In the wake of the most astonishing week in the financial markets since the Great Depression, sympathy for City folk is understandably thin on the ground. If any other industry was faced with the destruction of tens of thousands of jobs and the failure of some of its biggest, there would be outpourings of grief for the victims. But the general attitude to those thrown out of work following the collapse of Lehman Brothers and Bear Stearns, or the takeovers of Merrill Lynch, Dresdner Kleinwort and HBOS, seems to be that they had it coming.
That’s hardly surprising. Bankers were largely responsible for creating the chaos in the financial markets and now we’re all facing the consequences of their recklessness and greed. At least bankers have the cushion of all those years of fat bonuses they paid themselves during the boom years – disgracefully right up until earlier this year when the credit crunch was already in full-swing. Besides, many will rightly see what is taking place in the City as no different to the fate of many traditional industries, such as mining, steel and ship-building during the 1980s and 1990s – and nobody remembers the City showing much sympathy for them.
But people working in the financial services industry are human too and many are facing desperately worrying times. The City employed armies of support workers who didn’t earn fortunes but had mortgages and bills to pay like everyone else and who will now be wondering what the future has in store. There will be plenty of other middle-ranking City people who may have been ludicrously well paid, but who built up lifestyles based on the expectation those big pay cheques would keep coming in.
One aspect of City pay not well understood is that basic salaries are relatively low – rarely much more than £100,000 a year. The big money comes in bonuses. Over the last few years, even quite junior City folk came to expect bonuses of many multiples of their basic pay. Now many of these people are in for a shock. Large chunks of those bonuses were paid in shares and options that have lost much, or all, of their value. Plus there is little chance that bonuses will return to previous levels for years to come.
Very painful adjustments are inevitable. One banker told me this week that 100% of his salary was taken up by mortgage payments and that he had been relying on his bonuses for everything else – from food to school fees. Another used all his salary to pay school fees, while he used his bonus to service a near £1m mortgage. Others geared up heavily to buy holiday homes, ski chalets, yachts and so on. Stripped of their bonuses, they will be forced to put these assets up for sale – assuming they can find a buyer – and take children out of private schools. No doubt many City folk will struggle to avoid personal bankruptcy.
So, bad news for City folk – and bad news for the rest of us too as high-rolling bankers rein in their lifestyles. Already, the impact is being felt in restaurants and bars, in the construction and travel industries, and on the high street. All this suggests that the latest forecasts predicting only a mild recession in Britain are for the birds. The idea that the UK economy can go through a profound rebalancing of a sector worth as much as 20% of its GDP with only a mild downturn seems wildly optimistic.
But long term, this process of adjustment is long overdue. The City owes much of its success over the last two decades to the build-up of gigantic imbalances in the global economy: a preference in the West for imports rather than exports and on spending rather than saving. That led to the huge and unsustainable growth in debt upon which the boom was based. It also led to a gross misallocation of resources as the City sucked talent from other parts of the economy. That process has now gone sharply into reverse. In the end, that will be no bad thing. But don’t be too hard on the immediate casualties.
Nick Clegg is surely right on this one
There are lots of reasons to be sceptical about the Liberal Democrats promise to cut public spending and lower taxes: much of the proposed £20bn savings will simply be used to fund new spending projects; the overall tax burden is not going to be cut, so tax cuts for those on low incomes must be paid for by higher taxes on higher earners; besides, the Lib Dems are never going to win power, so who cares what they say?
But that does not detract from the fact that the Lib Dems have got this one right. Government spending under Labour has been out of control and low income households are paying far too much tax. Unlike the spineless Tories, the Lib Dems have led the debate on public spending. It won’t be enough for the next government simply to plug Labour’s giant hole in the public accounts. The only way the economy is going to recover is if the Government puts more money in people’s pockets to boost spending. That means tax cuts – and if the only way to pay for them is via tough spending cuts, so be it.
• Simon Nixon is the author of Credit Crunch: How Safe is Your Money?, from www.pocketissue.com, priced £5.99.