Wednesday, 8 July 2009

Payment by results

That nice young man Darling has announced his reforms of the general banking system. I've not found the enthusiasm to go into the nitty gritty but it seems that he has merely done a bit of a tune up round the edges. No major change in the supervisory system which remains with three major parties involved. Just a bit of finger wagging at bonus schemes. This after the greatest banking melt down for a very very long time.
I had hoped to see that the banks would be denied the opportunity to indulge in what is little more than gambling. There needs to be a firm foundation of banks that will serve the basic needs of customers. No get rich quick plans coming out every day. No take overs. Just plain vanilla attention to serve clients with terms, conditions, plans and charges all pre-determined and immutable. These staid and proper banks would never get into any circumstance that needs them being supported from central funds.
There is a need for cowboys to cater for the risk-takers. I have heard the term 'casino bank' and that seems about right to me. Players in a casino know the risks they run and a few spins of the wheel can strip them of everything they have made at the table. If one of the casino organisations were to go down the pan - so be it. They would not cause any major movement in the finance world and there would be no question of rescue, part-nationalisation or support. The term 'casino' would serve as a warning to those who would do business with them and they also would be on their own if things went tits-up. No great need for supervision; there would be clear and unambiguous rules and audit would be frequent and rigorous.
The question of bonus payments needs attention. The mantra is that the employer must pay inflated salaried and promise bounties for performance if they are to get the employee they desire. Nonsense. High demands and expectations by the prospective CEO or whatever are nothing other than blackmail. "Pay me this or I will go elsewhere" The system needs to be such that there is no elsewhere that will pay him the inflated salary and benefits from performance. If banks and other employers refused these high rewards to all, the idea that they had to meet the blackmailer's demands would fall by the wayside. Rugby clubs have wages caps where their total wage bill must not exceed a stated sum and these work. If the cap is £1 million and the employer wants to pay Mr Wonderful £900K - fine. All he has to do is fund the rest of his Board on the £100K that is left. There would be no £90 million transfer deals as in soccer if the agent and player knew no one would pay more than £30 million.
There should be other controls. The high cost of motor fuel and the instability of the market is artificially created. Getting a 50 gallon drum filled at the well head remains the same this week as it did 26 weeks ago. It is the machinations of the traders that cause the ups and downs. Trading on oil supplies must be barred. Only in the last few days we have seen how a trader went on a late night binge and caused a heck of a lot of trouble. The refiners all have long term contracts with those blessed with oil in their ground and it should be these that govern prices. Having a fixed price for crude would bring to a halt the nonsense where oil countries manipulate prices by raising or lowering the amount released on to the refiners. I have used oil as an example only. The same system should apply to all things capable of being traded in futures markets. These 'positions' also effect prices where costs to produce and market is steady but the cost of the item varies wildly.
I do not know enough of the, to me, murky world of the venture capitalist but the sale of deals here suggests it is something that needs control if it is not to damage a nation's economy. They are drawn into deals where they smell vast and quick profit as shark smells blood in the water. Fine. But there must be firm controls set up such that what they do is isolated from routine banking and should work alongside the 'casino' banks on the same terms. If they want to play no limit poker and go all-in and someone has a better hand - tough. Do not come crying to me.

Posted via email from John's posterous