Tory MP and Untrusteds– strange bedfellows
Jesse Norman, the Tory MP has written an interesting paper on what he calls “the Case for Real Capitalism”. Much of it echoes the mantra you’ll find repeated day after day on the Untrusted site by the armchair revolutionaries, anarchists and pseudo terrorists who inhabit that place. Strange bedfellow you might conclude.
The present crisis is not a mere economic downturn, but a fundamental shift of value, caused by excessive financial speculation and abetted by foolish political decision-making over two decades.
The US economy is stagnating. The Eurozone is in crisis. The UK may be dragged back into recession.
We are living through an age of crony capitalism, as illustrated by case studies of the Goldman Sachs flotation and the Lloyds-HBOS merger.
Few other businesses have been as pious in their official pronouncements, with the very first page of Goldman’s 2010 Annual Report proclaiming, as one of its core principles, that “Integrity and honesty are at the heart of everything we do.”
But few other financial institutions have so seriously breached public norms of behaviour and ethics in recent years, as acknowledged by Goldman’s payment in July 2010 of a record $550 million to settle an SEC court case for misleading investors over a sub-prime mortgage product.
In the words of the Financial Times, “The sheer scale of losses from the toxic HBOS loan book compelled Lloyds to use the government’s asset protection scheme to insure £260bn ($366bn) of toxic assets – 83 per cent of which have come from the HBOS loan book.”
The financial advisers to Lloyds, whose due diligence on HBOS had been so catastrophically bad, likely collected fees in the hundreds of millions of pounds from the deal. Some 24,000 employees have been laid off since the merger. Incredibly, Sir Victor Blank, the architect of the transaction, was invited by the BBC to guest-edit the prestigious Today Programme on Radio 4 over Christmas 2011.
Competition is welcomed, but made subject to proper regulation and supervision.
People are (should be) rewarded and respected for their aspiration, energy and innovation, not for being in the right place at the right time.
Crony capitalism is what happens when the constraints of law and markets and culture cease to be effective, or disappear; when entire industries lose their governing rationale; and when executives, freed from real accountability, are able to reward themselves at the expense of the shareholders. Entrepreneurship and value creation are replaced by rent-seeking, and certain groups become enormously wealthy without taking risk.
But crony capitalism is not restricted to the financial sector. It can also be found in other parts of UK PLC. Many of our largest public companies have become so complacent, unaccountable and bureaucratic that they resemble bad governments.
The total remuneration of the average FTSE 100 company chief executive has risen by more than 400 per cent over the past 12 years, to £4.2 million. Take-home pay has more than doubled to £2.5 million since 1999, moving from 47 to 88 times that of a full-time UK employee. The take-home pay of a mid-size FTSE 250 CEO has doubled to £1 million moving from 24 to 36 times median pay. Meanwhile, average real wages stagnated over the period.
The pay of FTSE 100 chief executives rose 13.6 per cent every year from 1999 to 2010, but the FTSE itself rose by an annual average of just 1.7 per cent. Not only that: pay continued to rise despite big falls in share prices in 2000-02 and 2007-08.
Overall, no reputable study has found a significant correlation between senior executive pay and long-term corporate performance. But one correlation is well known: the bigger the company, the bigger the pay package.
Takeovers always benefit senior managers, win or lose: the pay of the acquiring CEO and management team goes up, while the bosses of the bought companies are protected by golden parachutes—even though the evidence is that 60 per cent of takeovers destroy economic value.
An extra three million people found employment in Britain during this period—roughly 10% of the total workforce. Once they are factored in, it turns out that UK GDP per head in fact improved not by 50% but by 42% between 1992 and 2008. In other words, the UK’s growth record was even weaker than appeared at first sight, and only just above the average 40% growth of the “sclerotic” Eurozone.
In other words our “economic miracle” was a mirage.
As the Vickers Commission reports emphasized, between 1960 and 2000 the loans the banks made totalled about 20 times the amount of shareholder capital they possessed. After 2000, they started to rise vertiginously, up to nearly 50 times capital in 2007-8. When the crisis hit, the banking system was already in a desperately fragile state.
The increase in borrowing in turn fed through into a disastrous asset bubble in housing, which all but doubled in real value over the period, and into personal debt, which soared to nearly £1.5 trillion. Where only twenty years earlier personal debt had stood at below 60% of GDP, in 2007 it was, for the first time in history, higher than Britain’s entire annual economic output. Eighty per cent of that debt was secured on private property.
It should be an acute embarrassment to all concerned that there has been no comprehensive public investigation into the failures of the banking system, bank governance and the regulators. These failures ended up costing the British economy hundreds of billions of pounds. By comparison the failure of BCCI in 1991—a single institution—was the subject of an official inquiry.
But the CBI’s recent record on key issues such as bank reform, the Private Finance Initiative and executive pay has been lamentable. On all three it has consistently taken the side of big business against the interests of its smaller members and the taxpayer, and has done so in defiance of the facts.
This covers the first 16 pages of a 25 page paper and it deals with issues that are as important to the Labour Party as they are to the coalition, probably more so. Whether either has the guts to face the reality of accepting the analysis is doubtful.