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G20 Pittsburgh summit

Will the banks blow up the world – again?

by Brent Gregston

Article published on the 2009-09-20 Latest update 2009-09-21 15:03 TU

Merrill Lynch and Lehman Brothers - hit by the economic typhoon(Photos: Reuters)

Merrill Lynch and Lehman Brothers - hit by the economic typhoon
(Photos: Reuters)

G20 leaders have expressed support for tighter controls on the pay of executives and more capital for banks. Executive bonuses have generated public outrage and G20 leaders are under pressure to do something about it.

European leaders are demanding a "clawback" of excessive bankers' bonuses at this week's G20 summit.  

"The bonus bubble bursts tonight," said Swedish Prime Minister and current head of the EU Fredrik Reinfeldt after an EU summit on G20 issues. 

Meanwhile, the Americans and British say that banks have too much debt and need to raise more capital. The final G20 communiqué will probably acknowledge both positions while offering only minor adjustments.

Senior European Finance Minister and Luxembourg premier Jean-Claude Juncker says the 27 EU members have agreed to pursue ideas that could enforce "an absolute limit on bonuses, in other words a cap".

According to the Wall Street Journal, the US Federal Reserve might start reviewing the salaries for tens of  thousands of US bank employees to discourage risk-taking. But a top US presidential aide has ruled out fixed caps.

“We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis,” said President Barack Obama in a speech to Wall Street executives, “where too many were motivated only by the appetite for quick kills and bloated bonuses.”

The 2008 bonuses for Goldman Sachs, Morgan Stanley and JP Morgan, in particular, were “bloated” according to a report from the New York  attorney general's office. The three US banks, despite being propped up by massive taxpayer bailouts, paid out billions of dollars more  than they actually earned.

The financial system that plunged the world into global recession has not changed fundamentally.

The US economy is now dominated by five megabanks that benefit from regulatory exemptions and taxpayer handouts. Their too-big-to-fail status is an invitation to gamble on risky assets. If they lose money, the US taxpayer is left holding the bag.

“Capitalism without failure,” says the distinguished Pittsburgh economist Allan Meltzer, “is like religion without sin.”

Lawrence Summers and Tim Geithner, who currently advise President Obama and run the United States Treasury Department, both support the wave of deregulation that created the current financial system. He has now charged them with reforming it.

It is a system that has forced American taxpayers to provide the banks with cash bailouts, guarantees and loans -. the use of 14 trillion dollars(10 trillion euros) from the Federal Reserve, much of the seven trillion dollars outstanding at the US Treasury and 2.3 trillion dollars at the FDIC.

According to the the Washington thinktank the Center for Responsive Politics, Goldman Sachs, JPMorgan and Citigroup were three of the five biggest donors to federal candidates and political parties in last year’s election cycle.