As Derek Barry observes in a comprehensive post, the Productivity Commission has weakened its recommendations on corporate governance and remuneration. Business groups were reportedly complaining about ‘risk’ and ‘uncertainty’. (Intriguingly, those appear to be two of the most common litanies of lamentation from biz lobbies, despite the fact that they’re meant to be intrinsic to the operation of markets.)
Unions aren’t happy. Writing in The Australian today, the CFMEU’s John Sutton sees:
Kevin Rudd’s grand treatise on the failures of capitalism a few months into the global financial crisis ending with a whimper rather than a roar.
Sutton questions whether measures discussed in response to the GFC (over and above questions of executive pay and bonuses) amounted to very much. It’s an eminently reasonable question to pose.
I suspect that the economic situation in Australia has allowed Labor politicians to retreat from their previous rhetoric. In Britain, where things are still much more dire, Gordon Brown’s government has responded with limitations on bankers’ bonuses, in the lead up to this year’s election, which Labour is expected to lose. In the US, Barack Obama has continued with the big bail out of everything Wall Street, handing the Republicans a useful weapon for the 2010 midterms.
It’s an intriguing contrast.
It’s also intriguing to note that discussion of all the ‘toxic debt’ unaccounted for has gone completely missing, unless I’m missing something.
Update: The Tobin Tax and the GFC.
The comparison with Britain is difficult to make not just because of the direness of the British economy (as the situation in countries like France and Germany is becoming considerably less dire), but the sheer direness of Gordon Brown’s predicament, which would make the prospects of the NSW ALP government look bright.
Coming in after Blair and as Blair’s Chancellor has proved to be the worst of both worlds for Gordon B. His case for being PM rested on the notion that he would somehow be different to Blair, but he is so much an architect of Blairism – and certainly its key economic policy driver – than any attempt to distance himself from the New Labour project comes across as insincere.
Knowing that the day after the 2010 UK General Election will almost certainly be his last day in public life, Brown endlessly wobbles between two instincts. One is the “appeal to middle Britain” instinct that served Blair so well for so long, where he can present Labour as the “aspirational” party. But being increasingly aware that the middle classes are no longer listening, he then ramps up the class war rhetoric as part of the “save the furniture” strategy – if Labour can hang on to at least some of its heartland seats by appearing to renounce Blairism, with the hope of Labour living another day after 2010.
With each passing day, this violent gyration between Blairism/anti-Blairism occurs in a downward spiral to which fewer and fewer beyond a small circle of Guardian columnists are listening. The point is that, for most people in Britain, any policy that Gordon Brown announces is seen as irrelevant, since no-one believes he will be around to implement it after the election. GB’s growing interest in projecting himself as an international statesman by baiting the Chinese leadership almost certainly reflects his domestic malaise, and seems to be treated as such in China.
None of these problems face Kevin Rudd at this stage of the electoral cycle, so the need to ramp up rhetoric in the manner that Brown does is not there at present. If high-income Britons actually thought that Gordon Brown would be around to implement the policies he is proposing at present, the number of applications to live and work in Australia would be going up sharply. My understanding is that it is anyway.
That’s right about Gordon Brown’s electoral predicament, Terry, and his oscillating response to it (which, as you say, is also a function of his inability to disclaim responsibility for a lot of what’s occurred given that he was Chancellor for so long). But it’s interesting to recall how much was made by both Brown and Rudd just over a year ago about closely coordinating their measures for regulation of the financial sector, etc.
It appears to me that a lot of what was discussed at the G20 has basically come to nothing much – symbolic gestures like what we’re seeing here.
And I’d be interested if anyone’s able to give me an informed view on what exactly happened with all those trillions of ‘toxic debt’ swishing around the place.
I think everyone’s hoping the toxic debt’ll just vanish, Mark. I certainly do – it’s really going to fuck with my retirement plans, otherwise.
No doubt, David! But a while back, we were hearing stories about how much of it was still out there. Has it magically vanished with the billions shoveled in the US at banks? It would be good to know!
I think it’s just been swept under a whole bunch of carpets, Mark. It’ll turn up again once the spivs have finished hoovering up the rest of the loose money.
Mark
They were toxic assets – assets held on the balance sheet of financial institutions that turned out to be worth very little.
The issue has not gone away. Many financial institutions are still grappling with their excess leverage (a financial institution cannot shed its debt committments as quickly as asset prices fall, so when assets become “toxic”, the institutions’ leverage increases). Deleveraging will continue for some time and is contributing in many countries to ongoing weakness in credit growth.
That said, the outlook has improved in a few ways. First, because the global macroeconomic outlook has improved, global asset prices have risen significantly from their peaks and expected losses on loan books will likely be smaller than expected.
Second, through a variety of government and central bank measures, financial institutions have extraordinarily cheap access to finance and so are making quite a lot of money on their normal activities at the moment.
Third, programs were put in place in many countries to either help institutions take bad assets of their balance sheets, or insure them against losses in those assets.
Fourth, there really was no toxic asset problem in Australia, so the issue receives less coverage in Australia.
Neverthless, you are right that little has come of the G20 process that was supposed to reform banking regulation and make the system more safe. In most countries reforms have been weak, the incentives to increase leverage into asset booms still exist, the “too-big-to-fail” phenonmenon has become even worse, and authorities in most countries still don’t have an effective strategy for counteracting asset price booms.
The issue of executive bonuses is complicated. What Brown has done in the UK lasts for just one year and applies to a narrow set of institutions. In no way does it deal with the structural problems with executive remuneration in the banking sector. The PC report is about overall executive compensation, not just compensation in the banking sector. Remember that the issues are not identical – in banking the issue was less the size than the rewarding of activities that boosted short-term profits at the cost of taking on large risks. The ACTU’s idea of capping executive remuneration to 10 times the average earnings in a company is impractical. For a start, it is completely arbitrary and does not take into account different circumstances across firms. It is also impractical in a globalised economy and would have flow on effects throughout the managerial pay chain in companies that would make it much more difficult to attract the best managers.
Overpaid deluded & greedy executive scum are bandits of the worst kind; they have the law on their side. Imagine knowing (let alone being) one of them (shivers down my spine just now)
The union movement’s negative reaction is largely street theatre. Its about being seen to be against the bosses and staking a claim as the conscience of the Labor Party. They’d be more surprised than anyone if a Labor Government actually took up such a policy.
The bigger problem for the CFMEU in pursuing a genuine income redistribution agenda is that a large part of its membership is not exactly poor. That’s why it tends to be an “after the revolution” issue.
@6 – thanks for the info, LO.
I must confess I’m not reading as many economics blogs as I was a while back, but I did see some commentary suggesting fears exist that the same sorts of behaviours which precipitated the GFC were about to start up again on Wall Street – it was in the context of the enormous credit extension to Fannie Mae and Freddie Mac Obama snuck through, and the post TARP repayment bonus bonanza. The sorts of blogs talking about this weren’t the run of the mill US lefty blogs, but things like Naked Capitalism which generally appear to be well informed (I subscribed to a heap recommended by the NYT, if memory serves, when the GFC was at its height). I might start paying attention again.
And, yes, I’m aware that there’s a distinction between the PC stuff and the finance sector compensation issues. I was sort of running them together because they’re both part of Rudd’s purported reigning in of ‘extreme capitalism’.
Incidentally, I was just thinking earlier today of the discussion we had about a year ago when I said I thought that the recession would be much weaker than Treasury forecast, and in particular that employment would be more robust, and I think you argued it would not be. If memory serves! Not doing the bragging rights thing, but making the point that things could still go south even if no one is anticipating it at this stage. It seems to me that there’s a fair bit of complacency around, and that it’s a pity that the momentum behind the G20 stuff ran down so quickly. As I’m suggesting in the post, for all the rhetoric, it appears that the default position is that what pollies will do depends most on domestic politics.
The downturn certainly turned out to be much weaker in Australia than I thought it would. However, to save some face, I also said that there was a lot of uncertainty surrounding the outlook! I don’t think that has changed, despite the optimism in some circles. I think you will find that the majority of economists still see a lot of risks on the horizon – global imbalances, financial instability, getting the pace of the unwinding of loose fiscal and monetary settings right, etc. In a way, the perceived improvement in the outlook was a bad thing. While things looked bad there was broad support for fixing the things that were at the root of the crisis. Or at least it was harder to argue that changes were unnecessary. Now it is easier for pollies to give up on the harder reforms.
So, I agree with your final sentence….
Yes, that whole notion about seizing the moment of a crisis for reform was just that, it would seem.
Many years ago a very influential and mildly prominent Labor figure told me that the lesson the ALP had learnt out of the 1975 Dismissal was that big business, not government, runs this country. So, no surprise Rudd’s attack on “extreme capitalism” was merely rhetoric. Or so it appears.
Some of this is about to be tested out, with Icelanders having a referendum on whether they want to leave global capitalism and the global financial system:
Linked text
Mark,
The too-big-to-fail policies worked in the short term but may set us up for larger issues long-term. The problem being that anyone in those exalted circles will now flock to such institutions knowing that they will have government backup even if they f%ckup. It’s not the kind of lesson conducive to changing such behaviour.
While I personally didn’t think the G20 would achieve much I had hoped KRudd would understand that something more than a slap with a featherduster is necessary to change such behaviours.
The next 5-10 years will be interesting…
This attack on renumeration seems to be a treatment of one of the symptoms, rather than the cause.
Particularly in the USA, the people whose actions caused the GFC somehow remained mainly immune from the consequences.
What we need, across the capitalist world, is a system where the results of actions are fully felt by those responsible for them, GOOD or BAD. If someone’s actions as CEO create enormous wealth for shareholders and employees alike, then they should be handsomely and appropriately awarded.
If they pull an Enron, they should be ruined.
“The too-big-to-fail policies worked in the short term but may set us up for larger issues long-term”
True, steveh, and that is exactly the criticism made of it at the time from the “small government” right. The counter is that the Yanks didn’t have much choice; we genuinely faced the likelihood of a full 1930s scale depression which would make any worries about future excessive lending pretty irrelevant. Legal, administrative and (especially) political practicalities ruled out the only alternative – wholesale nationalisation of most of the finance sector.
Envious anger at people being in on rorts that you and I aren’t in on aside, the forces creating the obscene growth in these rorts in recent decades are a bit of a puzzle. The ingredients that make it possible – individual greed, a director’s “club”, institutional shareholders being part of the club and small shareholder powerlessness – were often even stronger during previous decades, so what changed? Merely fulminating against humans looking after number one doesn’t answer that question.
Howard Cunningham is correct. There is no evidence to suggest that the GFC would have been avoided even if every fat cat was on the minimum wage.
Mark’s point about the decisiveness of domestic politics is correct. Vaguely well-targetted handouts are always good box office.
The most telling policy of the government was to guarantee without limit deposits in selected financial institutions. This was necessary to stop an impending outrush of funds to banks in jurisdictions that had already offered that guarantee. It is now unlikely that this guarantee will ever be removed. Thus Australia now has some financial institutions designated permanently “TBTF”.
Both Lenin and Hitler achieved analogous control of the “commanding heights” of their national finances (for very different ultimate purposes, of course. Lenin was simply being pragmatic. Hitler wanted Germany’s banks to underwrite loans to the German government for the purposes of rearmament. Kevin Rudd, on the other hand, just wants as little change and as much short-term contentment as possible.)
It is also impractical in a globalised economy and would have flow on effects throughout the managerial pay chain in companies that would make it much more difficult to attract the best managers.
L.O., that is an oft-cited but rarely proven hypothesis. But I don’t think it should be the government’s role to sort this out, it should be shareholders. Unfortunately they are all in a conspiracy to keep paying each other more. There’s the inner circle of the boys club of directors, with their willing accomplices the CEOs (who will all be directors soon enough), then there’s the bigger circle of institutional investors, who have well-paid CEOs and directors with no interest in rocking the boat. The actual shareholders and superannuation owners never get a look-in, despite the fact that there’s basically no causal link demonstrated between performance and remuneration.
My solution is a super tax (of >50%) for individuals on more than (say) $500 000 a year, and rigour in closing all ‘options’ etc tax avoidance loopholes.
I think there are some reasonable options.
You bring in a rule that allows the benefits package of youyr highest paid employee to be 25 times the average wage of all your full-time employees. Above that, the marginal salary cannot be deducted from company expenses for tax purposes on a sliding scale up to a multiple of 40 when 0% is non-deductible. You include the rolling three-year value of share options in the value of the package.
On the income tax side, you abolish the tax threshholds and have an incrementing rate starting where the minimum tax rate is and finishing at about 60% for above 5 times average F-T ordinary income.
Derrida, I do understand the reason it was done at the time (and indeed still agree with it being done). I guess my poorly worded missive was meant more along the lines of Howard Cunninghams post on how we need to find some way of building direct feedback into the system. I’m just more disappointed that this doesn’t seem to have attracted the ongoing attention that it needs, apart from this slightly odd PC report.
I’m more than a little concerned that without stronger feedback mechanisms (be they monetary or otherwise) the likelihood is that there will be enough “troublemakers” left to cause an even larger problem.
I’m surprised that nobody has mentioned the cover feature article in The New York Times Magazine last Sunday, “What’s a Bailed-Out Banker Really Worth?”.
To every complex problem there is a simple solution and it is always wrong. I suspect that the real sting in the tail of the Productivity Commission’s recommendations is not the sort-of-two-strikes part, but the requirements on remuneration committee membership, for institutions to come clean in public about how they vote and abolition of the “no vacancy” rule that can be used to stop independent directors from being elected.
It was interesting to see the Fairfax board use just that rule late last year when it appeared that a former journo might have a shot at election.
Update: The Tobin Tax and the GFC.