The Bankers and the Stock Exchange

So a group of bankers are going to try and setup their own alternative trading system, as they feel the charges are too high..... nothing can be more ironic than the large banks complaining about charges. Incredible what is the world coming to?

Perhaps the stock exchanges are making too much money and lowering the cost of transaction would be a good thing, surely however, more important is to try and create a model where investment bankers are encouraged to think over the long run, and government tax on savings and investments is brought down.

Their bonuses are so huge, that they are in the UK encouraging companies to merge, diverge anything to increase their commissions, these same companies that often complain about high charges can adopt policies which may be detrimental to the long term health of companies and economies because they get huge fat bonuses on an annual basis. When they can earn millions in a year, when they can earn tens of millions in a year, what is the incentive to think about the long term health of companies, to build long term relationships? This is a far greater problem than the charges applied to buying and selling shares. The UK as one of the most open countries in the world will perhaps over time be most effected by this.

The liberal economic view is often a little naive, it is like escapism, it is the easy view to adopt, it is comforting and in many ways it is largely right. In some crucial ways it is wrong. The bankers are part of the market, the market is the best system, let Adam Smith's invisible hand guide the allocation of resources. Government intervention is always bad. Undoubtedly the market is a vital instrument in allocating resources, however, the Liberal Economic view is also naive, and ignores crucial facts.

Let’s start with trade...

Two countries by specialising in what they have a competitive advantage in will become richer; as the cost of the product will drop... trade is good...... what if you have nothing of importance to trade? What if you are the country that has a very low value added product, the benefit is disproportionate to the country with the higher value product and for many in the country in the lower value product, the benefits will perhaps be minimal, just visit Bolivia and parts of Africa to see the truth in this.

Governments should intervene to nurture nascent industries, the government should try and encourage technology transfer, government interference matters... just look at Japan, Korea, China... governments have played a massive interfering role in helping their countries to develop. It is naive to think governments should leave everything to the invisible hand of the markets.

The market is better than an average or poor government but a cleverly constructed policy by a government to help develop industries to protect industries can have a major positive effect on a country's economy. The problem with this policy is it can be exploited by unions and politicians to protect industries which are not so vital for the future of a country.
So what does this mean for the future what does this have to do with investments banks?

In many ways the investment banks are exploiting the UK’s unwillingness to intervene in the functioning of the market. The UK benefits from the inward investment of capital however, are these mergers really in the long term benefit of the companies and UK plc? The Spanish after all have a tax advantage which is heping them fund the takeovers. Why are smaller foreign companies able to purchase large well run British ones? This is surely wrong and only possible because the British government is so willing to let finance dictate the terms of the running of the UK economy. Leave it all to the market is their mantra as long as we can over tax.

Governments should never ever leave everything to the markets and they should try and help their companies and nascent industries where they can. They need to avoid supporting hundreds of companies. They should though adopt policies to help their best companies grow and develop as Porter says create clusters of companies as competition is important, but it should often be slowly introduced... governments matter.... what is the danger with this policy?

In protecting it can also stop openness to the change, companies must always evolve this is the power of capitalism; governments will often provide funds for the most politically sensitive companies and not those that will have the most importance for the future of an economy. Perhaps just like the bank of England is independent so should the government protection board. It would have to be called something less politically charged. The government sets the policy and the board decides those companies and industries which should benefit the most. The banks shouldn't be targeted but the government should try and adopt policies which encourage and help the long term development of companies, and make Banks think about the long term. The governments should try and reduce the importance of investment banks in the running of the economy and their short term horizons. The government should encourage no foster competition in this area, so that the charges commissions and bonuses available will drop and hence they should begin thinking more over the long run….so that talented people are spread more evenly throughout the economy. Obviously it goes without saying that it should continually invest and improve infrastructure and education.

Stock exchanges lower their charge.. nah I say Investment Bankers should first start by lowering theirs. Policies to reduce the importance and charges of investment banks will never happen in the UK as it has allowed finance to become too important as a proportion of the overall economy, anything it does that effects the revenue stream of the financial community would be devastating for the short run in the UK, something no government will ever be able to sanction. It needed to encourage and develop a more diverse economy, now it is beholden to the financial community whether it is or isn’t in the long run benefit of the UK. The only country which could force change in this area because of the size and diversity of its economy is the US.

Thatcher took the brave decisions that transformed the UK economy, she was willing to make the tough choices and the wealth that flowed has powered the labour government these last ten years. She also helped unleash the city a money generating machine, however, does it now operate for the good of the economy as a whole over the long run?