[Stu Littlefair]

Toby - thanks for rejoining the discussion. I might have been a bit heavy handed in my reply about CEO pay. Here's a more nuanced (and massive) response...

Interesting about Japan. I understand the rationality behind the argument that if you pay peanuts, you get monkeys. It seems this simple aphorism applies in Japan, but I'd argue it certainly doesn't in the UK.

The relationship between paying more, and getting better CEOs must break down at some point. For a start, there's a limit to how much profit even the best CEOs can make for their firms. Also, it assumes that there's a very restricted supply of people talented enough to run a large firm. I've yet to see convincing evidence that this is the case. As David Mitchell so eloquently puts in in this week's column, if top bankers (for example) are so hard to come by that we have to pay them millions, how come Bob Diamond is prepared to sack them for being rude to their PAs?

It is in shareholders' interests to pay CEOs enough to improve performance but not more than that. I think there's plenty of evidence that CEO pay in the US and UK has got way past that point. Firstly, CEO pay has exploded in the last 30 years. Not just in relation to the median wage, but CEO pay has also far outpaced the growth of their companies. Richard Lambert (ex-DG of the CBI) says this is the first time in history people have become seriously rich as mere officers of their companies rather than risking any money of their own. Secondly, there's the link that I posted earlier (together with many similar studies) that shows that future company performance is lower in companies that pay CEOs more. Surely that alone shows that high pay for CEOs has become counter-productive? Perhaps we have created a cult of the omnipotent CEO, ego stoked by his enormous pay package, who tanks his company with his misguided ideas?

This begs two questions - if CEO pay has become too high, why aren't shareholders reigning it in, and is it anyone's business but the shareholders?

Dealing with the first point - I don't know what it's like in other countries but there are several problems with corporate governance in the UK that even I can think of (and I admit, I'm basically a GCSE level economist). First, there's the fact that executive pay is set by renumeration committees who can, but do not have to, take the results of shareholder votes into account. According to Radio 4's today programme (sorry, no link - I can't remember when) there have been examples of committees ignoring shareholder votes entirely. But surely this is rare, and the committees will mostly respect it, if the shareholders decide to curb executive pay in the light of poor performance?

Well, maybe. But most large shareholders are institutional, and hold large portfolios in many different companies. And almost all shareholder AGMs take place at the same time of year, in the space of a few weeks, don't they? So it's not as easy as it should be for shareholders to actually take a hands-on approach to the day-to-day running of the firms they own. Lastly, the FTSE is often criticised because the firms listed only have a small share of tradable shares. This means the power of activist shareholders is severely limited.

So shareholders might not be as effective in governing their firms as you imply. But is it anyone else's business? Surely it's purely up to shareholders how a company is run? I admit, I have some sympathy with this idea. But the way companies are run have a profound effect on the societies they operate in. High pay for CEOs is a wren's-shit in the ocean in economic terms, but it has a corrosive effect on society, as well we see now. So society has a stake in how companies behave too.

This is why every country has corporate governance laws, and the UKs are amongst the slackest in the world. As well as allowing exploding CEO pay, they've allowed a culture change in which takeovers, deals, financial engineering and wild short-termism has become the order of the day.

City minister Lord Myners recently said that it is easier to buy a British company than one registered anywhere else in the world. British share ownership carries no legal or cultural responsibilities. Companies have no powers to require their owners to engage with them, to be "good" owners or share in strategic choices. Shareholders only have rights – to buy and sell when they choose, to vote at annual general meetings and receive dividends. - Will Hutton

Why not change our corporate governance laws to add ownership responsibility to shareholders, and to make it simpler for them to fulfil their responsibility. That would, in my mind, be a big step forward to the kind of situation you describe, where shareholders take an active role in the running of their companies.

[Falling Down]

I read this interesting article in the Grauniad a couple of weekend ago that suggests resource consumption in the UK peaked in 2001 and that several factors are contributing to a more efficient use of our resources.  Article here

[Oldmanmatt]

We would be in trouble if the rich stopped spending money (corporation or individual).
That seems unlikely...

Part of the problem is that the rich DON'T spend that much, other than buying assets (hence creating asset bubbles). You give a million pounds to a millionaire, he'll most likely put it in some sort of account or buy some sort of financial product. Give that million to a thousand people living hand to mouth and they will spend it all. The multiplier effect is much greater in the latter case.

Actually, I can attest, they often spend vast amounts; on very little.
I take you back to my point in the other thread about the person who spends €45M on a yacht. There will be a hefty premium on that and that money has been spent (you could say the asset now exists twice, once as a thing and once as the distributed cash). Even better, if the buyer has taken finance for the purchase, as he will also pay a premium on that product (yep, he bought a financial product and that means someone else made money out of him).
I have to stop here, if you follow the logic too far your mind will shut down.
Secondly, putting money in an account is buying a product. Someone (no, several someones), down the chain is making money from them.

The problem is viewing the "economy" as a finite pot, to be shared out. It is not.
The resources that you view the economy to be based on are finite. They are merely the current basis, they have been different in the past and I would/have argue(d) that they will change over time; they do not make the economy finite.

To the asset bubble argument.
Tulips were once extremely valuable, they are not anymore. Quite probably, someone got stuck with a vast amount of those assets on the day (metaphorically speaking), the soil dropped out of the tub...

[ksjs]

If CEOs / corporate governance were so great (and therefore worth rewarding) why are there so many poor business decisions made and corrupt practices? Also, how can it be that the basis of a free market is that success / efficiency is rewarded yet at the same time, those who apparently live by these rules, have things set such that regardless of how spectacular and huge their failures they're still guaranteed to walk away with millions?

Getting back to the OP, nobody has yet been able to explain why there's such non-stop parroting about the 'need' for growth from politicians etc?

[fried]

I am curious, why?

Not wanting to put words into fried's mouth, but perhaps the corrections were being almost as pedantic as I can be.

They weren't that bad

[Stu Littlefair]

Actually I think the UK has some of the best corporate governance in the world. But the hurdle is low.

The difference here may be a result of my small umwelt - I'd say our ownership rules are much slacker than most developed world countries. Would you agree with that?

I am not sure how that can be solved except through even more intervention in stockmarkets by private equity investors who unhelpfully rank above Satan in Grauniad-reader demonology ...

Couldn't it be solved by, for example, giving shareholders legal responsibility for the actions of the company. i.e moving to a model of capitalism where being a shareholder requires engagement with corporate governance?

TBH I agree with almost everything else you have written apart from:

High pay for CEOs is a wren's-shit in the ocean in economic terms, but it has a corrosive effect on society, as well we see now. So society has a stake in how companies behave too.

which is surely an ideological assumption not a truth?

You're right, both statements in there are ideological. I'd have thought the first was moderately uncontroversial? Even if the emergence of an über-wealthy CEO-class is beneficial for society as a whole, it's hard to argue it doesn't breed resentment. The latter statement is a 

[LucyB]

Stu, you're like a really clever friend who makes me feel just a tiny bit stupid. I love the way I have to look up words that you use. You are responsible for expanding my vocabulary - thank you 

[Stu Littlefair]

Erm. Thanks.

[Oldmanmatt]

In their defence, most people don't (and won't, no matter how you try), have anything other than the most cursory knowledge of these things. They were bombarded with TV and news paper pundits, telling them how great these accounts were.
The subject is too complex (in the true sense of complex), full of emergent behaviour and shrouded in jargon, for the majority.
I've learned a lot from this thread...

[slackline]

Cheers, will work my way through that in due course.

Personally I was surprised when I moved to Australia that fees were standard there and almost everywhere else in the world, and that it was the UK that was the exception to the rule.  The way I had previously envisaged it was that I was giving them my money to look after, and being they employed "savvy" ( ) financial investors that they would invest some of that and turn some profit off of the money myself and others had entrusted to them.  In return for, in essence having lent them some money to speculate with, they pay a bit of the profit they made back in interest kind of like paying interest on loans that they give out to people.  At the same time they'd be making money off of the loans that they gave to people with interest rates slightly higher than the rates they pay to people's savings.

Apart from being a little naive on this front (I've no great desire to accumulate wealth so investing/finance/etc. has never really been of any great interest) it seems I was grossly disillusioned to think that banks and those they employ have a clue as to how to invest wisely (although I have always recognised that speculation is exactly that and money invested has the potential to be lost, but expected that long-term the investments the banks made would return some profit  ).

[Jaspersharpe]

But ... if the US is so unpleasant because of its high inequality, how come so many relatively-poor voters back the Republicans, who currently have policies favouring increasing inequality? I am puzzled by that.

That's a simple one. They are fucking stupid. It's only exactly the same as relatively poor people voting Tory here. Makes absolutely no sense whatsoever and is guaranteed to make their life worse but they do it anyway because The Sun told them to.

[slackline]

Maybe not all of the poor people vote for Republicans or anyone else?

[Jaspersharpe]

No I'm not saying that it's the same as in both are influenced by the media to the same extent. Just that both make as little sense and are down to a lack of intelligence / education / information.

[Stubbs]

Isn't it christianity and xenophobia in the states that's driving people to vote for the Republicans, rather than economic policies?

[Jaspersharpe]

... yet ultra-right wackjobs like the Tea Party are a recent phenomena?

As things get worse, the more extreme views come to the fore. Of course for many it's easier to blame a black president, immigrants and "big government" for the problems caused primarily by the previous administration, a lack of regulation where it mattered and lots of other hard to define or "shout and wave misspelled placards about" things. Even if the economy was peachy these people would hold the same views. The poor state of things just gives them more of a stage to expound them unfortunately.

As for the Murdoch point it's plain that he has had far more sway over the UK than the US. Fox News preaches madness to the converted whereas in this country, his support or not of whichever political party has directly affected who has been in power for decades.

[Johnny Brown]

you'd think the shrinkage of radio and tv audiences by the internet would lessen not increase the power of established media

As I said on the previous page, the problem with getting your news/ info via the internet is you become the editor of your own newspaper. More than ever, you read what you want to read and disregard the rest. Not only does more choice only makes you more selective, its easier to write off stuff on the net as written by wackjobs.

[Stu Littlefair]

I think Toby's right about the politics in the US. "Freedom" as an unmitigated good is at the core of the US identity; I think the hard right fare so well because theirs is the politics of freedom, and every US child has been taught that freedom is what makes their country great. The fact that Fox agitates for the right so aggressively definitely helps, but it's leading people where they want to go anyway.

In this country things are different because we don't start from that cultural base, but also because the Murdoch press has been less ideological, willing to switch support from one party to another. Interesting to think which is cause, and which is effect...

Thanks for that link, Toby - that's my productivity for today shot. About the banks - this link seems to suggest that your 'typical' bank balance sheet superficially looks pretty different to your breakdown,

http://www.cssf.lu/en/statistics/banks/annual-stats/

The biggest single item on their asset lists are loans to other credit institutions (mostly other banks?). This makes it really hard to say what kind of lending a bank is actually involved in, doesn't it? Which, I guess, is what caused the panic when assets started turning bad... It may well be when you trace it all back the breakdown is similar to what you posted, but it hardly matters if investors can't work that out.

BTW, I think all of your criticisms to my idea of shareholder responsibility are true. Increased responsibility will increase the burden of ownership, and reduce liberty. I don't think these are necessarily bad things. To trivialise the argument, we expect the ownership of a dog to require some commitment from the owner, but not ownership of a company. Just as the dog's well being matters to more than the owner, so the company's well being matters to more than it's owners - the employees, the host country, trading partners all have a justified interest. Why not expect more of people who wish to own firms?

[slackline]

As I said on the previous page, the problem with getting your news/ info via the internet is you become the editor of your own newspaper. More than ever, you read what you want to read and disregard the rest. Not only does more choice only makes you more selective, its easier to write off stuff on the net as written by wackjobs.

What a load of nonsense! 

[Jaspersharpe]

I missed that about bank balance sheets.

I may be wrong but I don't think that 70% of UK bank assets are mortgages. Otherwise why the fear of total meltdown because of the amount of Greek debt (and more importantly the related CDS etc) held by UK banks?

As I've said before the previous financial crisis was not caused by loads of UK mortgage holders defaulting on their Northern Rock 125% mortgages. At all.

[Stu Littlefair]

Yeah, but shark lets his dog run off the catwalk.

I did look at Barclay's 2009 balance sheet but couldn't understand it! The biggest items in the assets are loans to customers (£420,224) and derivatives (£416,815), followed by 'trading portfolio assets' (£151,395), whatever they are. Will the derivatives be mostly mortgage-based things, or a more complex mix of insurances, metal futures, etc?

http://www.barclaysannualreport.com/ar2009/index.asp?pageid=127

[fried]

We've come to believe that it's inevitable that each generation will have a higher standard of living than it's predecessor, and this IMO is going to be the case on a global scale.

However on a more selfish Western European scale it is higher improbable to be so. In the west we have a very limited idea of what poor is. Personal debt was encouraged, now it appears as if it's the fault of those who were gullible enough to buy all the bright, shiny objects that were flashed before their eyes.

I'm genuinely worried that poverty (or what passes for poverty) leads to people being easily manipulated and when people are scared they move to the right. Or more likely we see the side of the silent majority whose views are easily found in any office ,pub or factory.

[slackline]

you'd think the shrinkage of radio and tv audiences by the internet would lessen not increase the power of established media

As I said on the previous page, the problem with getting your news/ info via the internet is you become the editor of your own newspaper. More than ever, you read what you want to read and disregard the rest. Not only does more choice only makes you more selective, its easier to write off stuff on the net as written by wackjobs.

On reflection, yes, good point.

Even more so given the pernicious consequences of the filter bubble.

EDIT : Incidentally I just came across this quote...

"The surest way to corrupt a youth is to instruct him to hold in higher esteem those who think alike than those who think differently." - Friedrich Nietzsche

[Stu Littlefair]

I'm selecting banks at random here toby - how many internet searches should I have to do to find one which is typical?

[philo]

The recession is actually the cure to the disease that is a bubble economy.  The fact that we have a central bank that is continuously wrong and has been since the dawn of its arrival is the problem.
The artificial interest rates that were too low prevented a big recession in 2000 and instead of letting people go bankrupt and capitalism to work, mal investment went into housing creating the housing bubble.

People did predict the crash and those people can also see that the artificially low interest rates prevented a huge collapse in 2008.  Instead the money has went into the bond market, and that is where the next bubble is - thats the next crash and this time, it wont be a housing crisis, it will be a currency one.

How do politicians in a country with fiat currency (UK/US/ EU) keep a straight face when they preach the keynesian economic line of "too big to fail" and the fact that we need to "spend" and "borrow" our way out of the problem, when thats what got us into this credit problem. 

People need to read some Austrian Economics and look at that school of thought, search for it on youtube and you will get a whole host of economic investors who have predicted the crashes. 

The truth of the matter is, interest rates HAVE to rise.  When they do, all of the banks bailed out will collapse again, the price of commodities will increase and our standard of living HAS to go down. 

A few things people say, look at Japan?  they had a deflationary cycle - We wont be so lucky, remember, Japan is a creditor nation and has an economy based on strong savings and productions (which they export)
What we will face will be inflationary, if you look at currencies compared to monetary metals you will see gold at $1700 an ounce, this is not the gold price going UP, its the fact that the US dollar is going down.  Compare it to the UK pound and Euro and you will see equally shite results.   When the BOE introduces a nice QE its devaluing our currency and this is the problem. 

Look at oil as an example, if you look at oil prices since the 50's it has not changed.  It has not changed if your buying the oil in gold.  It has went up massively if you buy it in pounds because the printing of money has devalued our purchasing power so much.

Austrian Economics is our only hope, I have money in gold and silver (which is 70% off its peak) 

[philo]

also, going back to GDP and CPI's.  I wouldn't trust the governments figures. 

The CPI does not include food or energy, or any commodity that would show the real inflation.