24 Jan 2012

Mervyn King rails against ‘small elite’ of bonus-addicts

As I arrive in Davos, a gathering of the global 0.0001 per cent, I receive a copy of a well-timed speech from Sir Mervyn King.

It is the Bank of England governor’s piercing assault on bankers that sticks in the mind from today’s important speech in Brighton. He doesnt quite join Occupy the City, but he does suggest that British capitalism’s very legitimacy is up for grabs if bankers go too far on pay.

Sir Mervyn told an audience in Brighton: “The legitimacy of the market economy will inevitably be questioned if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers”.

He said those now taking decisions on bonuses needed to understand that public confidence rests on “the acceptance that rewards are fair”.

This is stronger that we have heard from Sir Mervyn before. There is a reason. The BoE is in the process of acquiring new powers over the financial system. In the interim they have moral, not legal, authority to cajole banks over pay and business lending.

Late last year he released a report calling on the banks to limit bonuses and share dividends, and sit on a buffer of capital, or deploy that capital towards pumping business lending into the economy. Today’s speech is the words of a man who I fear is being ignored by the bankers.

Perhaps he is too pessimistic. I think the banking world, at least the City, is at another unique conjuncture where there could be a once-in-a-lifetime shift in banker remuneration. As I hear, the real story on dealing room floors is how low the bonuses are, and the absence of bargaining power from superstar traders pulling hissy-fits.

To be clear, the rewards are still six-figure, but there are plenty of bankers getting the dead duck – a zero bonus, and one less digit on their pay packet. For this to be a significant change, all the banks would have to go together.

It is a dynamic that should have kicked in in 2009, when the banks were bailed out, but US investment banks refused to play ball with City efforts to rein in banker pay. Angry US CEOs rang Alistair Darling making threatening noises over UK bond purchases.

Let’s see in the numbers, but as one big bank CEO told me during the failed 09 attempt to rein in bonuses, it’s in society and the shareholder’s interests to pay bankers less.

The dire outlook for the economy is outlined ahead of tomorrow’s GDP figures too. It’s not just the £1tr debt pile, or the 15-year-high in unemployment, or the fact that the IMF downgraded UK projected growth by a full percentage point (the UK will be slowest growing major economy outside the eurozone). In this speech, the BoE appear to be buying into the story of Britain’s painfully slow recovery as a result of a “balance sheet recession”.

George Osborne has used that phrase before too, and it’s most closely associated with the thinking of Japanese economist Richard Koo.  Koo is very down on quantitative easing, and blames premature deficit reduction for Japan’s malaise, pointing out that plans to halve the deficit in Japan collapsed the economy and doubled it instead.

Sir Mervyn does not follow that logic train. There’ll be some  relief that the public finance numbers show core Whitehall spending coming down. The question is just how much will spending on the automatic stabilisers: higher unemployment benefits etc, wreck that maths.

Read the speech, it’s only six pages long. More from Davos tomorrow. We have a big interview tomorrow too.

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4 reader comments

  1. Saltaire Sam says:

    In the words of the song ‘don’t talk at all, show me!’

    I’m sick of people like King and the polticians saying how much they deplore the excess, wringing their hands and pleading with the fat cats to behave.

    It is obvious now that these people cannot be embarrassed into behaving like a decent member of society. they have to be forced.

    There’s not a moment’s hesitation in imposing pay freezes on low earners, even cuts in places, but when it comes to the fat cats, nothing but words.

    The excuse is always that we cannot intefere with the markets, with globalisation. We mustn’t drive the wealth and job creators away.

    That would be fine if they were creating jobs but they are not. And they are only creating wealth for themselves.

    Instead we are lumbered with three main parties of wozgonnas – we was gonna do something about it but we were frit.

  2. Saltaire Sam says:

    Let us assume for a moment that our politicians are not a cosy bunch of wealthy elitists who have no idea of what it is like to live in the real world.

    How, then, to explain their actions?

    I think they are just in denial. They cannot believe that the capitalist model that has developed and moved away from its original form, has failed.

    Despite the evidence – banks, the very heart of the system, only surviving thanks to public funds – they simply can’t believe it in their souls.

    They are by nature suspicious of the public sector – even though they are part of it and need it to make capitalism work through infrastructure and bail outs. So they are happy to ‘reform’ the NHS, the benefits system no matter how much collateral damage in terms of human misery.

    Yet they are not willing to apply the same decisive, if necessary harsh treatment to capitalism, even when it fails. They talk around the edges, try to appease public anger with soothing, meaningless words, and just hope that things get better enough that they don’t have to face up to reality.

    Denial therapy definitely should be included on the NHS.

  3. Philip Edwards says:


    Of course the bankers aren’t listening to him.

    He’s only a capitalist apparachik, a neocon bureaucrat.

    Why be surprised?

    I hope if it is he you interview you start with, “You are very old……..”

    I’d love to see his kipper after THAT little dig :-)

    The whole gathering is of course a mere drawing of wagons into a laager. They might sacrifice a few of the more greedy aspects but it won’t make the slightest bit of difference to the transnational power structure. It will be the same old anti-democratic ripoff it’s always been.

    I hope you can stay awake – rather you than me.

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