Across the pond

Tomorrow we shall hear what kind of regulations the head of the Financial Services Authority, Lord Turner, thinks are necessary to prevent a repeat of the present financial crisis. Today the spotlight has been, again, on Fred the Shed, who has already taken part of his pension as a lump sum. Sir Fred Goodwin collected £2.7 million, but the board of the failed Royal Bank of Scotland coughed up an extra £1.8 million of the company funds to pay the tax he would have had to pay on it.

Such are the rewards for failure. But Fred was only doing what many, if not most, of his contemporaries were doing.  They were not capitalists risking their own money, they were salaried employees, asking for more and more money for managing the giant companies, and finding legal ways of minimising their own, and the company’s tax liabilities.

Mervyn King, the Governor of the Bank of England, put it pithily on BBC Television News tonight.  He said, ‘The bankers had to keep on dancing while the music was playing.’  The tune they were dancing to was the free market polka, in the belief that if only they could keep the money going round and round and round, they could keep the boom going on for-ever.

The moral basis of capitalism was forgotten by a whole generation.

Changing the regulations will not change that. As this and previous financial crises have shown, shareholders are not very effective in stopping company boards paying themselves extravagant sums of their money.

Britain and the US need something closer to the German model, whereby the employees and other stake-holders in the company, have representatives on the board. And we need governments to bring in laws to prevent to limit company directors of the giant companies from deciding their own pay.

A whole generation of managers has got used to receiving huge rewards for doing jobs that are no more stressful than the jobs of any of the workers, and require less talent, than many valuable company employees who are not on the board, like research scientists.

This crisis has been caused by a different kind of inflation than that which wrecked the British economy in mid-century.

It has been wage inflation for a few at the top, which has fuelled in those few an inflated idea of their own value. As the moderately successful entrepreneur with whom I had dinner tonight opined, luck is often a major factor, which decides the destiny of companies.