Why we have to let the bankers have their bonuses

[Caveat: there are various figures quoted here which may not be entirely accurate as they're pulled from all over the place and some might be one or two years out of date. However, there's no doubting that the numbers are enormous.]

The Chancellor, Alastair Darling, has today warned RBS bosses against paying bonuses to individuals culpable for losses incurred by the banks. As the BBC's Robert Peston put it:

The chancellor feels he has the right to limit bonuses and set conditions on pay at any bank propped up by us, by taxpayers, which broadly includes all British banks, since they've all received exceptional loans and guarantees from taxpayers over the past few months.

So the question is, why doesn't he limit those bonuses at RBS? After all, the government owns 70% of the bank and can do with it pretty much whatever it wants. Radio phone-ins have been full of people incredulous as to why the government doesn't just step in.

The truth is that if the government so much as tells RBS not to buy a box of staplers, it could have catastrophic consequences for the British economy. Sounds stupid doesn't it? Let me explain.

At the moment, the board of RBS is independent. It has full control over what the bank does. If the government were to put people on the board and start directing what it could do, then it would then obviously be responsible for what the bank does and, crucially, it's liabilities.

Incidentally, remember before christmas when all this kicked off and the government pumped billions into many of the high street banks to keep them afloat? The deal was, supposedly, that this money was given in return for commitments to increase lending to business and resume mortgage lendings at 2007 rates. Didn't happen did it? That's because those aspects of the deal were never enforceable, for just the same reason.

It's the liabilities of RBS that are the problem. Right now, RBS has liabilities of approximately £1,800 billion. Contrast that with the UK national debt, which currently stands at about £650 billion and you see just how vast a figure it is. If the RBS liabilities were added to the national debt, you're looking at £2,450 billion, which is equivalent to 177% of GDP. That's the third-highest debt-to-GDP ratio in the world, behind Zimbabwe and Lebanon.

With such a massive national debt comes problems. The first of these is interest. It's hard to say what the effective rate of interest would be on such a debt, but on very roughly cobbled together figures, we seem to be paying around 4.3% on the current £650 billion debt, which is about £28 billion a year. At that rate, we would be having to find £105 billion a year in interest if we took on the RBS liabilities, a figure broadly the same as the NHS budget. Alarming, isn't it?

This would inevitibly lead to tax hikes, vast budget cuts and economic stagnation, a fate which befell Japan in similar circumstances in the 90s and from which they are yet to recover with a debt-to-GDP ratio of 170%. The already weak pound would be decimated as our economic prospects were smothered by depression and foreign capital took flight. We would enter a spiral of decline not even the IMF could bail us out of.

So despite everything that's happened in the past six months, the bankers have us over a barrel. While the public are rightly outraged at the prospect of them paying themselves bonuses for failure, the bankers know full well that the government dare not interfere to stop them. At this point, we have little choice but to let them get on with it. The Chancellor know this, which is why he's launched an 'independent investigation' into bank maganement, pay and bonuses. It deflects from his powerlessness to do anything meaningful.

One final point I want to address. One of the arguments put forward by banks as to why bankers should get bonuses is that it's necessary to do that to keep them. They argue that in a time of crisis they can't afford to lose their "best talent". Well I'm sorry, but if the state most banks are in is down to that talent then to be frank, let the fuckers walk.