Legal claims against top Wall Street banks arising out of the financial crisis have, so far, settled at over $100 billion, and no doubt there will be more. Claims against audit firms for their involvement will surely follow, and it will be interesting to see how far IFRS-compliance will serve as the defence of choice. When the former Chairman of the Co-operative Bank enquired about Britannia’s dodgy loan book at the time of the disastrous takeover, he was told by his advisers that “this problem can be addressed by fair value adjustments”. We’ve been there before.
But the problem of toxic loan books is connected to a far wider malaise in the banking sector, and there is nothing that auditors can do once the law of unintended consequences enters the scene. For example, deluded politicians persist with attempts to put a lid on executive bonuses they consider excessive, yet aspirational guidelines and quasi-regulations gain no traction in the real world. Try to limit bonuses, and they spring up in alternative guises. You cannot put the genie back in the bottle.
Eye-watering sums – annual salary hikes however else labeled – in the £5m to £8m range, double or triple last year’s packages, have found their way into the pockets of FTSE chief executives whose companies have benefited from the cheap money that the Bank of England has landed in their laps through the novel experiment known as quantitative easing (QE). The Bank itself reported in 2012 that QE alone had boosted the value of quoted stocks by 26 per cent. Is that what the government intended?
No. It merely illustrates the “rocket-and-feather” pattern of executive earnings: pay shoots skywards in good years, for which CEOs claim the credit, and flutters down modestly when the going is tough – after all, a drop in profits is never entirely their fault but is due rather to “exceptional and wholly unforeseen circumstances”.
Economic law in action
Is it fair to link latest corporate success stories with the Bank’s QE activities? The money must go somewhere, and it will always enrich those closest to where it lands. Pundits will tell you about the difference between QE and just plain money-printing. Does the distinguishing nuance, between creating money to revive a failing economy (QE) and creating it to finance deficit spending, matter a jot? You cannot put the genie back in the bottle.
Both processes debase the currency and are unhinged from real economic wealth.
Both processes debase the currency and are unhinged from real economic wealth. The new money, conjured out of thin air, serves to fund the excess of government spending over tax revenues. It represents an equivalent rise in the national debt, ravages savings and causes massive resource misallocations. But as solutions to the problem of government spending beyond its means, they are demonstrably equally useless.
Zimbabwe-style hyperinflation in the form of round-the-clock printing of billion-dollar notes is, if anything, a more transparent form of counterfeit. QE, by contrast, is a two-step smoke-and-mirrors charade: since the Bank is prohibited from buying government debt directly from the Treasury, the government sells its newly-minted fiat bonds to private entities in the privileged core of the City’s banking coterie. These sell them on to the Bank of England – after retaining, as “excess reserves”, capital that their irresponsible lending has previously destroyed.
QE is irreversible
In theory, once QE has achieved its primary aim of revitalising the economy, the Bank will reverse the process and sell the fiat bonds back into the market. But QE has achieved none of its aims. Its true legacy is that after five years the economy has been unbalanced rather than revitalised. The frenetic building activity that now grips the City of London is testimony only to the resource misallocation QE has induced.
Little of the fiat money has found its way into new lending.
As for putting it into reverse once its job has been done? That job never even got started. Little of the fiat money has found its way into new lending. Creditworthy SME businesses have turned to private equity and hedge funds in the shadow banking sector.
Rising corporate profits, and hence executive pay, reveal where the new money has gone, exacerbating extreme income inequality and associated social tensions.