Refocus people; it is not about Goodwin, or his knighthood, the issue is bank bonuses

Fred Goodwin's lost knighthood remains controversial. Was it a vindictive act aimed against a ruined man? Or was it simply unacceptable that this man continues to be honoured by the British state after nearly destroying the UK financial system?

Pick whatever side you want on that issue. As for me, I have lost interest in Mr. Shred. My fear is that Goodwin's defunct knighthood is an unhealthy distraction. The real issue remains banking sector bonuses.


Before the crisis, there was a template justification offered when anyone challenged the huge annual packages handed out to bankers by the UK financial system. Supposedly, bankers were extraordinarily talented people, uniquely capable of handling the crushing stress of working in the highly competitive environment that characterized the City of London. Normal people simply didn't have what it took to work in Goldman Sachs, Barclays, or the Royal Bank of Scotland. Normal people were inadequate, weak and lacked the ambition to succeed. Bankers, however, had it all.

Allegedly, these superhuman bankers were rare people. Financial institutions had to pay fantastically high salaries to ensure that bankers would work for them. Otherwise, this talent would move elsewhere, possibly abroad.

Moreover, financial institutions could further justify high salaries by pointing to the enormous profits they made. These profits, along with the bonuses, helped generate hefty tax revenues, which in turn funded hospitals, schools, and unemployment benefits. Ultimately, everyone benefited from the extraordinary wealth generating activities of that rare and refined group of superhuman bankers. Even the little people gained from the hard work and risk-taking of the precious few.

That dubious justification was blown apart by the financial crisis. Within a few short months after the collapse of Lehman Brothers, UK banks had generated unimaginable losses. In many cases, those losses cancelled out the profits earned by banks over the preceding three decades. The uniquely talented superhumans were, from the perspective of the economy as a whole, the dangerous liabilities.

Today, UK banks remain in a deeply precarious position. The UK financial system can only survive by massive public support. That support take several forms. Low interest rates has helped banks reduce funding pressures. Capital buffers have increased, but this is almost entirely due to direct capital injections by the British taxpayer.

Insofar as banks are making any profits, is entirely due to the uniquely generous low interest rate environment created by the Bank of England. So when RBS announces that it will pay bonuses of £1.5 billion based on its annual performance, it is important to understand that it was the British government and the Bank of England that did all the heavy lifting. The bankers themselves did little more than open the office in the morning, managed the tills, fill up the ATM machines, and switch lights off at night. Judged by the rhetorical standards of the precrisis period, those bonuses belongs to the British taxpayer. The British state did the real work and took the big risks. If risk is to be genuinely rewarded, those bonuses should be taxed at 100 percent.

Now if you don't find that argument convincing, try this one the size. British banks remain undercapitalised. There are only three ways that banks can build up their buffers. They could ask outside investors to stump up more cash, but no sane investor would touch a British bank right now. So let us cross that option off the list. Another possibility is that the taxpayer puts in more cash. This isn't a terribly attractive option, not least because the taxpayer has already ponied up massive amounts of money to prop up the banks. The last option is that any profits that banks make are recycled back into their balance sheets. As a practical matter, this means keeping banking sector employment costs down, which in turn means no undeserved bonuses for useless bankers.

These points, I fear, have been lost in the scramble to humiliate Mr Goodwin. We should not be obsessing about him, or the hopelessly compromised and devalued UK honours system. We need to think about what is in the best interests of the country, and quite simply, this country's state-owned banks cannot afford to pay out £1.5 billion in bonuses to bankers. The taxpayer needs that cash. That is why we need an urgent law taxing banker's bonuses at 100 percent.