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Money is set to be in the spotlight
Money is set for a comeback. You might think that can't come too soon. But while government dollars may before long land in consumers' pockets through rebates or tax cuts, it is money's place in the overall system that will be in the spotlight this year, as authorities deploy all available tools to battle deflation.
- Financial Times
- Published: 23:35 January 5, 2009
Money is set for a comeback. You might think that can't come too soon. But while government dollars may before long land in consumers' pockets through rebates or tax cuts, it is money's place in the overall system that will be in the spotlight this year, as authorities deploy all available tools to battle deflation.
The US Federal Reserve, notably, has opened the monetary spigots, using its balance sheet to ease systemic strains. The US monetary base, M0, doubled during 2008. To recap, that measure of money supply comprises notes and coins in circulation plus bank reserves held at the central bank.
M1 includes currency, travellers' cheques and funds held in demand or current accounts.
A broader measure of money, M2, brings in savings and longer-term deposits below a certain size, plus individuals' money market mutual funds. M3 (which the Fed stopped tracking in 2006, a mark of its overall recent lack of interest in money supply) adds large time deposits, institutional funds and some repurchase agreements.
As the Fed has shovelled funds to the banks, excess reserves held at the central bank have surged. Curiously, currency has fallen from 90 per cent of M0 to about half.
Banks' fright has meant they are taking handouts and merely redepositing them at the Federal Reserve for safe-keeping rather than lending to the public. The link between the monetary base and M1 is not straightforward. Still, the fact that M0 exceeded M1 in December is unusual and may reflect this bottleneck.
Hosing the system with money runs the risk of sparking runaway prices, eventually. Yet until the Fed's provision of liquidity prompts lending, it will have little stimulative effect on output or inflation.
The pace of growth of M1 hit double digits in November for the first time since the early 1990s. Broad money growth, meanwhile, remains stable. Its acceleration could be one sign that the Fed's easing is taking effect. It will also be the cue for inflation hawks to swoop.
Last year marked the end for whopping cash bonuses - at least for some time. But rest assured that banks will still offer big incentives to their best and brightest. The trick will be to keep compensation beneath the radar of governments, shareholders and the baying public.
Various solutions are being bandied about. Credit Suisse is paying its bankers in securities whose worth derives from a $5 billion pool of complex assets.
UBS plans to pay its bankers cash in escrow, which can be whittled back should the bank lose money; the bonus then becomes a malus. Another idea is to increase drastically the proportion of bonuses paid in stock.
That is all very well when the size of a company's compensation pool is small relative to its market capitalisation. But with the share prices of many banks down more than 70 per cent or more since the subprime crisis erupted, potential dilution of shareholders could be a stumbling block.
For example, Goldman Sachs paid out about $11 billion in the year to November. Even if only half of that is paid in stock, it is still equivalent to almost a fifth of Goldman's market cap.
There are other problems with using paper. Why would anyone want to be paid in stock given the lack of transparency on balance sheets?
Widespread stock ownership in large companies also has questionable incentive benefits, even in good times. Individuals know that their actions are too small to move the needle.
Yet there are few worse feelings than to watch your shares fall in value because of some dummy in another part of the company. Lehman Brothers and Bear Stearns both had high levels of employee ownership.
Until the bonus systems settle, bankers will struggle to rank themselves in the usual pecking order. That may hobble bank-hopping star bankers. But jobs, like bonuses, can be deferred - in the current climate, some might argue, indefinitely.
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