Central Bank & Big Company Bosses – Too Much!

You would tend to think that people who receive huge salaries have some special powers that enable them to make great strategic decisions that enhance the performance of their organisations.

If this was not the case then why do they get 10 to 200 times more pay each year than what ordinary folk receive?

You can use some basic key performance indicators as a guide to see how successful they are.

Let’s start with the two most important central banks the Federal Reserve and the European Central Bank (ECB). Their job is to keep the wheels of the economy running smoothly, make sure that labour markets are not too hot so as not to drive up prices, and that annual price inflation remains at a maximum of around two percent.

In Europe, the ECB has another important role in ensuring the viability of the EuroZone and its important banks. As readers will already know many Eurozone countries have ballooning public debts because they were negligent in managing their budgets and banks. Reforms were needed and demanded by the ECB and the EU, but they were not implemented, and now some 15 years later public debt is higher and many banks in the EuroZone are weaker than weak – see below…

After the first financial crisis, the central banks introduced massive government bond purchases, and purchased significant amounts of new bonds issued by our governments – up to 30% of the total of each nation’s issuance. It was called the “QE-policy” and it forced interest rates down to negative levels. The purpose of this policy was to allow governments to fund the costs of the required economic recovery. Banks also received funding from the central banks at below market rates to “boost economic activity”. The bosses of the central banks all agreed that this was a good and necessary policy!

But both policies fell on dry ground. Banks did not lend much to companies and investments by these companies remained relatively weak even though this QE-policy caused zero interest rates that created a bull market for share and house prices, both soaring to new heights for ten years. 

These rising markets allowed banks and investment funds to make huge profits from massive speculation in shares and real estate. The real economy that creates products, services and jobs, just hummed along on the sidelines – growth and productivity were nothing to write home about. The bosses of the banks, investment funds and companies only had to follow the crowd and see profits roll in. As a group they received huge bonuses without needed any special skills. Ordinary people actually found that their savings earned nothing, while young people could no longer afford to buy their first home.

Covid just prolonged this situation, necessitating even more public support for companies and the unemployed, thus increasing public debt. As Covid calmed in late 2021 and 2022, consumers started to spend and inflation took off with a vengeance. The Russian invasion of Ukraine and sanctions against Russia only made inflation worse.

Now the poor dears at the central banks are trying to fight inflation they created. They have started to unwind their massive bond portfolios totalling trillions of Euros and US dollars. The result is a relatively fast increase in interest rates from below zero to some three percent. Stories in the media tell us that confusion and arguments rage in the central banks because they have mismanaged what they were supposed to do. We have inflation at near 10%, stock markets that have collapsed, while the prices of banks’ shares are still languishing at very low levels.

This last measure of performance, low bank share prices, tell you something about the lack of management skills at the commercial banks, and the lack of supervision by central banks. That, however,  did not stop the bankers and fund managers from paying themselves huge salaries and bonuses in the millions of Euros. The bosses at the central banks also enjoy large salaries well beyond what ordinary folks and ministers receive. 

Here is a selection of bank share prices – a wonderful performance in the wrong direction:

On the company non-bank side just look at the performance of two Nordic companies – Fortum Oy, a Finnish energy company and Nokia, a Finnish mobile telephone company. Fortum sold off their power transmission companies, all highly profitable natural monopolies, to hungry investors for a relatively low price starting in 2011. They then invested the proceeds in fossil fuel businesses that are heavily reliant on Russia around 2017, well after Russia had invaded Crimea and other countries. Fortum’s losses today from these stupid Russian investments and from lost income from selling the transmission companies are in the billions of Euros. The then boss of Fortum is now heading up Nokia, another company whose highly paid bosses failed to notice that Apple was a competitor and not just some fly on the wall around 22 years ago!

None of those responsible seem to have lost their jobs or received less remuneration in the central banks, commercial banks, or companies…

Your correspondent is asking why do we want things to continue as they are?

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