Quite amazing from Georgie Monbiot

It\’s bonus season, the time of year when bankers show us what they really believe. As soon as they get their money, they spend much of it on land and houses. They know that these are safer investments than the assets in which they trade. If they trash the economy again, they at least will survive.

Well, yes, it\’s called \”diversification\”.

It\’s at the very heart of all and any sensible savings or investment structures.

You certainly don\’t want to have your savings where your job is: you don\’t want you pension to be in he shares pof the company you work for. You want them to be in other assets, entirely (as far as is possible) unrelated. So if your job goes boom then you\’ve got your savings: or if your savings go boom then you\’ve still got your job.

And the same is true within an investment portfolio. You want to have a little of this, a little of that, spread the risks around, so that one piece or sector of the market going boom doesn\’t wipe you out.

There is another little point to make though. Let\’s just for the fun of it, set up a situation whereby a trader in mortgage bonds gets his bonus. Instead of buying land or a house, he thinks to himself, well, you know? I\’m one of the world experts in mortgage bonds. I should put my bonus into mortgage bonds. Trade them, just like I do in hte day job. In fact, with all that knowledge from the day job I\’ll be able to make a very good returon on my money.

What an excellent idea, eh? And we\’ve even got a name for this sort of behaviour:

Insider trading.

The rest of George\’s column is entirely bizarre. Quite simply he\’s complaining that the Government had a negotiating position, which it negotiated for, and which it didn\’t manage to achieve, over bankers\’ bonuses.

And that\’s it. George seems entirely ignorant of the point that this is what politics is: negotiation between interest groups and compromise. That\’s actualy why we have politics, so that we can have negotiations and compromise.

9 thoughts on “Quite amazing from Georgie Monbiot”

  1. Off-topic, and sorry if this has already been pointed out, but have you seen this?

    “Sign #1: A dubious name change

    Rare Earth Minerals (LSE: REM) used to be called Zest. It also used to be in the (unprofitable) business of music business and production.

    Then it changed its name.

    Zest only mooted its new name and direction in mid-November 2010, yet by the end of the year the share price had more than quadrupled to 1.60p. The firm is currently valued at £11.5 million.

    The only concrete change to the business that I can see is a change of its stated strategy, proposed to shareholders in its final results of 19 November:

    The Company is seeking the authority of Shareholders to acquire direct and indirect interests in exploration, development and producing Rare Earth Minerals and/or Metals projects and assets.

    A share price rocketing on trendy buzzwords will bring back bad memories for anyone who lived through the dot com days. Back then, sticking the appendage “.com” onto a listed company’s name did far more for a share price than any amount of hard grafting. This is therefore a worrying development — although hardly only the same scale so far.”

    http://tinyurl.com/6f9k77g

    Tim adds: I have indeed seen it and had a little chortle about it. I think I might even know which company they’re going to buy as well…..

  2. “Let’s just for the fun of it, set up a situation whereby a trader in mortgage bonds gets his bonus. Instead of buying land or a house, he thinks to himself, well, you know? I’m one of the world experts in mortgage bonds. I should put my bonus into mortgage bonds. Trade them, just like I do in hte day job. In fact, with all that knowledge from the day job I’ll be able to make a very good returon on my money.

    What an excellent idea, eh? And we’ve even got a name for this sort of behaviour:

    Insider trading.”

    surely that’s not a definition of insider trading, not unless the manager has some sort of priveleged information.

    also it’s not miles away from the sort of remuneration structure that some asset managers are looking at and some already have (ie making portfolio managers invest some of their own money alongside clients’).

  3. Tim, why do you praise “diversification” in this context but not when it comes to countries and comparative advantage?

    (asking not because I’m ‘having a go’ but because I’m ignorant.)

    Tim adds: It’s a matter of scale more than anything else. Finance (the wholesale stuff, The City) is 3 or 4% of the UK economy. Manufacturing is 13% or so I think. That looks like we’re doing what we’re good at (comparative advantage) while still being diversified (don’t put all your eggs in one basket).

    I would be horrified if wholesale finance became 100% of our economy (no diversification) just as I am horrified by people saying we should stop doing what we’re internationally good at (comparative advantage).

    As ever in economics there’s no “solution”. There’s just a series of trade offs. Tensions if you like, between different processes. Is it possible to be too undiversified? Sure. And is it possible to not exploit your comparative advantage? Sure. And no one really knows what the right balance is which is one of the reasons we have markets, because no planner can ever gather sufficient information to make the decision.

  4. Because diversification is concentrating on minimising critical risk and comparative advantage is concentrating on maximising economic benefit.

    If you think about it, comparative advantage is actually quite risky – if you can produce widgets better than anybody else and your entire workforce become expert widget producers, then your economy could be wiped out if the i-widget is invented (providing that the production advantages are not linked).

    Having a diversified economy limits the risk of technical or resource shocks – it is just less immediately productive than one focused on comparative advantage.

    And, frankly, future breakthrough advances are more likely to come where you have a critical mass of people working in the area (and they have the contacts for investment, working through regulatory hurdles, persuading the customers, etc).

  5. We also know that bankers are, by and large, status seekers (aren’t we all to some degree?) and in this country one of the best ways of showing off your status is the size of your house. We can also expect a large number of said bankers to to trot down to the local Porsche/Ferrari etc dealer to purchase one of those other favoured symbols of status.

  6. One of the sadder memories from the NR collapse was the retired bank manager on Question Time who had had his entire retirement plans tied up in the Northern Rock shares he was granted as an employee…

  7. If you are a trader of mortgage backed securities, you are most likely to lose your job when the value of such assets is falling, likewise for traders of any other commodity.

    Investing in what you do for a day job, would be like a Publican in Iran in 1978, investing in Brewery shares.

  8. What little ‘negotiation’ the Left has done historically tends to be at the point of a gun………the proposal normally consists of ‘You go to the work camp/re-education facility and we won’t shot you – yet.’ As most people take advantage of this offer, it must be a very good negotiation technique.

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