They’re our predators

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As giant banks such as Goldman Sachs, Wells Fargo, and Bank of America prepare to pay substantial year-end bonuses to their employees, we can expect a firestorm of angry complaints from the public, accompanied by calls for tighter regulation and/or punitive taxation.

It’s easy to argue that the big banks are predators, not producers.

Far from lending to small businesses and helping to revive the economy, the banks seem to concentrate upon funding arcane trading strategies and manipulating markets for their own benefit. Many of us believe that these “malefactors of great wealth” are only in business because terrified officials in both the Bush and Obama administrations saved them from bankruptcy.

If that’s the case, shouldn’t the government just forbid these companies from paying billions in bonuses, and make them invest in Main Street businesses? And shouldn’t we re-regulate these smooth-talking scoundrels in bespoke suits and  tax their bonuses?

Such beliefs stem both from an unreasonable desire for revenge and a misunderstanding of the banking business. Up to half of employee compensation in the invesment banking business has been in the form of profit-sharing bonuses, with the biggest bonuses going to those who produce the biggest profit. No profit, no bonuses.

Last month, the English government decided to levy new taxes upon both bankers and highly-salaried executives. Bank bonuses of more than 25,000 pounds ($40,000) will be taxed at a rate of 50 percent, as will incomes of more than 150,000 pounds.

Such measures may have pleased many British voters, who are just as exasperated with their unruly bankers as are their American counterparts.

But when contemplating such satisfyingly vengeful legislation, we need to realize that international banking is a critically important component of the American economy.

Sixty years ago, America’s unrivalled economic power vaulted New York into the position that it enjoys to this day — the capital of the world financial industry. Much has changed since then, but American banks and American bankers are still dominant. Hundreds of thousands of Americans are employed by international banks, and millions more benefit from their presence.

The industry depends upon reasonable tax rates and consistent, appropriate regulation. Absent either, it will eventually disappear. International banks have no factories, no assembly lines, no mines, no railroads — just highly intelligent people who understand how to deploy capital.

It’s an unfortunate fact of life that the international financial system is fragile, easily gamed and vulnerable to disruptive innovation. That systemic defect will only be magnified if, by excessive taxation and regulation, we exile our native predators to a less restrictive environment.

The big banks may indeed be predators, as ruthless and efficient as the great white shark — but they’re our predators. It’s difficult to imagine that a world financial industry based in, say, Dubai would care anything for American economic interests.

Unpalatable as it may seem, our best interests are served by leaving the big dogs alone.

As London Mayor Boris Johnson said earlier this week, predicting that 9,000 bankers might leave London as a result of the new tax rates:

“Such ill-thought-out plans come at a time when there is light at the end of the recessionary tunnel and London is excellently placed to compete and prosper,” Johnson said. “That prosperity will be threatened and the whole U.K. economy will suffer if our financial sector is denied a stable tax and regulatory regime.”