All that'll do is drive financiers to Bitcoin.

Saturday, 02 March, Year 5 d.Tr. | Author: Mircea Popescu

Since re-whatevering my twitter account yesterday pretty much all I'm saying is "All that'll do is drive financiers to Bitcoin". Through no fault of my own, I submit. Looky :

Mark Calabria ‏@MarkCalabria
Will be moderating panel here at Cato, March 13. Would a Financial Transaction Tax Affect Financial Market Activity?

Mircea Popescu ‏@Mircea_Popescu
@MarkCalabria Only in the sense that finance will move to Bitcoin faster.

Mark Calabria ‏@MarkCalabria
@Mircea_Popescu Does the EU transaction tax proposal apply to Bitcoin transactions?

Mircea Popescu ‏@Mircea_Popescu
@MarkCalabria No, Bitcoin is structurally immune to imposed taxation.

Pretty simple really... any sort of fee or tax on transactions will have to compete with this space where the only fees are applied by miners. Does the government mine ? No ? Well then... what good is it, Bitcoin wants to know. Make sure you have a pretty darned good answer, the thing's merciless.

Moving on,

Sweeping limits on bankers' pay in EU? Wait till the market reacts.

That links to a pretty decent article titled "I think it will really hit them." I must quote liberally :

That was the comment of a Green Party member of the EU Parliament regarding the sweeping compensation restrictions on banker’s pay in Europe. The measure would limit bonuses to the level of salary without explicit approval of a supermajority of shareholders, and up to two times salary with such approval. This is part of a package of reforms intended to reduce banking risk on the theory that highly leveraged pay structures encourage the kinds of risk that got the world into the financial mess of 2008-2009. This theory has no empirical support, but that’s never stopped the social engineers and the occasional filmmaker who know better.

The idea here is that people who are completely irrelevant in this discussion inasmuch as they're neither shareholders nor actual bankers can somehow establish a maximum shareholders may pay bankers for their professional services. It's not that the idea has no empirical support, as the author suggests. It's that the idea flies in the face of centuries' worth of clear and incontrovertible ironclad proof to the contrary. Many, many centuries. Twenty. Thirty. Something like that.

Hugo Chavez thought he can establish a maximum food buyers may pay food sellers for their food. On paper this may sound great (if you're illiterate and regard anything written down on paper as "great" by default), but in practice it simply worked out to a lot of hungry people. The fact of the matter is that each tidbit of food as well as each item of value whatsoever has a price. This price may only be set by the market. If the price as set by the market is not met in the marketplace the respective item vanishes.

This works if the item is actual money (called Gresham's law in that context), this works if the item is toilet paper or soap in the Soviet Union of 1980, this works if the item is food in Venezuela of 2005. This works no matter what the item is : as long as people want it - whatever it is - then it will have a price, and as long as that price isn't met it won't be supplied.

What's at stake, of course, is the bureaucrat's endless quest for relevance. Much like an obnoxious child that keeps trying to inject himself in the focus of adult attention, governments everywhere and their minions live pretty much for nothing other than trying to inject themselves in the focus of social attention. They don't matter, in any practical sense, but they do draw a salary with no other string attached outside of "putting up a good show". The only consequence is the endless security theatre and concern trolling these ultimately failed and purposeless human beings fill every available crevice with.

The rhetoric is about "saving", of course. The world, the poor, the needy, the old ladies... whatever it is they saw Superman "saving" back in the day. The rhetoric is about "progress", of course, and about "a better world", of course, and about "the people" and about "a [insert item] for all" and so on and so forth. Nothing's changed on that score since Lenin, and in general nothing will ever change on that score : concern trolling is concern trolling, what's to change ? What can change ?

Consider for a moment what an investment banker (or fixed income trader, or M&A adviser, etc.) must do to bring in $50 million in fees. They must plan and continually adapt an aggressive and creative strategy to thwart their global competitors in getting those fees first. They must then execute that strategy by waking up in a different city nearly every other day, working 60 to 90 hours a week, driving their teams crazy, then calming them again or hiring their replacements in order to maximize their productivity, and continually wondering if they might miss the next deal by days or hours because their competitors are chasing them that much faster, all the while leaving behind their families time and again because a real or potential client needs to see the analysis or the man the next day. And they must hope the global economy is good this year, or it’s all for naught. They work that hard because (a) every incremental hour on the job is potentially worth over $1,000 and (b) they won’t be young forever.

This is not actually true, as best I can determine. On one hand I've never worked hard, on the other it's been more than a year since my time was worth as little as $1`000 per hour. The fact that I've never worked hard is however not here nor there in this conversation : my time is worth a lot because I am very very good, irreplaceably so. How hard I work has no place in this discussion.

The notion that the hen laying golden eggs "works real hard" is that much misguided bull coming from some deeply rooted need to "even things out". Guess what ? Things aren't even, and things can't be evened out. It's not that evil banker guy "works hard". It's that without evil banker guy everyone's well fucked, and that's the end of the story. Pay up and say thank you, because it's not you doing him any favours. It's precisely the other way around, he's doing you a favour by even getting out of bed in the morning.

Now, if a banker had to work about 3,500 hours to earn their $10 million bonus under the old compensation program, they might get away with working much more normal hours, including watching their kids grow up, to make, say 35 to 40 percent of their new bonus opportunity. Under the new compensation structure, that would mean getting their $5 million in salary, and about $3 million in bonus. (Go ahead, check the math.) Experienced bankers know the 80-20 rule better than most, and if they can make 80 percent of their previous pay with about half the flights and half of the evenings and weekends sacrificed to the job, more than a few will try that, especially the older, more experienced ones with fewer years left before they call it quits and open their hedge fund out of the public eye.

This is certainly true and to a large degree already happening. I would venture the guess to say that the top 80% of banking and finance talent aged 30 and over (so anything but the yet-unproven broncosi) works outside of the government-regulated financial sector currently.

Well, their banks can’t let that happen. Neither can they allow their fixed costs to jump that high, and they certainly can’t allow their top talent in New York or Hong Kong to go across the street to their competitors. So they will do something else. They will enact the kind of strict clawback regime that everyone has been waiting for. Eighty percent of the new, $5 million salary would be placed in escrow, and at risk of forfeiture. To the extent that the banker fails to achieve, say, $30 million in fees, his salary (in escrow) will be docked by twenty percent. If he brings in at least $50 million in fees, he will get his full $5 million salary plus $5 million bonus. That way, if the banker does pretty much what he does now, the bank can pay him pretty much the way they pay him now.

I doubt this system can actually be implemented. It's not entirely new, which is one of the pillars of my doubt : if indeed it was workable it'd have been a workhorse by now. I suspect it's not really workable, and not for lack of trying, going as far back as the 1880s. On the other hand it may be the case that inept legislation forces captive markets into suboptimal solutions - this is pretty much the story of the welfare state since the 1930s onwards. Perhaps the author is more in touch with these matters to give a call, they're peripheral to my interests.

When the Greenies and other socialists in Brussels catch on to this, they will no doubt enact additional laws preventing this particular work-around. We compensation advisers will then develop others. To the extent that the Greenies and socialists tighten the screws to the point where workarounds become too difficult or costly, then the City of London will fade as a global banking center, while the diehard, remaining European banks see their fixed costs as a proportion to their revenues move sharply higher. The net effect of higher fixed costs, of course, is higher risk to the company. I know, I know; the whole purpose of this regulation was to reduce bank risk, but that’s what happens when financial illiterates make financial rules. It’s a bit like watching novice campers trying to cut down trees with blowtorches.

This is absolutely true, and the campers with blowtorches figure is particularly apt. It's not just that blowtorches don't work for cutting down trees, you see. It's much worse than that : attempting to cut down a tree with a blowtorch also ruins the tree for any sane ulterior lumberjacks. It's all much akin to the story of the New York plumber who upon being called to do a job always asked if the caller had attempted to fix the problem by himself already, and doubled his fee in case the answer came back in the affirmative. To put it plain : after the current crop of failed and purposeless human beings masquerading as political leaders are done with "fixing" the problem, expect any compensation going to the people actually fixing problems to be roughly double what it would have been. And when I say double I mean actual value rather than nominal. The distinction is not without a difference : if Bernanke's approach is anything to go by that "double" will probably mean something in the millions per hour. Just the way this particular cookie crumbles.

As with all pay rules, the people living under the evolving EU rules will have their choice of unintended consequences:

1) Encourage endless additional complexity by creating new rules to stop the workaround of the old rules;

2) Increase banking risk by forcing banks to accept a higher fixed-cost structure (more than offsetting any benefits of new capital requirements that are driving this whole process);

3) Push their banking centers to other nations, further lifting the property values of New York, Hong Kong, and Singapore.

One way or another, the Greenie who commented “I think it will really hit them” will prove correct. But like the hapless shooters that lawmakers often are, they will hit the wrong target.

Nobody ever wins a war with the laws of nature, and certainly not for lack of trying. Few people are more keenly aware of those laws than the financiers. Consequently, yet another inept politician (who is a politician, let us remember, because he was not good enough to become a teacher, which is what people who fail to become lawyers do with their time) declaring his firm intention to spit upwards and remain dry is not really noteworthy. The pain following him will bring to any followers may be noteworthy, inasmuch as we care what happens to followers. Some say bankers really don't.

Be that as it may, what's the end result of this ? Why...

Mircea Popescu ‏@Mircea_Popescu
@overlawyered This sort of nonsense will simply drive some of the more competent ones to Bitcoin.

It happens to be very, very true. I'm in a prime position to know, incidentally. You want to know what drives Bitcoin adoption ? It's not just technical ineptitude of an entire sector. It's the general incompetence of multiple sectors, especially in its politically organised and belligerent form.

There's no argument that 50%+ of any group may at any time organise and demand stupidity be mandatory for the group so as to make life easier for everyone involved. The barb is that 2% of that same group will simply leave and form a new group, and that group will be about 98% of the original.


  1. They say that the value of an engineer is a direct function of the value of broken lab equipment. This is true with engineers, and exponentially more so with bankers. Kids, no matter how talented, are usually more of a liability than an asset. Once they get their experience the story changes, but that experience universally means significant cost for their employer. []
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  1. [...] breeds failure both in the direct (because if better isn’t better rewarded than worse then worse will run better out of circulation) and in the meta sense (because the discursive contortions necessary to justify the entire pile of [...]

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