Politicians' Earnings

There is a glorious row rumbling on about the salaries of Vice-Chancellors [general managers] of Universities. A new Vice-Chancellor of Oxford feels constrained to defend a salary of less than £400,000 as the head of one of the half-dozen most powerful and effective academic communities in the world: and that is quite inappropriate. To attract a significant global academic-cum-manager needs that amount of money: though it is only a couple of decades since Sir Colin Lucas occupied the office of Vice Chancellor for a couple of years as Master of Balliol College. Colin was able to persuade the powers-that-be in the university that the time had come to drop the hit-or-miss rotation of the Vice-Chancellorship among the heads of colleges and to employ a top manager on a longer-term contract. Cambridge did the same thing about the same time, and so far the two institutions between them had some successes and some embarrassments: but nobody is proposing a reversion to the medieval system.

The silly title of Vice-Chancellor implies an assistant or deputy to the honorific head of a university, who may be a member of the aristocracy [even a minor royal] or a politician or a benefactor or a distinguished scholar or scientist: but who is in no way involved in the routine management of the place. Several vice-chancellors have added titles like 'president' to their portfolio [evincing a painful need to say 'I'm really the boss'] and Scots avoid the whole morass by being known as 'principals'.

The route to being a vice-chancellor is complex, but now that there are some 120 of them it has become obvious that both the institutions and their general managers are of very different quality. The vice-chancellor of Bolton University [yes, there is even one there now] has waded onto the media several times, bragging of his importance despite his institution wallowing near the bottom of the league. He claims to be worth what he is paid, in a way that would perhaps justify £50,000 a year plus expenses and pension: the fact that he is within spitting distance of the top 'earners' is absurd on any objective criterion.

The row started with somebody making the observation that all the vice-chancellors are paid more than the Prime Minister is paid. This has been developed into something close to a vendetta by the obsessive proponent of the useless HS2 railway, who has been unable to make any inroad into the system; while the government looks most unwilling to intervene. There are at least twenty world-class university institutions in the United Kingdom, including the leading colleges of the University of London. Their heads need to be global figures. But for the rest of the so-say university system the salaries are indeed inflated. How did this happen? I was there at the time. During the 'seventies and the 'eighties of the last century several 'polytechnics' were created, usually by amalgamating teacher-training colleges and craft colleges with city technical colleges. These institutions grew quickly as they 'produced' graduates more cheaply than did the 'traditional' universities; so their Directors were able to negotiate high salaries with their local-authority-dominated  employers. Then the government decided that the polys should be given 'parity of esteem' by being designated as universities. Then the pre-existing vice-chancellors found it impossible to ignore the fact that their median salaries were below those of ex-poly directors; and a game of catch-up went crazy: resulting in the present system.

Then somebody drew in the comparison with the Prime Minister: if she gets a much more modest salary for 'running the country', then it can be claimed to stand as self-evident that V-Cs are paid 'too much'.

This is daft: everybody knows that most prime ministers in recent decades have been quite young people, who had a great deal of lifetime remaining in which to make a great deal of money, if they are so inclined. Gordon Brown is not so inclined: he has a comfortable existence doing global good works. But his old sparring-partner Blair was quickly notorious for the millions that have passed through his personal accounts as well as through the charities that give him a public profile that has not yet diminished his odious personal reputation. David Cameron's cowardly exit from Downing Street and the Commons was followed by the purchase of a hut-on-wheels in which he is writing the memoirs that he hopes will begin the repletion of the fortunes that he and his wife have inherited. Mrs May's impending departure will give her the opportunity to accumulate a cash pile to set alongside her husband's City earnings; starting, again, with heavily-supported memoirs.

The 'granny of them all' among ex-politician big earners, Hillary Rodham Clinton, is in the UK now to promote the memoirs that have been written and published in quick time since her election defeat last November. Like her husband, she had outblaired Blair himself in the league of big post-political earners. So to make a current prime minister's salary a template for anything is simply silly. Some civil servants, NHS managers and others in the public sector are necessarily paid more than the prime minister. If Labour re-nationalise any industries or utilities, they will have to pay their managers more than the prime minister, if they want the re-nationalisation to work. That is the way of the world. Meanwhile, the vice-chancellor of Bolton University will be the living proof that some people in the semi-public sector are indeed overpaid.

What the Fed is Doing

The Federal Reserve Board, the central bank of the USA, has announced that it will continue on a large scale to buy 'mortgage-backed securities'. A security is a promise-to-pay that has been issued by a firm or a government agency, that is considered to be highly likely to be cashed [or exchanged for another acceptable asset] when the owner demands payment in accordance with the terms on which the security was created. By concentrating primarily [though not necessarily exclusively] on mortgage-backed securities the Fed is slowly capturing the reckless expansion of credit during the nineteen-nineties and twenty-naughties, when the spending-power that was created was used to 'buy' houses. Hundreds of thousands of Americans were encouraged to participate in Bill Clinton's concept of a property-owning democracy by taking a material stake in the country - and gaining a material asset - through house purchase. Lending institutions, mutual funds and banks, were bullied by the agencies of federal government into making mortgage loans, even to people whose incomes and history of indebtedness indicated that they were incapable of resourcing and managing the repayments.

Notionally the books balanced. The population collectively borrowed more money each month to buy an increasing housing stock, comprised of properties whose resale prices were increasing in line with the rising price of new homes. The public's debt to the banks notionally matched the liability of the banks in the form of the sums that they owed to the investors who had supplied them with the credit that they had advanced as mortgages. Month by month the vast majority of mortgaged householders paid the sums due to their mortgage lenders. The lenders used the inward cash flow to pay their business costs and to pay the interest that was due on the credit that they had borrowed, and to repay those creditors and depositors who asked for their money back: and they had enough left to carry on lending to more borrowers at higher prices. Then during 2006 economic conditions became tougher for low income groups. Unemployment and prices were increasing, and an increasing number of 'sub-prime' borrowers either surrendered their properties or were evicted from them as their arrears on mortgage payments were deemed intolerable by the lending institutions. The mortgages had partially been funded by sales of securities that were 'bundled' with other mortgage lenders' debts and with the ownership of loans that had been made for other things. These 'complex' securities  were said to be 'safe'  because they would not lose more than a fraction of their value if any one of the lending institutions became unable to pay out against the security on demand. During 2007, however, it became clear that several major mortgage lenders had so large an exposure to sub-prime mortgages that there could no longer be a guarantee of the value of the securities that they had issued; and it was unclear, in the case of many complex securities, how much of the asset had been eroded because it was not clear how much of the asset was devalued. So the only way to treat such a security was to assume that it had no determinable value. This caused the catastrophic collapse of banking confidence and of asset values generally that was quickly dubbed the 'credit crunch' and which spread around the world.

A variety of headline-grabbing measures was taken by governments and by central banks both to calm down the markets and to prop up the values of as many shares and securities as could still be seen to retain positive value. The banks were enabled to carry on allowing customers to access their own money, and to service those of their debts that it was necessary to pay off. Where it was deemed necessary the government took partial or even total ownership of the banks; though the most preferred method was to 're-capitalise' the banks by topping up the cash that they had available so that they could continue to met their obligations.

Though house prices fell significantly, valuations were still quoted and contracts for house purchase continued to be made; and the vast majority of mortgage holders carried on making all or most of their payments. For a while the mortgage backed securities could not be valued, but they continued to exist. But then in 2011-12 conditions became more stable, particularly in the US housing market, as the massive spending on infrastructure by the federal government and the constant increase of the amount received by the American people in welfare and unemployment pay and the sluggish creation of new jobs worked together to increase confidence in the valuations of most US house property. Significant value could again be attributed to the securities from the 'nineties and the 'noughties that had been in limbo since the credit crunch. The Federal Reserve has now announced the continuance of its programme of taking such securities into the asset registers of the banks that are members of the Fed, in turn for new credit that is given to the banks to support their ongoing operations.

The short-term impact of this policy will be slightly to stimulate activity in the US economy, adding to business turnovers and employment. The major impact of the policy of 'Quantitative Easing' will be to increase the notional money supply; to convert the inflation of credit that had been confined to the housing sector to general credit within the banking system. The excess debt that was accumulated in the housing sector is being nationalised in the hands of the Fed, and a huge amount of spending-power is placed in general circulation. It will create inflation of general prices; and will stimulate modest economic growth. Without allowing any other major default of a bank to occur since Lehman's disappeared at the height of the crunch, the absurd sectoral credit expansion from the bubble era is being legitimated. This will be a phenomenal achievement, if it can be brought to completion. The objective is clear. In Britain the promised continuance of quantitative easing is not similarly targeted at 'monetising' the inflation of house prices that went so disastrously wrong through the sub-prime experiment; it is principally helping the banks to continue to meet their obligations from past casino banking, and secondarily allowing them to perform the statistical tricks that are needed to 'strengthen' their balance sheets to meet new global capital requirements. However long it goes on, it is unlikely to assist the growth of the real economy.