Financialisation
Dec. 17th, 2017 07:36 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
qatsiBook Review: Other People's Money, by John Kay
I picked this up a while ago from the book-swap shelf at work; several years ago I'd read the author's The Truth About Markets, so I thought this would be worth a go. Written in 2015, this is in many ways a reflection on the financial crisis, but really I think Kay's point is that the crisis just highlighted things that were already broken in the system.
For many people, it won't have escaped their attention that some of the problem "banks" - Northern Rock, Bradford & Bingley and HBOS (Halifax) - were formerly Building Societies that demutualised in the 1990s, and for Kay this is a big factor, because it changes the way the assets of these institutions were managed. (RBS is slightly different, but the greed-is-good mentality that led to its disastrous acquisition of ABN Amro follows broadly similar logic). What I hadn't really grasped before is that most investment banks were, broadly speaking, demutualised only slightly earlier, from the 1970s onwards - previously they had generally been partnerships, with all the liability that implies for the partners themselves. In both cases, demutualisation produced a step-change in attitude to risk - once the ownership of the institution is transformed into equity, the working capital is other people's money, and is no longer treated with the same care.
But it's not just about risk; another of Kay's significant themes is that an awful lot of the activity of banks and financial institutions isn't useful for the economy; and, by implication, the profit of that activity is at the expense of someone else. The business of managing payments between parties, and stewardship of deposits and loans to businesses and consumers, is necessary and useful; but, according to his theory, the apparently endless trading and re-trading of fragmentary assets and liabilities serves no-one other than the bankers themselves. Kay concludes with some suggestions for reform, but these seem fanciful in the current situation.
I picked this up a while ago from the book-swap shelf at work; several years ago I'd read the author's The Truth About Markets, so I thought this would be worth a go. Written in 2015, this is in many ways a reflection on the financial crisis, but really I think Kay's point is that the crisis just highlighted things that were already broken in the system.
For many people, it won't have escaped their attention that some of the problem "banks" - Northern Rock, Bradford & Bingley and HBOS (Halifax) - were formerly Building Societies that demutualised in the 1990s, and for Kay this is a big factor, because it changes the way the assets of these institutions were managed. (RBS is slightly different, but the greed-is-good mentality that led to its disastrous acquisition of ABN Amro follows broadly similar logic). What I hadn't really grasped before is that most investment banks were, broadly speaking, demutualised only slightly earlier, from the 1970s onwards - previously they had generally been partnerships, with all the liability that implies for the partners themselves. In both cases, demutualisation produced a step-change in attitude to risk - once the ownership of the institution is transformed into equity, the working capital is other people's money, and is no longer treated with the same care.
But it's not just about risk; another of Kay's significant themes is that an awful lot of the activity of banks and financial institutions isn't useful for the economy; and, by implication, the profit of that activity is at the expense of someone else. The business of managing payments between parties, and stewardship of deposits and loans to businesses and consumers, is necessary and useful; but, according to his theory, the apparently endless trading and re-trading of fragmentary assets and liabilities serves no-one other than the bankers themselves. Kay concludes with some suggestions for reform, but these seem fanciful in the current situation.