What could Sir Martin Sorrell possibly want with £7.4m annual income? What could the FTSE350 company directors do with their 49% annual rise? As Adam Smith put it, there are limitations to ‘the size of a man’s stomach’. Of course, he also recognised they might want to satisfy ‘other wants and fancies … Cloathing and lodging, household furniture and … equipage.’ These might include what Thorstein Veblen referred to as ‘conspicuous consumption’, or for the truly inadequate: ‘conspicuous waste’. But Sir Martin Sorrell and his colleagues on the Prime Minister’s advisory committee on economic strategy, such as arch tax avoider Sir Philip Green, would struggle to spend even a small proportion of their income on such. So, according to the current economic orthodoxy – which it has to be admitted is based on some pretty quaint ideas – most of their income will necessarily find its way, as savings, into investment.
Some might get stashed under matresses and some might be spent on works of art, fine wine etc – the sort of things Ricardo noted as being in fixed supply and therefore reasonable stores of value with the potential for speculative gain. But the vast bulk of savings will be deposited with investment banks or other financial institutions where they are lo9oked after by professional fund managers. The orthodoxy assumes, though it is known to be an utterly false assumption, that it will be invested in real firms and real projects, creating jobs for the general population. Thus, even apart from Sir Martin’s claim to be worth 300 or more of his fellow human beings, his extreme high income is justified by its benign impacts for the rest of us. Any argument to the contrary must be motivated by base envy, and not worthy of consideration.
Continue reading Down the Financial Plug-hole
Kweku Adoboli lost some $2.3bn for his employer, Swiss bank UBS. A couple of years ago Jérôme Kerviel lost over $6.5bn for Société Générale, while a dozen years back, Nick Leeson cost Barings $1.3bn and their independent existence. In all, around $10bn of losses were accrued by these three nice young men who were no doubt the pride of their parents. $10bn may seem a lot, but it’s less than a billion a year – a small price to pay for the continued freedom from regulation which enables investment banks to continue their rogue trading, which is hugely profitable for them, even if it costs the rest of us an arm and a leg.
One of the recent articles on Adoboli’s exploits, suggested that banks had failed to learn lessons and had not controlled individual traders effectively. Another suggested that securities had grown in complexity making it difficult to assess the trading risks involved. The internal risk controls within UBS were said to be obviously inadequate. The same was said about Baring’s in its day. But UBS, Société Générale and Barings, seem pretty typical members of the investment banking community. UBS may have differed slightly in requiring its female employees to wear flesh coloured underwear, but otherwise they seem fairly normal. The lack of risk control in investment banking must be endemic.
Continue reading The Real Rogue Traders
The Independent Commission on Banking (ICB) is expected, when it reports next Monday, to recommend ring-fencing investment banking (the speculative ‘casino’ activities) from the traditional bank role supporting the real economy. The aim of ring-fencing is said to be to ensure the government never again has to use tax payers’ money to bail out the banks when their speculations go wrong.
However, ring-fencing is a hugely ambiguous concept. No doubt the ICB will deliberate at length on its chosen interpretation. But why bother? If the aim is to insulate traditional banking from the high risk, high return speculation, why ring-fence? Why not separate the two completely, as they were prior to deregulation? Then, if the ‘casino’ banks create a bubble that bursts, they can be allowed to go to the wall with a more limited impact on the real economy. But the bankers wouldn’t like it.
Continue reading Ring-fencing or Separating Banking Activities
Over the past few days, the famine in East Africa, the US loss of its S&P triple A credit rating, the Murdoch disgrace, the Eurozone indebtedness and Greece’s odious debt, and even the World Championship Hen Races in Derbyshire, have all been driven from the front pages, at least in UK, by the looting and burning street riots. Consideration of their underlying causes and recommended solutions have dominated the media. Prime Minister Cameron, for example, expert in policing and broken societies, apparently wants to appoint a native from gun-toting America, to show British police how to do their job.
This blog’s intent is to flag up the impacts of theory on practice. The focus is mainly on the management and governance of real economy organisations, because they are what pays for our education, health and security, and they are where most of us work. The broad contention which has emerged from postings on this site, is that the theory which impacts on those organisations has had a profound, very widespread and more or less wholly negative effect. And that almost certainly includes some motivation for the looting and burning riots.
Continue reading Looting and Rioting – Bob Diamond Again
These interesting times might take our eyes off the things that really matter. During a recent late night discussion on the BBC among the financial cognoscenti, one of the participants warned against getting drawn back into ‘the red herring of banker’s bonuses’. The real issues were the British government and police being in the pockets of the Murdochs, media plurality, the debt crises in Greece, Italy, Ireland, Portugal, etc etc and the future of the Euro, not to mention the changing world roles of the US and China as well as the developing famine in East Africa. Bankers’ bonuses were surely small beer against such giant issues.
Keynes argued that reducing taxes on the poor enabled them to immediately increase their spending which would stimulate growth in the real economy, thus reducing debt and creating jobs. Reducing taxes on the rich did not have that immediate effect, but, the argument ran in Keynes’ day, it enabled them to increase investment in the real economy thus having a long term positive impact on growth. That was then.
Continue reading The Red Herring of Interesting Times
The bonuses earned by the bankers, hedgers and various fund managers arise as a result of making fast, smart decisions about price movements in currencies, commodity prices, food, energy and key resource shortages, mergers and acquisitions and the like. The quick returns from such deals ensure that mini speculative bubbles keep getting inflated, and the smarter fund managers make money when the bubbles burst as well as when they inflate. And the smartest and biggest fund managers are able to create bubbles and control their inflation and bursting, that is except the really big, conglomerate bubbles that gather once in a while. So speculative trading continues to grow and the problem of how to spend the resulting bonuses keeps on growing too. It really is quite a problem.
It’s not as though it’s a one off. And it comes on top of a basic salary which very much more than pays for living expenses at quite a generous level. You can do the Veblen thing and go for some conspicuous consumption – conspicuous waste is really not regarded as attractive today even if one was so inadequate as to find it intrinsically appealing. But conspicuous consumption is still seen as admirable. The Financial Times ‘How to Spend it’ Saturday supplement provides some ideas. For example, £81,000 for the Philip Treacy hat as worn by Princess Beatrice (??) at the royal wedding, except it looks so silly. Or £78,000 for the ex-Kate Middleton St Andrews dress. Or a wrist watch, amount spent depending mainly on the weight of gold and diamonds. But really such spends, even if one felt desperate to bolster one’s identity that way, could only provide relatively minor contributions to solving the problem.
Continue reading How To Spend It
In the United States, Goldman Sachs, hugely profitable out of the financial crisis, still rules the roost. According to Senator Carl Levin, chair of the senate permanent sub-committee on investigations, in the report on Wall Street and the Financial Crisis, it’s a “sordid story” of a “financial snake-pit, rife with greed, conflicts of interest and wrongdoing.” Levin said he would be recommending Goldman executives be referred for criminal prosecution. But that’s barely news. Goldman have paid for their criminality before. In the UK this startling story is hidden away in a few short paragraphs on page 26 of today’s Guardian (15th April). It hardly qualifies as news. Because everybody knows.
Continue reading Why Don’t We Make the Bankers Pay?
In 1914 UK owned 45% of the world’s foreign direct investment. America’s peaked at 50% in 1967, but is now less than half that, with the UK nowhere. Today China has just 6% but growing fast. America’s manufacturing productivity gains were in decline since 1970s (2.8% pa), well behind Germany (5.4%) and Japan (8.2%). American R&D expenditures in absolute decline. In relative terms the America’s real economy is following UK into absolute decline.
In a forthcoming book – ‘The Road to Co-operation: Escaping the Bottom Line’ – these various economies are identified as on different positions of the economy life cycle: UK and US being post-industrial, Japan and Germany, industrial, and China and India, industrialising. But what does post-industrial mean?
Continue reading Economy Life Cycles
From time to time the real world where people eat, drink, sleep and have their being, is impacted by the very unreal financial world of speculative markets, and invariably to its huge disadvantage. The bursting bubble of 2007-8 was one such example, which some hoped might be a tipping point, leading to a more civilised future. But not just yet. Now, the speculating elements are picking over the humanitarian disaster unfolding in Japan, to seize the chance of a quick profit. And there is still no sign the ‘madmen in authority’ have the stomach for making any fundamental change. The real world will continue its devastation.
Continue reading Is Japan’s Misfortune the Real Tipping Point?
The almost universal acceptance of neoclassical economic theory, at least in Britain and the United States, has resulted in much destruction of professional management practice. The so simplistic dogma leads to a set of mindless clichés which have not only severely damaged enterprise management practice, but, also the wider management of the real economy, as has been seen over the past two years.
Continue reading Restoring Enterprise by Burying Dogma