Juggling Dynamite

I had hoped that the boy from the Northwest Territories was still in that Goldman Sachs groomed body somewhere…

Speaking at a City conference on “inclusive capitalism” in London this week, former Bank of Canada, and now Bank of England head, Mark Carney offered a strong call to reform and ethical principles in finance.

Calling out the “heads-I-win-tails-you-lose” mentality of bankers and their traders, Carney admitted that reckless, unethical practices in the finance sector have led to massive compensation to bankers on the tab of taxpayers. The effect has been rising inequality and a corrosive and destabilizing erosion of the basic social contract at the very heart of capitalism:

“We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital.

Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system.

“All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis such radicalism came to dominate economic ideas and became a pattern of social behaviour…

Consideration should be given to developing principles of fair markets, codes of conduct for specific markets, and even regulatory obligations within this framework. There should be clear consequences including professional ostracism for failing to meet these standards.”

See: Bank of England governor: capitalism doomed if ethics vanish

He went on to point out that one of the lessons of the 2008 crisis was that compensation schemes that delivered large bonuses for short-term returns encouraged individuals to take on too much long-term risk, such that the “present was over-valued and the future heavily discounted.” Today these mal-incentives are widely evident in corporate executives, borrowing mountains of long-term debt for unproductive share-buy backs that goose earnings and price multiples in the short run, but undermine the longer-term strength and resilience of the businesses under their management. Harming the host to inflate the short-term gains of the c-suite, directors and shareholders is counter-productive. In the end, unfettered greed is self-defeating.

Having left Canada last summer on a high note (before our over-heated housing market hits its credit-abused comeuppance), Mr. Carney is now facing a similar downside threat in England where 5 years of lax monetary policies have helped push home prices up 9% in the past year, a whopping 17% in the City of London– where they are now 30% higher than their pre-crash 2007 peak. Thanks to the government’s signature “Help to Buy program” where the state (backed by taxpayers) insure mortgages for first-time buyers with a 5% down payment on properties up to £600,000 ($1.1-million), the proportion of home buyers now owing greater than 4.5 times their annual income, is also back at pre-crash levels.[reflect on that a moment: people are buying million dollar homes at bubble valuations with just 50K down and 950K mortgages backed by taxpayers!] See: The end of Mark Carney’s British honeymoon for more.

Sounds very like Canada, Australia and New Zealand. With no banker or politician wanting to take responsibility for inflating or bursting the bubble, leaders are engaged in a quickening game of musical chairs, with each intent on positioning to not be blamed for the pain and loss when the leverage music inevitably stops.

Danielle was a guest today on The Financial Survival Network with Kerry Lutz, talking about recent trends in the world economy and markets. You can listen to an audio link of the segment here.

Here is the chart discussed of bond yields falling while the S&P has rallied year to date.

This morning the down draft in yields continues, with US 10-year yields breaking below 2.50%, now at the lowest levels since July 2013.

There has been an incestuous circle of influence and selective rewards from Central Bank QE directly into financial markets and the coffers of the fortune 500 executive suite. More and more financial leverage and creative accounting supported abnormal (and historically unsustainable) corporate earnings growth the past few years notwithstanding less and less sales. Companies have borrowed at low rates, not to invest in their business but to buy back their own shares. This in turn has driven share prices to silly levels which has magnified the equity compensation of CEO’s and their boards.

Not surprisingly, management has continually proposed more and more buy-backs, putting short-term gains ahead of long-term investment and business stewardship…quite revolting really. Here’s the chart (notice how little these business wizards were buying back their shares in 2009 when prices had collapsed to the best investment levels in 12 years). Apparently they prefer to buy high!

Longer-term this intense self-enrichment of the few is destabilizing to the businesses, the labor markets, economic strength, democracy and the social fabric as a whole. The c-suite is genius alright. But overall incentives are self-defeating, as the number of consumers who can afford to participate in our consumption led economy weakens by the day. See: Top-paid CEOs get 400% raises for some good historical context.

“CEOs have been quietly (and some not so quietly) ratcheting up higher and higher paychecks throughout the past few decades. From 1978 to 2012, CEO compensation rose 875% — a rise that was “substantially greater than the painfully slow 5.4% growth in a typical workers’ compensation over the same period,” according to a study released last year by the Economic Policy Institute . Furthermore, the CEO-to-worker compensation ratio was 29.0-to-1 in 1978, compared with a whopping 272.9-to-1 in 2012, and CEOs now earn 202.3 times more than than the typical worker, compared with 26.5 times in 1978.

CEOs are even raking in loot at a far faster rate than very highly compensated professionals (those earning more than 99.9% of other wage earners). In the ‘50s, ‘60s and ‘70s, CEOs made 1.62 times more than ultra-high earners, but in 2010 that ratio was 3.08 times more.

Meanwhile, the 99% is struggling — and has been for decades, according to several studies. A report by the Census Bureau found that the real median income of Americans — $51,017 — is virtually unchanged from the late 1970s and early 1980s. And a study by the Economic Policy Institute released last year found that the median worker has seen wage growth of about 5% between 1979 and 2012, even as productivity grew 74.5% over that period. “The wage and benefit growth of the vast majority, including white-collar and blue-collar workers and those with and without a college degree, has stagnated, as the fruits of overall growth have accrued disproportionately to the richest households,” the study authors conclude.”