Change needs to be shaped by the needs of those outside rather than inside financeby Andrew Haldane / September 17, 2015 / Leave a comment
John Kay, Other People’s Money: Masters of the Universe or Servants of the People? (Profile Books, £16.99)
Now read an extract from John Kay’s book
First, a disclaimer—I think John Kay is a quite brilliant economist, thinker and writer. As these three attributes are not always complementary, he is the rarest of breeds. That means I am probably incapable of writing a genuinely critical review of a John Kay book.
Fortunately, in this case there is no need to do so. His new book, Other People’s Money, is about as good a demonstration of Kay’s skills (as economist, thinker and writer) as you are likely to find. Where others have jumped in feet-first, Kay provides a head-first diagnosis of what contribution finance makes to wider society.
The core of Kay’s argument is simply put. Finance plays a crucial role in supporting the economy and wider society, along at least four dimensions: in facilitating payments between people, in matching end-borrowers and end-investors, in managing risks to one’s health and wealth and in managing money across generations. And historically at least, these are precisely the roles the financial sector has played. That is why, through the ages, it has been accepted (if not always especially liked) as a trusted servant of society.
But the past few decades have seen a sea-change in the functioning, and hence perception, of the financial sector. Latterly, that sea-change has at times risked flooding the entire economic and social waterfront. In a nutshell, finance has moved away from serving the economy and towards serving itself—and indeed remunerating itself. The financial services industry, Kay argues, has moved from servant of society to Master of the Universe.
Thus the simple financial products of yesteryear, tailored to customers’ needs, have given way to complex chains of transactions understood by few and ripe for rent-extraction. The sober-suited retail bank manager straight out of secondary school has given way to the sharp-suited investment banker straight out of business school. The cult of liquidity has usurped the ethos of long-termism. Manufacturing of transactions has displaced cultivation of relationships.
Even if this is something of a caricature, it is not an entirely inaccurate one. And this evolution, Kay observes, has not been benign in its consequences. It helped sow the seeds of the global financial crisis and the subsequent…