In the wake of collapse of the banking system, it is understandable that we want to make sure that is does not happen again. Politicians, those who are ostensibly elected to act on our behalf, are the ones who have to take the responsibility for finding a solution – not because they are knowledgeable and competent in the field but because it is the responsibility of politicians to act at a national and supranational level, a level at which we, as individuals, simply cannot. Unfortunately, the world’s politicians have assumed that they are competent to act directly (i.e. they are knowledgeable and have the skills in the field), rather than accepting that their role is to seek considered and thoughtful input from those that do know what they are talking about and then to mange the process so that a solution is found. The result of assumption of competence has been a rush by politicians to develop policy and enact law – and to get it spectacularly wrong!

Nicolas Sarkozy, the President of France and a member of the G20, has recently called for a tax on financial transactions as a method of reducing risky behaviour amongst bankers. This is profoundly flawed as an idea since it does absolutely nothing to reduce risk and merely levies a charge on the transaction and so bolsters the government’s tax revenue – and that, of course, is the real reason why he proposed it: it is simply a way for the government to raise more revenue to spend on protectionist and parochial schemes that benefit only the French. When it was suggested that the French government should work with its European partners to develop a regulatory framework for the reduction of systemic risk in the financial sector, President Sarkozy had nothing to offer.

Another president who has shied away from solving the problem and has preferred a populist approach is Barack Obama, President of the USA. His focus has been on punishing the risk takers and removing the incentive that they may have for making profits (and thus driving the economy and generating huge amounts of tax revenue for the financially beleaguered American government). This plays well to the gallery and the media and public response has been one of approval – after all, the reasoning goes, the risk takers were the ones that crashed the system, thus conveniently forgetting that it was been the greed of the American public and their desire to live well beyond their financial means that caused the crash in the first place.

At September’s G20 meeting more reasoned voices were heard – these called for a regulatory response – but what emerged was merely a requirement for banks to hold more capital so that they can absorb the results of their risk taking, rather than regulating the way banks operate and restricting their risk taking. Greater capital requirements are certainly a good thing – if banks want to gamble with their own money that is fine, if they want to gamble with other people’s money then that is not acceptable and the capital requirements should at least be big enough to underpin the retail deposits made by the public. Unfortunately, that is not what the new capital requirements actually introduce.

In the UK, the politically and financially beleaguered government of Gordon Brown has been forced to step away from what Mr Brown knows to be the right thing to do (regulate effectively) and to adopt a series of measures that tend towards the punishment of bankers, rather than restricting their ability to do harm.

Let us be quite clear about this: the business of bankers is that of any other commercial institution – to make profits. Those profits are then taxed and the government has revenue to spend, so it is in the government’s own self-interest for the financial sector to make huge profits and thus pay huge amounts of tax. In an effort to protect their own self-interest, governments are shying away from regulation that would limit the ability of the financial sector to take risks and thus make profits (and thus pay taxes) but at the same time, they know they ‘have to do something’ and thus they have targeted the bankers as individuals and are attacking the bonus system.

Although loved by the public who merely see ‘them fat cats being hit where it hurts’, this is a spectacular ‘own-goal’. If the bankers, as individuals, are penalised for doing what they are employed to do, then they will simply stop profit-maximising activities (and risk taking). This, in turn, will lead to lower systemic risk taking (that’s good isn’t it?!) but will also lead to much reduced profits within the sector which in turn leads to reduced tax revenue generation (think: reduced public sector spending on hospitals, schools, infrastructure), reduce the profits for the pension funds (so we can all expect lower pensions in the future), and will do absolutely nothing to increase the availability of cash in the system to support growth in the economy (perhaps this recession could run on for another two years).

Attacking the bankers as individuals is a populist and petty response by self-centred politicians who lack the competence to deliver on their responsibilities. If the politicians are to accept their responsibilities and do what we elected them to do, then they need to grasp the nettle of establishing an enforceable regulatory system that restricts what banks are allowed to do, that splits the retail banking functions from the investment banking activities, and provides constraints as to systemic risk taking. This needs to be backed up by giving real authority to a regulatory agency that is staffed by financial experts to examine and authorise the financial instruments that the banks devise.

Regulation of banking is what is needed to fix the financial system and not the emotive targeting of those who are paid to make our economies rich. Those who persist in attacking the bankers are simply barking up the wrong tree (again!).

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