Less Talking, More Doing

U.S. President Barack Obama and an enormous international community of banking clients are angry at the financial institutions. The passionate threats that Obama has proclaimed are thus understandable. They are just not very convincing.

It has been more than sixteen months since the outbreak of the financial crisis and representatives of governments the world over have repeatedly declared that “something” has to be done. “If nothing happens, the next crisis will happen.” It’s true: “Nothing” has happened.

There has been, however, a fierce demand for closer supervision and that the law should limit the bonuses of bank managers. These two requests alone indicate that there is still no change in sight.

As long as bank executives are allowed to carry on with speculative trading ad libitum, a tightening of supervision will be ineffective. Only if these absurd feats were prohibited would supervision be able to regulate more strictly. Nobody is considering that solution, however. Rather, the hope is to keep the bankers’ gambling tendencies in check by regulating their capital resources more strictly. Unfortunately, this is a recipe for disaster, considering it couldn’t pass the test in the past.

In reality, there should only be a few new rules. First, banks should not be allowed to sell the loans they have granted. Second, the stock exchange and concessionary banks should only be allowed to tender options and futures if the basis of the transactions are available. To illustrate: If one business partner promises another that he will deliver securities or commodities at a certain price on a certain day in the future, he will first have to prove that he does in fact own them. On the free market, far away from banks and stock exchanges, everyone should be able to speculate at will.

What sounds peculiar, however, is the suggestion that banks should be prohibited from paying bonuses to their executives. Here it concerns a private sector agreement between the owners of a company and its business managers. From a legal standpoint, government interference is barely justifiable. What the government ought to do is establish firm rules regulating the financial accounting of these companies. The ability of a business to enhance their asset value simply through predicted appreciation on the market should have been prohibited long ago. On the one hand, companies make themselves appear wealthier than they really are. On the other hand, these theoretical appreciations form the basis for individual bonus amounts.

To completely prohibit giving out bonuses from actual profits is nearly impossible. In the case of losses, however, the beneficiaries of these bonuses should have to pay – especially when the government is helping them out. Then, the state as payer and rescuer should very much be authorized to set rules and regulations.