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Mervyn King, what recovery?

The Conversation,  founded by the following universities: Aberdeen, Birmingham, Bristol, Cardiff, City, Glasgow Caledonian, Liverpool, Open, Salford, Sheffield, Surrey, UCL and Warwick , offers independent expert commentary

Recently, Prem Sikka, Professor of Accounting, Essex Business School at University of Essex, contributed an article to the site, opening:

The outgoing Bank of England governor Mervyn King has presided over a huge economic crisis. His parting gift is the claim“a recovery is in sight” that the UK might achieve economic growth of even 1% this year. Despite this, the GDP will still be less than the 2007 figure.

Don’t be in a hurry to pop any champagne corks, because the assumed economic recovery is not what it seems and is unlikely to be sustained. It has been achieved through quantitative easing, printing money as old-fashioned economists used to call it, to the tune of £375 billion. That is equivalent to about £16,000 per household.

Quantitative easing has not been used to restructure the UK economy or start new industries

This money has been added to national debt – the only thing that citizens seem to own these days – but has not been used to restructure the UK economy or start new industries. Instead, it has been mainly given to the banks and they have used it to bolster their balance sheets and pay high executive salaries. . . Wealth has been sucked upwards with the aid of state policies. Corporation tax rate has been reduced from 52% in 1982 to 21% for 2014. The top marginal rate of income tax has declined from 83%, in 1979, to 45%. Despite the recession, the rich are getting richer. In 2012, the richest 1000 people, representing just 0.003% of the adult population, increased their wealth by £35 billion to £450 billion, enabling them to fund political parties and shape public choices”.

Professor Sikka lists the ways in which the plight of ‘ordinary’ people has been getting worse:

  • UK unemployment is rising and the official count now stands at 2.52 million.
  • Nearly a million young people aged 16-24 are unemployed, taking the rate to a depressing 21.2%.
  • The number of young people on zero hour contracts has doubled from 35,000 in 2008 to 76,000 in 2012. They provide no guarantee of regular work or pay and have become the preferred mode of employment for some 23% of UK employers. Many miss out on rights such as sick pay, pension and paid holidays. Many firms and even charities and public sector organisations are adopting zero hour contracts.
  • Thousands have become victims of the payday loans industry which does not shy away from charging interest at the rate of 4000%.
  • Some 13.5 million people, including 1.8 million pensioners and 2.5 million children were estimated to be living below the poverty line and with a deep austerity programme these numbers will increase.
  • In 1976, wages and salaries paid to employees, expressed as percentage of GDP, stood at 65.1% of GDP. Now it stands at barely 53%.
  • The number of people relying on emergency food handouts, simply to survive, has trebled to 350,000.
  • People are facing massive hikes in the price of electricity, gas, water, transport and other essentials and simply do not have the financial capacity to take any further hits.
  • One survey has suggested that an increase in monthly bills of just £99 will prove to be disastrous for a large number of families.

Large sections of the UK population are wracked with insecurity. Since the 1980s, the governments have sought to weaken and destroy trade unions and in the absence of countervailing power structures, workers’ pay has been ruthlessly assaulted . . . The plight of ordinary people is made even worse because the above statistics include the rewards lapped up by executives. The rates of corporate profitability are at historically high.

The above sketch of the social landscape is a million miles away from the rosy picture painted by the Bank of England. Equitable distribution of income and wealth is a key requirement for any sustained economic recovery, but it is not on the agenda of any major political party. Some may be happy to gather the crumbs of economic recovery; but most of us will simply be asking, “what recovery?”

Disclosure Statement

Prem Sikka does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.


Why are credit ratings agencies still taken seriously by business people and governments, despite their track record ?

Many will agree with Professor Prem Sikka that the influence of these agencies is extraordinary.

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His article in The Conversation –  an independent source of news and views, sourced from the academic and research community – raises important points about credit ratings agencies:
  • They are a major money-spinner. In 2012, Moody’s reported profits of $1,077 million and 2013 is expected to produce record profits as investors seek shelter from growing financial uncertainty.
  • Notions of social stability, justice, and fairness are beyond their remit. The general message from the Moody’s downgrade is that the UK government must deepen its austerity program and attack hard-won social rights on education, pensions, healthcare and unemployment.
  • They can have a serious impact on national and household accounts
 Sikka looks at their track record

“For many years, the UK-based banks engaged in organised tax avoidance, money laundering, interest rate manipulations, mis-selling of pensions, endowment mortgages, payment protection insurance and many other scandals. These scams did not persuade credit rating agencies to reduce the UK’s credit rating. Perhaps they approved of hot money rushing to London to take advantage of scams.

“The very concept of risk assessment requires some openness and a relatively free flow of information, but credit rating agencies continue to give higher ratings to opaque jurisdictions. Bermuda, whose opaque structures often enable corporations and wealthy elites to avoid taxes elsewhere, is rated Aa2, while the economic powerhouse China is rated Aa3. Oil-rich Saudi Arabia is rated Aa3, the same as the Cayman Islands which is well-known for its secrecy, opaque structures and fiddle factories that facilitate tax avoidance.

“Credit rating agencies have a history of poor performance. Enron, the fraud-ridden US energy giant, collapsed in December 2001. Right until its demise, it continued to attract favourable credit ratings. These enabled the company to overstate its profits and assets and understate its liabilities. Credit rating agencies said that lessons will be learnt, but the banking crash once again has shown that the emperor had no clothes”.

And, most seriously, Sikka points out that the report of the hearing before the US House of Representatives’ Committee on Oversight and Government Reform recorded that Moody’s, Standard & Poor’s and Fitch, the world’s biggest credit rating agencies, maintained A-ratings for Lehman Brothers and US insurance giant AIG until early September 2009, just days before their collapse and bailouts.

He concludes that credit rating agencies wield enormous economic, social and political power, but do not owe a “duty of care” to the stakeholders affected by their opinions. These issues have now become the subject of several legal disputes. Credit ratings form the basis of economic experiments that can result in austerity drives, unemployment, loss of social welfare, and ruined lives; there is an urgent need to check the economic, social and political power exercised by them.
Read the article here.

PCU asked the author to explain why these organisations are taken seriously, despite their track record, adding ‘surely it has to be more than wining and dining the ‘right’ people’. He replied:

“They are taken seriously because they have the appearance of voodoo science, maths and jargon; business people and governments seek comfort in the idea that risks can be quantified and even eliminated. Risks are always manufactured and rarely eliminated – rather they are displaced – and that is what we have witnessed in the banking crash”.