The late Eddie George (а former governor of the Bank of England) was very fond of а little joke that went as follows: 'There are two types of bankers: those that can count and those that can't.' Some­times jokes capture profound truths. In all the fuss about bank bonuses, we have heard about labour market 'realities' (from the bankers) and moral and political philosophy (from everybody else). We need to think more about simple arithmetic.

All business people know that you can carry on for а while if you make no profits, but that if you run out of cash, you are toast. Bankers, as pro­viders of cash to others, understand this well. They just do not believe it applies to their own business.

In general, banks have no mea­sures of cash flow that work for banking. They do think about liquid­ity – can you borrow from other market participants, can you get money from the central bank? Being turned down in the market means curtains - it happened to Northern Rock in 2007 and Midland Bank а quarter of a century before, and forced its sale to HSBC.

That means banks are not con­scious of making cash decisions of the sort that other businesses face daily. But, of course, they frequently make decisions with cash conse­quences, and in the mid-noughties, they began to splash out. The recipi­ents were employees, in the form of bonuses, and, to а lesser but still significant extent, shareholders, in the form of dividends.

The existence of bonuses reflected the nature of financial businesses, where labour always represented a major cost, while revenues were unpredictable. It therefore became essential to make labour costs vari­able, as banks couldn't always guarantee high profits, and bonuses were the mechanism used to do this.

People in the City have always been paid well relative to others, but mega bonuses are quite new. From my own experience, in the mid­-nineties, no more than four or five employees of Barclays' then invest­ment bank were paid more than £1m, and no one got near £2m. Around the turn of the millennium, things began to take off and accelerated rapidly – after а pause in 2001-03 - so that exceptionally high remuneration was paid out between 2004 and 2007.

Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later, the whole indus­try was bankrupt. А simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

How could they pау this imaginary wealth out in cash to their employ­ees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the 'revenues' did not actually consist of money.

How did the shareholders let them get away with this? They were sitting on the gravy train too, enjoying the views from the observation car. How did the directors let it happen? Innumeracy and inability to understand accounts. How depress­ing the shame and folly of it all is, when one considers that the system was brought down not because risk management was deficient (though it was), nor because greed was rampant (though it was), but because bankers could not count.