Harvard, 16/04/2008
The Germans have a word for it 'Schadenfreude', taking pleasure in the misfortunes of others. And there are excuses for schadenfreude around in the trade union movement today as we contemplate the wreckage of the credit crunch and the newfound vulnerability of the financial services sector.
Yet that schadenfreude must be mixed with concerns, deep concerns, that we are on the brink of a recession which could be deeper and more dangerous to organised labour and the workers generally than any since the Second World War. The credit crunch is producing the bizarre situation that as official interest rates tumble, as the central banks seek to maintain liquidity and a ready supply of capital, commercial banks have suddenly discovered prudence and are making loan availability much more restrictive and expensive as they seek to recoup their losses.
In consequence, house prices are falling in the countries where the bubble has been most pronounced; repossessions are also rising; households whose ‘feelgood’ prosperity has been due to the appreciation of their real estate rather than to earnings are beginning to struggle; consumer spending is down; currency values are down in the most affected countries, and the threat to jobs is clear.
But my talk tonight is based on the upsides for organised labour in the present crisis; I have taken a dose of New World ‘can do’ optimism and left old European fatalism behind.
What use can we make of capitalism’s current woes? What opportunities are there for us in the present crisis? I hope that this conference will focus on maximising our chances and, in the slogan of the ETUC at its recent Congress, take the offensive. Look on this as a council of war where we have the possibilities of recovering ground that we have been forced to lose in recent decades. Just as I hear some faint echoes – all too faint echoes – of a revival of the New Deal in the campaigns of the Democratic candidates in the primaries, so we need a trade union led campaigning on the excesses of financial capitalism as was done in the 1930s.
This is not just whistling “Always look on the bright side of life”. The conditions are there for a trade union counter attack.
Firstly, what has happened in credit markets is, and I quote, a “huge blow to the credibility of the US/Anglo-Saxon model of transactions orientated financial capitalism”. These are not my words but those of Martin Wolf, chief economic writer on the Financial Times. What happened was a shifting round of risk on to the shoulders of those least able to understand it.
And here I have a confession. I was General Secretary of the TUC in London for nearly 10 years. My office was two miles or so from the City of London, and until my daughter’s then boyfriend got a job with a hedge fund three years ago, I had no clear idea of how these things worked. I asked him what he did. He replied. I said, astonished, “but is any of that legal?”
My broader point is that, with exceptions like Ron Blackwell, Damon Silvers and some others in some American unions, we did not have a sophisticated understanding of the instruments of modern capitalism. “Know thine enemy” commands the Bible. We didn’t. We still thought of our enemies and maybe sometime partners as the old industrial giants.
Yet they have been under the heel of the new financial capitalists to an even greater extent than ever before.
I remember asking a group of European unions “do any of you know what Goldman Sachs do?” The answer was silence. We used to think of the titans of the modern capitalism being GM, Boeing, Volkswagen etc. Now it is the Wall Street banks like Goldman Sachs who call the shots.
My next question to them was about private equity, which owns around one sixth of the total of the UK’s private sector. Again silence. And as for the language of leveraged finance, second lien loans, mezzanine finance, syndicated loans, collateralised debt obligations, securitised lending etc., this territory is like learning a foreign language. And yet financial services have been the world’s most successful industry for the past 30 years or so. Banks aim for a return of 30 % at least and most years obtain it. Those cities which specialise in financial services are the world’s most prosperous.
But as Will Hutton said in the London Observer recently adapting Winston Churchill’s words “never in the human affairs have so few been allowed to make so much money for so little benefit. Across the globe, societies and governments have been hoodwinked by a collection of self confident chancers in the guise of investment bankers, hedge and private equity fund partners and bankers who in the cause of their monumental self enrichment, have taken the world to the brink of a major recession. It has been economic history’s most one sided bargain”.
The key point is that they keep the profits but socialise the losses. And what is the result even in the good times – more short – termism, lower investment in useful activity, and asset stripping – why they were so memorably called “locusts” by the then Vice Chancellor of Germany.
Yet this sector has managed to persuade most Governments of the left of centre that it is an essential factor in a modern society.
New Labour threw their protective cloak around the city of London like it never would have done for industry. In Gordon Brown’s five tests which the UK would have to assess before it joined the euro, the safeguarding of financial services in London was one test. No other industry was mentioned. Connections between politics and the City are close. Major consultation fees are generated by the State. City slickers are trusted advisers of this Prime Minister, and the last who now works for JP Morgan.
In the States, the activities of the casino capitalists have stripped out the guts of many a good American company and left them anorexic and enfeebled. And in the meantime the boys from Wall Street are prime funders of American politics and the candidates involved in the Presidential campaigns.
I say this with some acidity to illustrate just how entrenched the locusts are. Taming them will not be easy.
They are already full campaign mode against any new regulation, any end to the privileged tax status that many are able to enjoy – for example, private equity purchases financed by debt are able to attract tax deductions on interest paid – in effect the tax payer is co-funding the takeovers and mergers. Hedge funds are almost all based, for tax purposes only, in tax havens.
A year ago, we were all outraged by private equity and hedge funds, what I call with a nod to Irish politics, the provisional wing of world financial capitalism. But now we know it is the mainstream banks and financial institutions who are at the heart of the problem.
Even a venerable pillar of respectability like Lloyds of London has many of its members registered for taxation purposes in Bermuda. “Lloyds of Bermuda” is an equally accurate term nowadays for Lloyds.
My personal journey into this murky world started with that conversation with my daughter’s then boyfriend and was continued by an invitation to give a lecture in the House of Commons in memory of Aneurin Bevan, a prominent Welsh socialist of the New Deal era. I took the opportunity to stand back and do some research into what is going on. That lecture was taken up by the Financial Times and by some other media commentators, acknowledging that I had a point when I criticised what’s going on. There were some high profile disputes involving private equity, especially in the food industry, and the issue began to come to prominence.
A further factor in stirring interest was pensions. Around the mid 1990s, in the UK at any rate, pension funds seemed to go from comfortable surplus to alarming deficit. Pension holidays had been common. I have never really understood why there was such a quick turnround from feast to famine. We were told that actuarial calculations about lifespans had to be revised. Yet the longer life spans were no surprise. They had not happened overnight. They were not unexpected by anyone other than actuaries but the actuaries hammered pensions with their new calculations. Then we were told that stocks & shares had fallen especially since 2001 but we had known worse falls before which had not triggered a pensions crisis and when stocks and shares have recovered handsomely to well about the earlier peaks, we still have a pensions crisis.
Then there were some changes to accountancy rules which presented formerly apparently strong pension funds as weak ones. The result was clear and we have had the same experiences as you:
- defined benefit schemes replaced by defined contributions; more risk transferred from employers to workers
- schemes closed, or more commonly, schemes closed to new starters
- employers shifting risk from themselves to the workers and to Government, except for top hat schemes
Of course time was when all a company’s employees were in the same scheme and everyone had an interest in keeping it going. Now that has been replaced by executives having their own – the so-called top hat schemes. There seems to be no trouble funding those. The share of company income going to top executive benefits is increasing year on year.
To return to my theme, pension funds are now in the main under huge pressures to keep paying benefits. To have a good pension is becoming a privilege, not a right, a minority, not a majority experience. Those companies who are trying to keep good schemes are having to pay around 20 % of salary per employee.
Of course, there never was a golden age. Many workers, women in particular, the low paid generally, never did have these schemes in the Anglo-Saxon world. Nor did you keep a pension’s value if you changed jobs – you were trapped with one employer. They were never universal in the way that some continental European countries have managed to be where a more collective spirit prevails with schemes industry wide or national. When candidates say – let us move forward together – what’s together – it can not just be the firm. I say to the Democratic candidates – learn from the non-Anglo-Saxon models.
All this has put pressure on schemes to find the best investments – you know that. And our money in pension schemes has become part of a wider problem. Scheme/fund managers are demanding 20 % returns from companies in an era of low inflation. They are insisting on linking executive packages to returns to stockholders – and shareholder value has been the first, second, and last obligation.
How do mature companies survive – cut costs, reduce R&D, borrow, pump up the share price artificially, become weaker as they become much more short-term. I was arguing this case in the City of London recently. A banker confirmed my view when he replied that a long-term investment is a short-term investment gone wrong. What chance invention/innovation? What chance serious investment in the Environment?
The USA and Canada have been a better than the UK with the venture capital movement – risk takers on technology - but that has often been abused by the other side of private equity, club of rich investors, whose interest is not technology but mergers and acquisitors, always maximising profits while minimising risks to themselves.
Pension funds have been increasing their exposure to these groups, and union influenced funds have been prominent in supporting hedge funds and private equity – eg Calpers and the British Post Office. Union trustees have had to take note of claims like those of KKR to have returned 27 % every year since 1987. So we have been party to investments in the locusts. Fiduciary duty has triumphed.
For me, all this means that we must have a sophisticated offensive against the locusts.
40 years on from 1968 – and I see some of the class of that year in my audience today – there’s not much scope for thinking that capitalism’s internal contradictions might precipitate its collapse. A few revolutionaries in the union world might hope for such an outcome but that is not a strategy.
The answers surely lie in taking a determined social democratic approach – and perhaps absorbing some Christian Democracy too - with a number of necessary features as follow.
Firstly, we must know better what is going on. This is a challenge to unions and our friends in the academic world. Bob Kuttner, Will Hutton, and Robert Reich have all written important books on the subject and more is necessary, both generally and specifically. We need to turn our anger into campaigns, both political and industrial.
To repeat, we must know our enemy and be as ruthless as they are in promoting our cause. And I suggest that the mainstream banks and pension funds are key to all this. They fund the hedge funds, the subprime mortgages and private equity. Goldman Sachs have just opened a new hedge fund. They place activities off balance sheet which, by definition, must be a device to hide information form investors, the tax authorities and the regulators.
Second, we must focus on tax. These deals are often based on tax breaks designed originally to boost investment in real things, not mergers and acquisitions. With difficulty, we have secured in the UK a higher tax rate on capital gains and on non domiciled workers in the UK. This was against the constant change that we were killing the goose that lays the golden egg – and that talent would emigrate.
Denmark has gone much further and in an anti hedge fund move, has increased tax rates on short term investments to discourage the quick flips that are so attractive to the financial services world.
Thirdly, this promiscuous, one night stand capitalism has strengthened the case for trade unionism. To inject balance, we need stronger unions and stronger worker rights. These include measures to help unions secure bargaining rights in the USA in particular, measures to strengthen rights to information, consultation and acquired rights in the European context. Share or stockholder capitalism has too, few obligations to anyone other than the investor and a return to multi-shareholder capitalism is long overdue. The German system is not perfect but its supervisory board system comprising union and community interests is an improvement on the Anglo-Saxon model that we are used too particularly as it guarantees that unions can get involved.
The next area is pension funds. If you are involved say in the GM pension fund, you will be desperate to maximise your returns. If you are Calpers, the same pressures apply but there is some scope for applying ethical stands. Can we secure agreement to avoid off balance sheet transactions? Can we build a culture of longer term investment, a device which has, inter alia, served Warren Buffett well? Are there legal changes like the Danish new tax law which can help?
Is there mileage in the idea about raising big funds ourselves to influence markets and play against the locusts at their own game? That would be a high risk game against opponents who know more dirty tricks then we do, and would not be as restricted by ethical, social and environmental factors as we would be. But if it could be done, it would be a hell of a victory for the trade union world.
So, in conclusion, let us concentrate on what we can do, as well as understanding what’s going wrong.
I do not think that trade unions in the medium term can live in a world where financial capitalism in its present form. As Bob Kuttner has pointed out, nor can democracy. Our employers are under excessive short-term pressures and their legal obligations to their stockholders are too great. Too much is outside the scope of democratic politics and is left to the market.
It has been frankly disappointing from a European viewpoint to see so little being said in the Democratic race on this subject. American labour’s offensive on these issues needs to focus on the candidates and to do so quickly when people are looking for democratic support. At the end of the day, our best offensive play against the locusts will be to mobilise our democracy to reclaim its primary over markets. It was in 1928 that Winston Churchill said “industry is too humble, finance is too arrogant”. It was not quite so arrogant a year later after the Great Crash but since the liberalisation of capital markets in the 1980s, it has achieved levels of arrogance beyond anything that Churchill would have imagined possible. Let us cut it down to size.