Adam Smith said that if the price of a product or service remains inordinately high then it is not operating in a free market.
Now, if the price of banking services remain high, then there must be a lack of competition in the market for those services. This means that market forces are not brought to bear to reduce the prices through competitive pressure.
This is what causes the large banking profits and the large bonuses that go with them.
So instead of bashing the bankers, let’s take a long hard look at banking regulation in order to unleash the power of a truly free market to squeeze profits and hence bonuses.
Update: Sep 2010. The UK Banking Comission is now formed to look at “Promoting competition in both retail and investment banking with a view to ensuring that the needs of banks’ customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail”. Not quite exactly what is needed, but a step in the right direction. Though it will face strong head winds from the vested interests no doubt.
Robert Peston has alluded to this same point, here The private thoughts of bankers .
The point being that the bonuses aren’t the problem. The problem is the fact that the market they operate in is fixed to the extent that they can charge these high fees with no price competition to reduce them.
The various barriers to entry of these markets need to be investigated by the competition authorities.
And it looks like the OFT has woken up to this at long last:
http://news.bbc.co.uk/1/hi/business/10280626.stm
Hurrah for that !