How some common sense can help restore “priority and respect for financial services that meet the needs of the real economy”
I agree with John Kay: “The objective of reforming the finance industry should be to restore priority and respect for financial services that meet the needs of the real economy. There is something pejorative about the phrase ‘the real’ — meaning the non-financial — economy, and yet it captures a genuine insight: there is something unreal about the way in which finance has evolved, dematerialised and detached itself from ordinary business and every day life.”
Consider these observations by Louis Brandeis that Kay cites in Chapter 4, and note the date:
“The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else’s goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people’s own money.” (From Brandeis’ Other People’s Money and How the Bankers Use It, 1914)
Brandeis could well have been describing today’s financial institutions (including banks) whose total control of credit limits enables them to charge usurious rates on unpaid balances and charge usurious penalties on debit card overdrafts and credit card late payments.
These are among the several dozen passages of greatest interest and value to me, also listed to suggest the scope of Kay’s coverage in Part 1, “Financialisation” (Chapters 1-4):
o The Road to Pottersville (Pages 11-16)
o The Rise of the Trader (16-23)
o New Markets, New Businesses (23-34)
o From Crisis to Crisis (34-42)
o The Robber Barons (e.g. Henry Clay Frick, Jay Gould, J.P. Morgan, John D. Rockefeller, and Cornelius Vanderbilt) 42-46
o Chasing the Dream (61-69)
o The Role of the Middleman (77-84)
o Liquidity (84-91)
o Leverage (95-100)
o Smarter People (101-106)
o Competition (106-108)
o The Edge (108-113)
o Regulatory Arbitrage (113-117)
o I’ll Be Gone, You’ll Be Gone (118-126)
o How Profitable Is the Financial Sector? (126-132)
One of the greatest strengths of this book is John Kay’s relentless focus when taking a common sense approach to reforming provision of various financial services in order to restore the priority and respect for those services that meet the needs of the real economy. For example, these are the principles that he believes should underpin reform:
o “Re-establish short, simpler, linear chains of intermediaries.”
o “Restore focused, specialist institutions with direct links to financial users of financial services, deriving competitive advantage from their skills in identifying and meeting the needs of these users.”
o “Require that anyone who handles other people’s money, or advises on how their money should be handled, should demonstrate behaviour that meets standards of loyalty and prudence in client dealings and avoids conflicts of interest.”
o “Enforce obligations of high standards of behavior in the management of other people’s money by criminal and civil penalties, directed primarily to individuals rather than to organizations.”
o “Treat financial services as an industry like any other.” [Kay has some especially sensible thoughts about this.]
o “Cease using the financial sector as an instrument of economic policy, and treat the opinions on economic policy of people in the financial sector with the same (modest) regard accorded to the political opinions of other business people.”
He provides additional comments about each on Pages 259-260, noting that the complexity of modern finance “has been designed, and has operated, principally to benefit financial intermediaries rather than the users of financial services.” Kay is a world-class pragmatist, driven by insatiable curiosity to increase his understanding of what works, what doesn’t, and why…and then share what he has learned with as many people as possible.
Indeed, if you check out the profits of the ten largest banks — as I did recently — you’ll learn that more than 50% of their revenue is generated by fees. Worse yet, in recent years, the same banks have reduced the available funds on credit cards they issue so that they can charge higher interest rates on unpaid balances. Of course, cardholders’ credit scores are then lowered, enabling the banks to charge even higher interest rates.
There are those who believe passionately that “the real business of finance” is to use (abuse?) other people’s money in order to become wealthy. They have flourished, especially since 2008, and will continue to thrive unless and until — in Kay’s words — we “get back to work: the serious and responsible business of managing other people’s money.”
Be sure to check out the Epilogue, “The Emperor’s Guard’s New Clothes.” With only a few hundred words, John Kay captures the essence of what enlightened democratic officials and an educated general public can prevent.