And this is exactly what is happening with governmental reaction to the financial institutions and the mess they have made of their economic value and the economy as a whole. The extraordinary thing is that the UK government is not alone in its idiocy – other governments around the world are going down the same path in the sublime, but ridiculous, belief that if all governments agree then they must be right.

Let’s put the issue firmly on the table: governmental response to the financial disasters of the last 18 months is to (a) attack the individual bankers as greedy and dishonest people, and (b) to try and avoid risky behaviour by penalising the individuals through restricting their pay. The idiocy is the belief that risk taking of the type that crashed the financial system is A RESULT of the way the bankers are remunerated. It is not, it is the other way round: the way bankers are remunerated is a result of the risks that they are encouraged to take.

If the government genuinely wanted to reduce risk in the financial system then they must regulate what the banks are allowed to do in terms of their trading and investment activities and the amount of financial cover they have in their reserves. With proper control of risk in place, then the bankers will not be able to take uncovered risks and thus the system will not fail. The problem is, governments are made up of politicians who have no understanding of the situation, who –in the case of the British politicians – are venal and arrogant, and they have NO IDEA how to regulate to minimise the risks in the financial system. And they are certainly not willing to put serious money and legislation into place to allow those who do know how to do it to get on with the job.

The current governmental attitude towards bankers and their bonuses has nothing whatsoever to do with making the financial system less risky, but it does have everything to do with the fact that, having flooded the economy and the banks with money to stave off further disaster, the governments now have no idea what to do next and are watching helplessly and ineffectively as the bankers continue to operate on a ‘business as usual basis’.

The real problem is that those at the top of the banks and of the governments are, essentially, useless and have little idea what they are doing and would rather be seen to be doing something, no matter how wrongly based, than to admit they do not have a clue.

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!).

Like most western and developed nations, both the administrations in the UK and the US have stimulus packages in place (if not yet delivering) and both have found their proposals under fire from the opposition politicians (how unsurprising is that!). The issue that seems to enrage the opposition and the populace equally is the idea of bonuses for top bankers – especially those in the banks that have had to take government (tax payer’s) money in the current crisis. On the one hand, there are the free-marketeers who are saying that top bankers should get their bonuses and then there are the socialist reactionaries that say they shouldn’t.

Let’s take a closer look at the issue.
(1) We live with the rule of law and under the law of contract, some of these bankers are contractually eligible to receive bonuses.
(2) Those lower down the banks who were not culpable for the disaster, or worked in areas completely separate from the business units that took such high risks with such toxic assets that they crashed the bank, should not be punished for doing their job well.
(3) If people are punished for doing well, then they will leave the company thus further stripping it of assets and resources. (That is, if they haven’t already been fired in a panic-driven cost cutting exercise that never seems to touch those actually responsible for the disaster.)
(4) There has to be a penalty for failure, but it is straight stupid to punish success.
(5) The government is right to attach constraints and conditions to the loans they are making to the banks and these should, rightly, include a restriction on the salaries and bonuses of those culpable for the disaster.
(6) Where the government has virtually nationalised the banks then they should, as the new owners, set the pay and conditions of their employees – but if they set these too low then they wont attract the skills and quality they now desperately need.

Voilà! There are pros and cons to all this but if we step aside from the cut and thrust of the political duelling and consider the ethics of accepting a huge bonus when you’ve just crashed the bank, then it is almost a ‘no brainer’ that senior managers who have direct responsibility, or even indirect but evident responsibility, for the disaster should now make a public ‘mea culpa’ and publicly renounce their right to their 2008 bonus and all future bonuses until their performance is again at an acceptable level.

Will they do it? Of course not! Greed over rules sense.