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Is the Financial Sector so high speed it’s running away from what matters?

Fuelled on coffee and scrambled eggs, we were joined by leaders of Financial Services for breakfast, all keen to hear what Economist and Financial Times columnist John Kay’s provocative stance would be.

Centred around his latest book “Other peoples money: Master of the universe or servants of the people” John spoke about bringing the financial sector into the light by addressing what it’s all really for and how its focus has strayed.

John kicked off by posing the question “what do these people actually do?” He went on to state the answer is simply “they trade with each other.”

Here are just 3 of the topics that John covered…

Regulation & rule books

In order to keep the financial sector sustainable John argued changes need to be made. A reform needs to take place with the needs of the real economy at the centre. Not only does the structure of the industry need to change people’s incentives within it. He made a point of stating that in doing this he wants to make clear that this is not a plea for more regulation - in fact quite the opposite.

John argues that interestingly, regulations are set up in a way that stimulates compulsive high frequency secondary trading.  The reform he argues carries “a plea for less regulation” and a financial sector which is far more related to the needs of the real economy. John claims his plea stems from the need to get away from “what is always an unsuccessful attempt at regulation”, which in his mind consists of a construction of very detailed descriptive rule books on how firms and sectors should behave. Instead we were told the focus should be centred not on rule books and regulations but the industry itself and the people within it.

The real economy needs boring banks

John clarified what’s needed is to promote an industry structure with much shorter, simpler chains of intermediation. This would lead to an industry with less intra-financial activity in which the intermediates are simply people in direct contact with savers or users of finance. In short he argued we need a world of simpler institutions, or as John put it “rather boring banks which basically do what they used to do”. While also ensuring the incentives of those who work there are people “who are engaged not in fruitless and almost individualistic cases and trying to hurl them at each other” but those who’s incentives are admirable; concerned to identify the needs of savers and companies and any other areas in which they invest. John observed the need to get away from a world which is dominated by a rather small number of financial conglomerates. This is a world we have not only created, but now in effect have institutionalised by the sorts of measures of public support and regulation which were put into place to back up the 2008 crisis.

Scrap the status

We have essentially created a financial economy which talks and trades with itself and is increasingly disconnected with the real economy. John argued it has strayed dangerously from its core functions and the functions themselves have moved away from their primary activities. There’s less investing, more trading, fewer assets and more asset backed securities, resulting in instability and crisis. “Our willingness to accept uncritically the proposition that finance has a unique status has done much damage.” He observed that the finance sector we’ve created today is much larger, much more complex and much less robust than it needs to be able to achieve sustainability. John maintained the challenge we have is to make a settlement which is legitimate and permanent, before the next financial crisis. Or without reform we risk people with undesirable incentives who are capable not only of messing up the financial sector and complete economics but messing up the regulatory capitalism which everyone understands.

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