Economist John Kay, who writes for the Financial Times, delivered a powerful, eminently readable critique of the finance industry last month at the Bank of International Settlements conference.
The speech guts the claims of the finance industry to be unique in its importance and in the applicability of general good practice to its operation. Every industry — dairy, widget manufacturing, coffee shops, search engines — claims it is doing something unique, but governments and economists treat these claims with deserved scepticism. Whatever unique characteristics these industries have, they're swamped by their foundational similarities.
But finance claims to be really, truly different, and credulous economists buy these claims — and let the industry get away with all kinds of terrible, destructive conduct that no other industry could pull off.
I thoroughly recommend this sprightly, easy to understand paper as an introduction to the unchecked problems of finance, which have weakened the foundations of so many other parts of our lives.
Finance exists to serve households and businesses. Individuals and companies
engaged in finance should have specific knowledge of at least some of the needs of
these users of the financial system. We need focused financial businesses with a clear
productive purpose and a management system, governance regime and capital
structure appropriate to that purpose. We should aim to restore and nourish the rich
variety of institutions and organisational forms that existed in the finance sector
before the 1980s.
It is possible to have a smaller, simpler, financial services system that is better
adapted to the needs of the non-financial economy — an efficient payments system,
effective capital allocation, greater economic stability, security in planning and
managing our personal finances, and justified confidence in the people who advise
us. We will not wake up tomorrow, or next year, and find such a reality. Is it therefore
pointless to articulate that vision? I do not think so. My experience in public policy,
business and the academic world has led me to believe in the truth of KeynesS remarks
on the long-run power of ideas.
"Madmen in authority, who hear voices in the air, are generally distilling their
frenzy from some academic scribbler of a few years back."22 Today, thank goodness,
we have few "madmen in authority". The ideas here are intended to represent a guide
for the democratic politicians who will be confronted with the next financial crisis. We
need a restructuring of the finance industry, to provide a provisional blueprint for
how thoughtful policymakers might prepare for the next crisis, and an illustration of
how they might have used the control of the finance sector they achieved in the
aftermath of the crisis to more useful, and long-lasting, effect.
Finance is just another industry [John Kay]
"Finance is Just Another Industry"
(Image: Eat The Bankers, Adam Smith, CC-BY-SA)