Home—Blog—The banks have brought it on themselves
Mar 12, 2013, 01:38
Posted byMerryn Somerset Webb
Comments (19)
I wrote earlier this week about the effect that the distribution of wealth might have on prosperity. The general argument is that there is a limited number of innovators in each population. There is also a limited amount of capital.
The key to economic success, then, is to have an environment in which enough innovators can get enough capital to create growth. Clearly, the more widely wealth is spread around, the more likely this is to happen.
The problem today? It is getting less rather than more widely spread around, something clear in almost any statistic you care to look at. A note from the High Pay Centre pointed out earlier this week that there are now 26,000 Britons taking home more in a month than those on the average wage take home in a year (so over £20,000), for example.
At the same time, the share of national income going to the top 1% of the population has risen to 15.5%. That’s more than double the number in 1979 and brings us roughly back to where we were in the 1930s.
A flick through the papers tells you similar things at an anecdotal level. This week’s Observer came with a double-page story on how the “new global elites” are buying up Europe – wealthy Russians are apparently popping up in £40m estates all over Tuscany and Sardinia.
You might say that this doesn’t much matter. After all, we all have more access to capital than we did in 12th century Italy, for example (thanks to everything from banks to equity markets to Zopa). So, if we have a fabulous idea, we are bound to be able to get the money to develop it from somewhere.
You may be right. We’ll have to wait and see. But whatever the reason, history does consistently show that relatively equal societies with robust liberal institutions grow faster than the opposite (please no comments about communism – it isn’t really the same thing and you know that). It is also the case that the residents of relatively democratic states don’t like extreme inequality. And that they particularly don’t like it in recessions.
One of the common reactions to my initial column on this was to berate me for suggesting that there should be any more government intervention into the distribution of wealth. But I didn’t actually suggest anything of the sort.
I’ve spoken about this problem many times over the last few years. And on each occasion I have pointed out that governments don’t usually get smaller in times of crisis. They get bigger – moving into all sorts of areas that were once considered none of their business.
But early on the in the financial crisis, at least big corporates and banks had a something of a choice. They could either be seen to be doing something about excessive pay bonuses, and so on themselves, or they could sit back and wait for popular protests to push governments into doing something about it.
Inexplicably, they appear to have opted for the latter. Hence the bonus restrictions out of Europe, the endless talk of wealth taxes and the like.
I would have liked the solution to rising inequality to be less government (so more competition and fewer oligopolistic industries) rather than more government, but that isn’t the way it looks like it's going to go. And those running our big firms and our banks? They have only themselves to blame.
Published in Blog More articles by Merryn Somerset Webb
By Matthew Lynn, May 17, 2013
May 16, 2013
By Bengt Saelensminde, May 15, 2013
By Merryn Somerset Webb, May 09, 2013
Leave a comment
(12 March 2013, 04:53PM) Complain about this comment
"wealthy Russians are apparently popping up in £40m estates all over Tuscany and Sardinia"Isn't the more important question to ask what are the Italians who are selling off their Tuscan estates doing with their £40m windfall ?
(12 March 2013, 05:15PM) Complain about this comment
#1 Shinsei. It goes to Switzerland ,from what I've seen. Another important article from Merryn. One of the problems is modern society's propensity to see the innovator as some sort of unparallelled genius who deserves a reward out of all proportion to his contribution. Barnes Wallis was paid as a mid ranking civil servnat at the at office.I question the 26,000 figure. It must be higher. HMRC says we have 400,000 millionaires and 130,000 earning over a million. THP on average pay is £22,000. To get 12 times that needs an income of only£465,000pa.
(12 March 2013, 05:17PM) Complain about this comment
Oops. Forgot to say I agree. The Banks have brought it on themselves, but the article does not really indicate what they brought upon themselves. Does Merryn mean a max bonus of 100% of salary or the new reserve ratios, or both?
(12 March 2013, 05:28PM) Complain about this comment
#2 Sorry glitch . Barnes Wallis worked for the war office.
(12 March 2013, 05:43PM) Complain about this comment
Boris, what on earth are you rambling on about yet again? You don't get out much do you?
(12 March 2013, 05:49PM) Complain about this comment
Thank you Merryn. Interesting and thought-provoking.But how are you - and your MoneyWeek colleagues - on investing in banks these days? Any softening towards, say, Lloyds or RBS?
(12 March 2013, 08:41PM) Complain about this comment
Just a few facts..Spreading wealth around is not the same as spreading capital around. Merryn's article appears to confuse high pay levels and the availability of capital for wealth creation?The increasing share of national income going to the top 1% actually increases capital availability, because there is a limit to what the rich can spend it on, and they have to save the surplus in banks etc which, in turn, loan it to entrepreneurs. If it were to go to the middle and working classes they would tend to spend it, consume it, and destroy capital. We have more capital compared to history, because banks now gear up their capital/loan ratios to mad levels. RBS was lending 60 times capital, Northern Rock 100 times. French banks 40-60 times, German banks 30 times. The historic average is about 9 times. New rules, Basel II etc, are suggesting a return to about 10 multiples. That is why all your entrepreneurial capital is diminishing... it was all unreal in the first place!!
(13 March 2013, 10:55AM) Complain about this comment
EU control of bankers should be focussed on their business practices which have allowed them to pay themselves bank robbers sized earnings, not on the earnings themselves. It's rather like the law allowing bank robbing provided the amount stolen was limited. Surely it's the lack of effective competition that allows the large scew in earnings that we are suffering.
(13 March 2013, 10:59AM) Complain about this comment
@Boris MacDWell, possibly the £40m ends up in a Swiss bank account. But don't you think it more likely that an Italian aristo selling up the Tuscan estate that has been in the family for generations is likely to distribute the £40m between his kids. That provides a substantial pot of capital for all manner of innovative production (which is what Merryn is talking about). Instead of a family keeping up a Tuscan pile doing holiday lets and organic olive oil they can be internet entrepreneurs and retailers and back all manner of interesting start ups.And Barnes Wallis was Head of R&D at Vickers Armstrong. And I'm sure one of the richest residents in his agreable Surrey village.
(13 March 2013, 02:19PM) Complain about this comment
It is not true there isn't enough capital in the economy. The world is presently awash with capital seeking somewhere profitably to go. Much of this capital is being generated in East Asia where the average worker, even on low pay, saves about 40% of income. In the UK it is about 4-6 %. Saved income finds its way into banks and investment funds and so onto entrepreneurs. East Asian capital has been flowing into the West, not for entrepreneurial use, but into gilts and treasury bonds for governments to pay for the Welfare State their citizens actually cannot quite afford. So the problem is not the uneven distribution of wealth in our society, but rather misallocation of capital due to government greed and intervention, squandering and consuming capital through its tendency to expand State services to bribe voters into electoral support. All the wishful thinking in the world, all the righteous desire for wealth equality, isn't going to change that.
(13 March 2013, 02:26PM) Complain about this comment
In East Asia there is little social security so it is necessary to save for old age. In the West there is no need to save because other people, via taxes and the State, will look after your every desire and need. With fewer people owning their home and rents averaging £175 per week, consuming all the state pension, what will people with no savings live on? They will live on other people of course. With everyone living longer, soon half the nation will be supporting the other half, paying their rent, buying their food, clothes etc. Unsustainable? A 100% property owning society is imperative for the UK's future survival. Shrink the Welfare State.Presently, many corporations and SMEs are sitting on large cash deposits because they see flat demand everywhere and little incentive to invest in new production. Sensibly, they do not want to take on unnecessary debt which banks could call in leading to insolvency. Only failing zombie businesses crave more capital for survival.
(13 March 2013, 02:32PM) Complain about this comment
Our present coalition government appear to have little resolve and have U-turned on so many reforms (today its minimum alcohol pricing and the list runs to about 36 back-downs )! I am fairly sure that the banks are confident of using their considerable influence and batting off any reforms they don't like and carrying on business as usual?
(13 March 2013, 03:16PM) Complain about this comment
Why does everyone argue that the poor will squander all their money? It may be true, but in the squandering, they are making economic choices. That leads to price discovery, and some enterprising individual will provide a need that leads to better wealth, as a result of poor people spending money.The alternative; that rich people must fuel society's entrepreneurial spirit by being gracious enough to lend, and therefore own, to the entrepreneur, is bull.I don't buy Jay's point about capitalisation at all. The economy, the real economy, is really about money flowing in a cycle from industrialist to labourer, to consumer, to retailer. With goods and services flowing in the opposite direction. Investment/Capitalisation is really just a magnification on this flow. It allows more to be produced with less money. If, at any point, the cycle breaks completely, then your consumers don't have jobs, so can't buy anything.
(13 March 2013, 05:14PM) Complain about this comment
#9 Shinsei. The kids still put the money in Switzerland. Go to the Italian Tyrol and watch the businessmen carting cash over to Zurich every week.Yes, Barnes Wallis worked for Vickers and had a modest house near Effingham. But he had to be paid as a civil servant during the bouncy bomb development. At firms like Metro Vicks in the 1950's chief execs earned about 4 or 5 times the factory floor staff. Even when I started out the chairman of BT got just 8 times average pay. Now they moan if it isn't 50 or 60 times, with an easy win bonus to boot.
(13 March 2013, 07:05PM) Complain about this comment
The explosion in top execs. salaries is a recent development, but also so is the award of massive share options such that after a five year stint as CEO they can retire or take a non-exec sinecure. In the period that BM refers to main board directors were members of the same pension fund as the staff but no longer; with millions of share options they don't need a final salary company pension so they've dumped them. Clearly, if people are allowed to pay themselves however much they like - they will. Even BBC staff - who as public servants should be on civil service scales - are grossly overpaid and are now the bench mark for media salaries.
(16 March 2013, 04:22PM) Complain about this comment
It seems particularly unjust that the banks having been rescued by the public finances are able to pay such high salaries with impunity. I would suggest that the government introduce a progressive reduction, reducing to zero over three years, on the guarantee to members of the public with funds in the banks incorporating investment banking operations.Concurrently it should maintain and increase the amount guaranteed to users of banks (possibly new banks) which are limited to the traditional savings and lending functions. Savers would be protected, but the megabanks would become independent of public support and have to take the consequences of their mistakes.Perhaps Merryn could espouse this idea, and use her opinion leading role to encourage its consideration.
(17 March 2013, 01:35PM) Complain about this comment
The bank guarantee is worthless so why increase it? Cyprus has just exposed the biggest banking scam, your money can be taken/stolen despite the guarantee.
(17 March 2013, 10:16PM) Complain about this comment
"and they have to save the surplus in banks etc which, in turn, loan it to entrepreneurs. If it were to go to the middle and working classes they would tend to spend it, consume it, and destroy capital."History is against you here. The industrial revolution was not funded by banks, it was funded by the middle and upper classes, as shareholders. There is a crucial difference between banks and shareholders; shareholders want the business to do well, after all it's their business. Banks don't give a damn about the business, so long as they get their interest every month. I would say that could be one reason why economies do better with a more equal (note more equal, not equal) distribution of wealth, because you get more funding from shareholders who have an interest in the business and less from banks and other lenders against securities that don't.
(19 March 2013, 07:44PM) Complain about this comment
Important point for any banker reading MW. Banks are much less unpopular than Scotland. Shift the agenda and dodge some bullets.
Name This will be the name displayed with your comment.
Email This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Comment Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.Sign up FREE to Money Morning here.
16 May 13
14 May 13
16 April BBC Radio Scotland(From 1h 45m in)
21 March Radio 4: Moneybox Live
12 March Photogallery of Merryn's talk at BAB London
Become a smarter investor in just 3 minutes a day.
MoneyWeek is not responsible for the content of external internet sites.