Why I'll be reading “Other People's Money” by John Kay
Gary Adams listens to distinguished British economist John Kay criticise the out-of-control financial sector.
I recently had the pleasure of stepping through the polished halls of Westminster to attend a speech by John Kay, a professor of economics and author of ten books.
The title of his talk was also the title of his latest book, Other People’s Money: Masters of the Universe or Servants of the People?, the theme of which is “financialisation”, a term used to describe the increased influence of financial institutions on all of our lives.
The whole production was part of his duties for New City Agenda, a think tank that aims to look at the role of financial services in our society.
Professor Kay zoomed between the macro and micro with astonishing figures thrown in for drama, but the thread that ran through all he said could be summed up as “what is the point?” To wit: how is it that these massive financial institutions, “too big to fail” (or, in his words, not too big but “too complex to fail”) and in the last round of disasters bailed out by tax payers after making gargantuan errors in the name of greed, are valued so extraordinarily highly by our societies? What do they actually do for us?
He went on to suggest that wealth isn’t really created by these institutions but simply moved about – and not, as seems to be the commonly-held belief, in the form of lending to businesses (in fact this is equal to around 3% of total lending activities by British banks), but between each other in a closed circle of mega-corporations. Where are their reported profits coming from?
In fact, knocking down commonly held beliefs regarding economics was a drumbeat that sounded continuously throughout the talk. From how many people working in the financial industry actually earn the astronomical amounts reported in the press to the role of regulation. This especially was a point that made some of the room bristle as Mr Kay suggested that there is in fact too much regulation. His argument was that complicated regulation leads to more complex financial products aimed at circumnavigating these rules (Credit Default Swaps being the exampled cited in one case), which leads to more complex regulation and so on – a war of attrition, the consequences of which were seen in 2008 with no end in sight. He touched on some reform ideas, name dropping the Glass-Steagall Act (a 1933 act that prevented commercial banks from engaging in investment, created in response to the Great Depression and then repealed in 1999) and saying that in its previous form, wouldn't go far enough in today's environment.
He touched on some reform ideas. One that left me really thinking, was how the risks the financial services sector concerns itself with – interest rate rises, inflation etc. – are nothing to do with the risks that you and I worry about – job losses, debt, relationship breakdowns and so on. The implication appeared to be that if we are to accede our lives to these institutions, shouldn’t their balance of risk be more in line with our own? There are strong arguments against this for sure, but for me at least, it’s calorie-dense food for thought.
He also raised the fact that not too long ago, the brightest and most driven didn’t go into banking. Now they do. What has the development of our society lost out on at worst and delayed at best due to this?
The talk was refreshing in that it was highly critical of what looks to be an out-of-control sector, but without the hysterical hyperbole that’s all too easy to find in the mainstream press. It has certainly got me interested in reading his book, and if I can’t wrangle a free one from the publisher I’ll be in Foyles this weekend, scuffed credit card in hand.