must pay high bonuses to the geniuses who caused the crisis. Just as Timmy Geithner claimed, while trying to protect his Wall Street handlers, UK banks always say that contracts are contracts and so no matter how repulsive it might be, they have to pay out bonuses as spelled-out in their contracts. The FSA said fine, go ahead, but if you do you will lose your license to do banking in London. In other words, it is the bank’s choice: be a bank, or pay bonuses. You cannot have it both ways.

So here is the deal. President Obama should direct his administration to offer our bankers the same choice: either forgo all bonuses until the US unemployment rate drops below 5%, or lose your bank charter. Indeed, he should go further. Banks are really public-private partnerships, and bank management and other employees should not receive pay in excess of civil servant pay. Assign the appropriate civil servant pay grades to our regulated and protected banking institutions. Any banks that wish to pay higher salaries than that to retain “rocket scientists” can do so, but they will give up their bank charters. They will slip into the dark “shadow banking” sector and will lose all access to government protection.

Then adopt a strict version of the Volcker rule. Should any of those shadow banks find themselves in trouble, they will not be bailed out. Instead, they will be “resolved”—that is, shut down, with creditors paid whatever the government can recover on assets. If that rule had been in place two years ago, no more Goldman Sachs (GS). Instead, Goldman was handed a bank charter, which allowed it to stay in business, to hoover up manufactured profits, to manipulate government policy, and to pay out bonuses using government bail-out money.

As to the complaint that banks will not be able to retain all the geniuses that helped to create the crisis, Obama’s response ought to be: Goodbye and good riddance. Go find jobs in the Caribbean. Banking does not need rocket scientists. It is basically a simple business: assess credit worthiness, make loans that have a high probability of repayment, and issue deposits. It used to be known as the “three-six-three” business: pay three percent on deposits, charge six percent on loans, and hit the golf course at three p.m. That was good banking and it did not need high remuneration. Tens of millions of Americans bought homes, started businesses, and sent their kids to college. It was good enough.

About L. Randall Wray 64 Articles

Affiliation: University of Missouri

L. Randall Wray, Ph.D. is Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute.

His research expertise is in: financial instability, macroeconomics, and full employment policy.

Visit: L. Randall Wray's Page

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