Bank Of England Boss Attacks Bankers' Bonuses
The governor of the Bank of England has attacked pay packages amongst bankers whilst warning of a difficult year ahead as the UK looks to continue its recovery from the banking crisis.
In a speech hours before figures reveal whether the economy contracted in the final quarter of 2011 and on the day that the IMF slashed its forecast for UK growth, Sir Mervyn repeated his plea for banks to limit pay to employees and shareholders and store cash to save against future shocks. He said every £1 of capital could be used to fund £20 of lending.
He said: "The tragedy of the financial crisis is that those who have suffered most have been those who bear no responsibility for it, and who, whether employees or businesses, accepted the disciplines of a market economy only to find that others were excused that discipline because they were 'too important to fail'.
"Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair."
The governor added there was scope for more stimulus measures to help the UK economy on its "arduous, long and uneven" road but warned that the recovery will be slow and 2012 will not be an easy year.
With inflation falling, there was scope to leave interest rates at their record lows and for another round of quantitative easing if needed, he added.
Sir Mervyn repeated his calls for banks to moderate pay ahead of the bonus season, saying rewards should not go disproportionately to a small elite, especially one that benefited from the support of taxpayers.
He added that it would be "a bitter tragedy" to deny funds to those who need them and rewards needed to be seen to be fair.
And on the day that government debt smashed through the £1 trillion barrier, he said the UK needed to import less if it was to cut borrowing, the Press Association reported.
Sir Mervyn said the economy had only grown by about 1% over the past year as a ferocious squeeze in the purchasing power of take-home pay brought about falling consumer spending.
But this was due to be eased by falling inflation, unless commodity prices started to rise again, most likely if tensions in Iran pushed up the price of oil.
With banks continuing to suffer higher funding costs, the tightness in availability of credit was set to continue to act as a headwind to the economy.
The international landscape was still dominated by imbalances and large losses will need to be recognised and absorbed in the eurozone.
But he added that the Bank "stands ready" to provide liquidity should conditions deteriorate further.
He said the world economy would take time to move to a new equilibrium and recoveries from crises linked to banking are slow but do eventually come.
He said: "Starting from a position of excessively leveraged balance sheets, the path of recovery is likely to be arduous, long and uneven.
"The position of the world economy, especially in the euro area, is serious. But there is no reason to despair.
"Helped by the right policy actions, the UK and world economies can and will recover. And when they do so, they will be on a more sustainable footing than at any point in the past fifteen years."