OTHER PEOPLE'S MONEY

All’s not well in the counting house, nor in a capitalist system grown increasingly unequal and corrosive.

“We need a finance sector to manage our payments, finance our housing stock, restore our infrastructure, fund our retirement and support new business,” writes British economist Kay (Obliquity: Why Our Goals Are Best Achieved Indirectly, 2010, etc.). By his account, we don’t have a sector that does much of that necessary work; instead, intermediation, buying and selling abstractions rather than real things, is the new method. In fact, writes the author, lending to entities that make things, “which most people would imagine was the principal business of a bank,” makes up only about 10 percent of the sector’s business. The rest lies in intermediation, which is another way of saying that “the industry mostly trades with itself, talks to itself and judges itself by reference to performance criteria that it has itself generated.” Take securitized mortgage loans, bundled and traded like baseball cards: there’s a recipe for disaster, and in the absence of meaningful external oversight, it and other contributing factors to financial meltdown are not likely to be tamed anytime soon. Kay is no Chicken Little; his arguments are calmly made, backed by such evidence as can be teased out of the reclusive industry. In the meantime, he notes, many aspects of the financial sector, such as the lending and deposit channels, are “ripe for disruptive innovation,” just as in recent years the increased use of credit and debit cards and other electronic tie-ins to bank accounts have made cash unnecessary in most daily transactions. Kay holds forth for increased regulation that is focused “more on the interests of consumers and less on the integrity of market processes”—in other words, the more vigorous application of Dodd-Frank and other regulatory regimes that Congress is now hurriedly trying to dismantle.

Sobering and lucid. If you’re moved to keep your money in a sock after reading this, you’d have cause.