The only way to achieve the necessary changes will be as a response to the next financial crisisby Jay Elwes / December 8, 2015 / Leave a comment
A full recording of the event, which was sponsored by Aberdeen Asset Management, can be heard here:
John Kay, the economist and Financial Times columnist, spoke at a recent Prospect event to discuss his book, Other People’s Money.
Bronwen Maddox, Editor of Prospect, chaired the discussion. Also on the panel were Martin Gilbert, Chief Executive of Aberdeen Asset Management and Will Goodhart, the Chief Executive of CFA UK, the organisation that represents Britain’s financial analysts.
Kay set out the core critique of his book: that the City consists of institutions that trade almost exclusively with one another. This activity, he pointed out, is vast. The total nominal value of all outstanding derivatives, a kind of financial asset, is $700 trillion, he said, an amount equal to three times the value of all assets in the world.
Lending to non-banks makes up less than 3 per cent of banks’ balance sheets. The financial system, he said, is increasingly pre-occupied with itself and its activities are becoming ever more divorced from the interests of the real economy.
Kay was clear that Britain does need a financial services sector—but one with a very different character.
Equity markets began in the nineteenth century as a way to fund the development of railways and other capital-intensive corporations, said Kay. Now, things are very different. Companies such as Google, Facebook and Apple are very capital un-intensive. They do not require factories or production lines, and employ many fewer people than the global corporations of the past. As the demand for large-scale up-front equity finance has declined, so the nature of equity markets has changed profoundly, said Kay. Stock markets have become a way of taking money out of companies, not putting money in.
Turning to the asset management sector, Kay said that its most important role was stewardship, where asset managers work with companies in which they invest in order to encourage better performance. But what kind of performance? At this point, Kay drew a distinction between different ways of gauging success. The first method was by measuring a company’s “alpha”, a measure of how a company performs against its competitors. (An asset manager can hold equities that are falling in…