Saturday 1 January 2011

Saturday, January 01, 2011 Posted by Jake 1 comment Labels: , , , , , , ,
Posted by Jake on Saturday, January 01, 2011 with 1 comment | Labels: , , , , , , ,

“And, being fed by us, you used us so
As that ungentle gull, the cuckoo's bird,
Useth the sparrow--did oppress our nest”

William Shakespeare, King Henry the Fourth, Part I

Money is the key to releasing all the skills and assets in a nation. Which is why those who manage the flow of money, the bankers and financial traders, have been able to enrich themselves in a way no other non-criminal profession has. Possession, after all, is nine tenths of the law. And once you’ve put your money into a bank or an investment, it is de facto in the possession of the banker.

You can do a lot of things with money. In fact, that is the entire point of money – you can do a lot of things with it. Money, after all, is the physical manifestation of liquidity. The economy is ultimately based on people exchanging goods and services produced by their own labour and assets for goods and services produced by other people’s labour and assets. Money is nothing more than the token used to conduct this exchange.

If money didn’t exist, the only way a carpenter could get his teeth fixed would be by finding a dentist who happened to need some carpentering. The carpenter would build the dentist some shelves, and in return, the dentist would fix the carpenter’s teeth. The dentist too would only be able to employ those tradesmen who happened to have a toothache. All our skilled carpenters, bakers, butchers, doctors, dentists, computer programmers, and everyone else would spend virtually all their time finding a counter-party who not only needed their particular skill but could also provide the particular skill they needed in exchange.  And have very little time left to use their actual skills. Imagine, if the dentist’s house was burning down and the fire truck arrived, only those firemen with bad teeth would take the trouble to fight the flames!

Under these circumstances, the only way to have a Rapid Response fire brigade would be to have literally thousands of firemen waiting at the station. When there is a fire at, say, a butcher’s shop, it would require a show of hands of those fancying a pork chop for dinner to raise a crew.

Money is the token that enables people to offer their skills to anyone with money. The dentist pays the fireman, through his taxes, with money – so even those fire fighters with good teeth will save his house, chattels, and loved ones. The dentist fixes the teeth of tradesmen he has no need of, providing his dentistry skills in exchange for their money. And he uses that money to pay for, among other things, his taxes which makes sure firemen are available regardless of the state of their molars.

There is a limited demand for everything except money – because money enables the possessor to demand everything. A baker may refuse to sell his bread, but there will always be another baker who will take the opportunity to fill the gap. The stubborn baker is ultimately left with a heap of unsold mouldy bread. Similarly, a dentist who refuses to fix teeth for a day is unable to horde that day. The dentist’s asset is his skill and the time to use it – and time flies. But holding onto money is its own reward.

While there is an unlimited demand for money, there is a limited demand for bankers. It is this limited demand that enables bankers to create a rigged market for their own services. And by calling this rigged market ‘free’, they justify their excessive pay. 

The free market is a wonderful thing – making many things possible, including incentivising firemen to enthusiastically save dentists’ houses. The principal is that in a free market people get paid what they are worth, because if they charge too much they won’t get any business and won’t get paid at all. The financial services industry, however, is in a unique position. It has no problem getting money, because that is what it is for – it exists to manage other peoples’ money. The top executives of the industry, finding themselves in the happy possession of the pot of money with responsibility for ladling it out, can see little reason not to serve themselves first. The limited demand for top bankers means there is no need to admit to the summit of the profession those who see otherwise.

There are three main forces constraining excess - the free market, morality, and regulation. The most effective of which is undoubtedly the free market, so long as it actually is free. Having rigged the free market and bred out, by selective recruitment, the morality, is the financial services industry now only left with regulation?

The reality is regulation is the final refuge to which we do not quite yet have to resort. We need look no further than our own FSA to see how ineffectual regulation can be. Now that governments, particularly in the USA and UK, own a substantial portion of the financial services industry the opportunity exists, for a limited time, to break the rigged market in executive pay. Vince Cable, Business Secretary in the coalition government, minister, said it himself, in his interview on the Andrew Marr Show on the 19th December 2010

Dr.Vince Cable, Secretary of State for Business, interviewed in the BBC’s Andrew Marr Show on 19th December 2010.

If we are expecting the bankers who manage our pension funds to push down the pay of bankers, then we must be bonkers. On the other hand, the British and American governments are owners of a large slice of the financial services industry following the bailouts. What are they going to do, not as legislators but as owners? Will they take the action Mr.Cable recommends, or will they divest themselves of this embarrassing power by quite literally selling out? As the US government did in early December 2010, by selling its remaining shares in the rescued Citigroup? The British government is still the controlling shareholder in Royal Bank of Scotland Group (84%), and the largest single shareholder in Lloyds Banking Group (41%). Will the UK government bluff its way through with impotent pronouncements until it too can sell out? Or will it allow the taxpayers of the UK to exert the market power that comes from this ownership in our name?

The question is, will excellent professionals work their guts out for less than £1million a year, including perks? They do in every other area of endeavour, from running major organisations, commercial and governmental, all the way to being brilliant doctors and academics, and excellent accountants and policemen. It is only in the financial services, so they tell us, that £1million isn’t enough. Will a bond trader refuse to work for £250,000 a year?  If that is the rate the banking industry offers him, then what is his alternative? Do so many of them have Beckham like football skills such that they can disdain this reward, flounce away from the banking industry altogether, and earn a better salary on the pitch at Wembley?

Top bankers, shedding crocodile tears, point out that the main reason they pay themselves so outlandishly is to help themselves resist the temptations of other banks’ outlandish benefits packages. The great power of democracy, so great that it is astonishing it is allowed to survive, is that even bankers need to be able to provide some justification for what they do to the ordinary man on the street. Not to provide themselves with cover directly, but to provide a smokescreen for government inaction to avoid the judgement of the voters. The great limitation of democracy is it is vulnerable to the short attention spans of the voters. Money can buy anything. Even now we can see money being spent on public relations and obfuscation consultants with the objective of filibustering the attention spans of the voters. The chances are they will succeed, and will continue their excessive pay with scarcely a hiccup. Something the bankers and the government are smugly confident of.

Why do the bankers get away with it? Like cuckoos in the nest, feeding on the deposits of small investors and savers? In October 2008 appearing in front of a US congressional committee looking into the collapse of the banking sector, Alan Greenspan, former chairman of the Federal Reserve and former evangelist of light regulation, admitted

Testimony of Dr.Alan Greenspan to the Committee of Government Oversight and Reform, October 23 2008.

Cuckoos live their parasitic existence by disguise, making their hosts believe they are part of the family. The reality is the cuckoos push all aside, taking the largest share of what is brought to the nest – the others only get to eat once the cuckoo is full. The regulators and governments all fail, either through stupidity or wilfully, to recognise that the self-interest of powerful individuals in an institution is rarely the same as the self-interest of the institution. Even less so when they can quickly make themselves independently wealthy, as they have done in the financial services. Like cuckoos, they are just passing through.

1 comment:

  1. Further evidence that shareholders do not have the power to control executive pay, reported in the BBC:

    "Bank of England deputy governor Jon Cunliffe said banker pay had failed to adjust sufficiently since the crisis.

    Mr Cunliffe said banking staff had been receiving "a larger share of a smaller pie" relative to shareholders.

    At global banks, profits attributable to shareholders averaged 60% of the pay bill in 2007, but by 2013 this had fallen to around 25% of the pay bill, he said."


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