Bob Diamond, the American boss of the UK bank, Barclays, went before the Britain’s parliamentary Treasury Select Committee yesterday. When questioned about whether the banks were to blame for the financial crisis and why should the taxpayers have to pay the bill, he said that Barclays did not take any public money and anyway the banks should not have been bailed out.
He was quick to tell the committee that the “period of remorse and apology” by the banks “needs to be over”. It was time to move on. As for excessive salaries and bonuses being paid to top bankers, Diamond was clear that he needed to pay his executives their big bonuses or they would all leave for another bank. “I don’t agree that I can isolate bonuses and assume that would have no consequences on the rest of the business.” So we need to pay ourselves huge packets of compensation, says Diamond, or we”ll go elsewhere.
The coalition government’s talk of reining in bank bonuses has turned out to be just that – talk. This year, the CEBR estimates that the banks will pay out £7bn in bonuses on top of salaries. That’s down from the peak of £10bn in 2007, but up sharply from last year.
The new head of the now publicly-owned Royal Bank of Scotland, Stephen Hester, is to get £8m in compensation, including £1.2m in cash. This is more than previous infamous chief executive, Sir Reg Goodwin, who was knighted by the Labour government for “services to the banking industry” got £3.5m in total and under £1m in cash in his last year at the helm! Sir Reg, after being sacked for taking the bank into bankruptcy and forcing the government to bail it out and take it over, was allowed to take home an annual pension of £700,000 a year (worth £17m in total). Similarly, the executives of the bankrupt Northern Rock mortgage bank left with ‘golden handshakes’ of over £1m. Reg Goodwin has now resurfaced in the financial services industry. At the same time, RBS has cut 7000 jobs in the bank.
Stephen Hester also told the Treasury select committee that even though it was state-owned (87%), RBS had to pay out bonuses because “it was the prisoner of the market” and must pay ‘the going rate’ to top executives. The other state-owned bank, Lloyds Banking, has put its boss, Eric Daniels, in line for a bonus of £2m in cash this year plus another £2m in shares. So there we have it – no remorse, no apologies, business as usual.
The attitude of these bank chiefs expresses the attitude of the ruling elite. As Will Hutton has said in his latest book, Them and Us, “The rich argue that it is fair for them to be so wealthy, in much the same way as Athenian noblemen believed their riches were signifiers of their worth. They believe they owe little or nothing to society, government or public institutions. They accept no limit or proportionality to their wealth, benchmarking themselves only against their fellow rich. Philanthropic giving is declining ; tax avoidance is rising; and executive pay is rising exponentially. All three are justified by the doctrine that the rich simply deserve to be rich. ”
Of course, being rich or poor is relative. Robert Gibbs has just left his post as press secretary for President Obama because his pay of $172,000 a year was too ‘modest’. On this money, Gibbs is in the top 10% of income earners in the US. But he does not feel rich because his mates in the banks and big corporations are earning way more than him.
The Tax Policy Center estimates that for the bottom 90-95% of Americans, income distribution is fairly flat. To move from the bottom 30% of income earners up by 5% points to the 35th percentile would require earning only $4000 a year more, or a 17% pay rise. That applies all the way up to about the 85th percentile. But then income levels just take off! If you want to go from the 91st percentile, where Mr Gibbs was, and reach the 96th percentile, you need to earn another $324,000 on your salary of $172,000. That’s because the income scales are so grotesquely skewed that there is huge difference between the well-off (as most of us would see them) and stinking rich (as the well-off see them).
This extreme inequality of income has only been generated in the last 30 years or so. Fantastic recent work by economists Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley has shown that the top 10% of income earners in the US now take 50% of all income. See Saez’s great website at http://elsa.berkeley.edu/~saez/
It wasn’t always that way. From World War II until 1976, the top 10% took home less than one-third of all income. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today’s terms, earn more than $110,000 a year. Even within that top decile, the distribution is remarkably skewed. By 2007, the top 1% of households took home 23% of national income after a 15-year run in which they captured more than half – yes, you read that right, more than half – of the country’s economic growth!
The main reason for this growing inequality has been massive rise in the dominance of the banking and financial sectors, particularly in the US and the UK. The financial sector has sucked up a larger and larger proportion of the value created by the labour of others. In the latest available data, the big six US investment banks hold assets worth 64% of GDP. This is up from before the crisis – they held only about 55% in 2006. And this is up massively from 1995, when these same banks has assets worth only 17% of GDP. The top executives in this sector have become ‘masters of the universe’ and can get bank shareholders to pay them accordingly.
And money breeds money; and money inherits money. The rich provide an overwhelming advantage to their children in ensuring that they become rich too; not just from inheritance but from better schools, health, contacts and facilities. And it is no accident that research by Julia Isaacs at the Brookings Institution found that a son’s earnings were 50% due to how much their fathers earned in the US and the UK, but only 25% or less in Europe. Mobility up the social ladder is way lower in the so-called ‘land of opportunity’ than in the countries of ‘Old Europe’.
No remorse. President Obama has agreed with the ‘tea party’ Republicans to extend the tax cuts for the rich introduced by President Bush; to reduce inheritance tax and shortly to cut corporation taxes. As one White House ‘insider’ put it: “Obama is finally beginning to realise his liberal and progressive base and their political agenda did not get him elected in 2008,. They got into a position of power because of him, not the other way around. He is beginning to truly see himself as his own man now,. Maybe he is secretly glad to be rid of Pelosi and the agenda-setting dominance of the House Democrats. Obama has decided that between losing with the party’s liberal and progressive wing or winning by keeping his distance, he’d prefer to win.”