Rhetoric is spiralling out of control

Allister Heath
PERHAPS the most depressing part of Vince Cable’s nasty attack on corporate Britain, capitalism and finance was his embarrassing misreading of Adam Smith. The great economist agreed with Cable that business people dream of setting up cartels – but he made it clear in the subsequent sentence that the best way to prevent this was for the government to step aside and allow a truly free market.

Cable’s speech was based on so many misconceptions that to demolish them all would fill half this newspaper. Take pay. Virtually all service sector industries pay a large proportion of their revenues to their workers in the form of wages. In many firms, it can be up to 90 per cent – the only other costs are often office rent, technology, basic office supplies and tax. A figure of two-thirds is certainly not uncommon in large service sector firms. This is the natural product of competition and the fact that there is, on average and over time, a strong link between an individual’s productivity (pounds he or she makes for employers) and his or her pay.

If anything, banks pay their staff a much lower than average proportion of revenues; Goldman Sachs, for example, is now paying out about 43 per cent. But because revenues generated per staff are hugely higher in finance than in other industries, average incomes are equally larger. This is true even today with much lower levels of leverage. So when the politicians claim that they are angry at the banks for their “behaviour”, what they are really saying is that financial firms should defy economic gravity by pushing down compensation ratios. Ironically given Cable’s misinformed rants, this could only work in a global cartel and if staff were banned from leaving to small start-ups.

The politicians’ contrived “anger” also has to do with the supposed refusal of banks to lend to solvent borrowers, a claim which is never backed up with any robust figures. In any case, this shouldn’t concern investment bankers, fund managers and other non-retail financiers – yet they too are coming under fire. It is always assumed that only the supply of lending is down, not its demand; yet this is an absurd claim. Of course supply is down: three years ago, an army of dodgy, under-capitalised institutions (including Icelandic banks) were lending as fast as they could. This supply no longer exists – and rightly so.

It may be that lending is somehow artificially scarce – as opposed to more prudent, rational and expensive – but I have yet to be shown any real proof of this (surveys of wannabe borrowers, such as small firms, don’t count as they are not objective). Please email me if you have some real proof that banks are curtailing lending en masse for the “wrong” reasons, as opposed to making the odd stupid mistake or pricing loans more expensively to reflect the increased risk of default and the increased cost of capital and liquidity requirements.

With bank profits up, and intensifying competition for staff globally, compensation will rise again. The only way to stop this would be to destroy the industry, which would bankrupt Britain. Given that a total shutdown won’t happen, and that firms cannot do anything other than hike pay at the moment, all hell is about to break loose politically. As we are already dangerously close to a tipping point, with Britain’s anti-capitalist mindset beginning to chase away global capital, the result is looking all too clear: an almighty, devastating train crash.