Saturday, November 28, 2009

Dubai Crisis: the answer lies in the bonuses

Dubai is unable to pay back debts to banks, which creates a new hole in the worlds financial markets which may be in excess of $90 billion. Most of this is owed to British banks, HSBC, Standard Chartered, Baclays and Lloyds TSB, who are owed $29,948,000,000 - nearly $30billion.

Will taxpayers be expected to pay up again, on the grounds that these banks are too big to fail?

Clearly, in view of the huge debts that we all face due to last years' bailout, and the dogged refusal of the banks to express contrition and change their bonus culture, it goes against natural justice to expect another round of bail-outs.

Free market economics believes that there should be no state intervention, and that events should be allowed to follow the course of nature, which means a total bank crash, probably leading to a global economic depression.

There is an alternative to this dilemma between bailout and crash. The alternative lies in the bonus culture itself. Bonuses are paid on the basis of the individual's responsibility for their decisions. If a banker makes a deal that brings in a profit, he (yes, he, usually, because of the glass ceiling for women) benefits as an individual by getting a bonus. If his decision results in the bank making a stonking loss due to inability of his chosen debtor to meet the debt, the individual dealer should be responsible for a proportion of the loss. This means that they will go bankrupt as individuals. This is sad for them, but bankruptcies happen all the time. They are part of the financial scenery.

The advantage of the bankruptcy solution is that the debt is annihilated in the process. It disappears. It is no longer. It becomes extinct.

Only a proportion of the debt will disappear, based on some formula that relates the bonus to the dealer's regular salary. The regular salary reflects the responsibility of the institution, and the bonus reflects the responsibility of the individual.

This solution reduces the burden on the taxpayer, and introduces a much-needed element of natural justice into the system.

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