Review by New York Times Review
IN AN 1814 LETTER, Thomas Jefferson complained that the financial sector of his day was populated by "adventurers . . . who burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry, of theirs." Almost exactly two centuries later, John Kay echoes the sentiment, noting that as "exchanging bits of paper cannot make profits for everyone," it is very likely that much of finance's profit "represents not the creation of new wealth but the sector's appropriation of wealth created elsewhere in the economy." The charge is an old one that has taken on new relevance in the wake of the 2008 crisis. Yet Kay is no angry Jeffersonian agrarian, but rather an academic economist with a weekly Financial Times column and a onetime financial consultant. He is more sanguine than the typical finance basher in that he acknowledges the sector's critical roles: as a payment system, a means of channeling savings to productive investments, an instrument to help manage personal finances across the life cycle and generations, and a marketplace for transferring and managing risk. Nonetheless, Kay writes, a more recent process of "financialization" has created a hypertrophied sector, its activities ever more abstract and divorced from the real economy, successful mainly at multiplying the remuneration of its members. "The tip of the tongue that laps up the cream of the commerce of a continent" was how Oliver Wendell Holmes Sr. described the New York money center of his day; Kay might rather characterize it as a gobbling maw. Finance, Kay argues, has strayed dangerously from its core functions. And the functions themselves have been jumbled in dangerous ways (for example, with deposit-taking becoming the funding source for uncertain, long-term risk-taking). Within each function, activities have moved from the primary to the (literally and figuratively) derivative - less investing, more trading, fewer assets and more "asset-backed securities." Meanwhile, long-term relationships have been reduced to short-term transactions. The result: instability and crisis. While the gravamen of its complaint is old, "Other People's Money" is not merely another broadside content to denounce finance's dysfunction, but rather a masterly attempt to locate its various origins and connect them with analytical and theoretical rigor. Kay provides by way of context a panoptic overview of the history, evolution and structure of the financial system in the United States and Britain, one that is impressive in its ability to weave together a comprehensive range of material, from the mechanics of banking to the Gaussian copula, in elegant, jargon-free prose. He confidently employs many perspectives: economic, historical, legal and psychological. Call this technique a Lombard Street for the 21st century. THE LAST THIRD of the book insightfully addresses reform, which, refreshingly, Kay stresses is not the same as regulation. Some of finance's most abstruse and pernicious activity arises from regulatory arbitrage - restructuring transactions so that they move from a less favorable to a more favorable regulatory rubric. Moreover, financial regulation suffers from a faster-spinning revolving door compared with other industries, with the regulators themselves either coming from or looking forward to landing in the industry they are supposed to oversee. Kay writes like an anthropologist: The roots of finance's dysfunction, he says, are cultural. The ethos of an old-fashioned partnership of traders risking their own capital endured even as a move toward public shareholding transferred "both these risks and these rewards from the partners . . . to the shareholders. In reality, it had little effect on the financial expectations of those who worked in the firms." Reform has to mean changing the industry culture: inculcating an ethic of stewardship and faithful agency (living the rhetoric of "putting the client first") and changing industry structure where culture clash is insuperable. It's a pity policy makers didn't have this book in 2007. In 2015, it can read like an indictment of a convict already sentenced. Post-crisis, banks are more heavily capitalized, trading less and earning lower return on equity. "Large financial conglomerates were run for the primary benefit of the people who manage them - and, in the main they still are," Kay says. But surely to a decreasing degree: At Goldman Sachs, the amount of total revenue that is set aside for employee compensation has gone from more than 50 percent before the crisis to about 37 percent in 2014. Still, this can feel like a change born of chastening rather than epiphany. Kay makes a strong case that change must be embraced rather than accepted grudgingly if it is to endure. Finance, Kay says, is succeeding mainly at raising its members' remuneration. BENJAMIN HELLER is a hedge fund portfolio manager based in Austin, Tex.
Copyright (c) The New York Times Company [October 11, 2015]
Review by Booklist Review
Kay, British economist with experience in public policy, business, and academia, discusses the nature of finance and financialization (his shorthand term for the process resulting in finance gaining a dominant economic role during the last 30 to 40 years). Today's banks and most financial institutions trade in securities, which mostly explain the finance sector's growth. Part 1 describes the causes of financialization, which include political changes; Kay comments, Little progress can be made in reforming finance unless the influence of money in politics is reduced. He addresses the purpose of finance in part 2 from the viewpoint of the market users of finance's four basic functions: making payments, matching borrowers with lenders, helping individuals handle their money, and managing risk. Part 3 covers reform, and Kay indicates there has been far too much regulation: he concludes with recommendations for a more limited financial sector and warns that there will be another major financial crisis. A challenging book that will add to ongoing discussion and debate.--Whaley, Mary Copyright 2015 Booklist
From Booklist, Copyright (c) American Library Association. Used with permission.
Review by Library Journal Review
Kay, a British economist, author, and visiting professor at the London School of Economics, has an interesting perspective on the world of finance in the United States, the UK, and Europe. While finance is necessary to modern societies, Kay considers how finance did, does, might, and should work. The book's first part includes the history of economics, as well as modern political, intellectual, and technological shifts. The second section tries to answer questions about the purpose and quality of modern financial activity. The third deals with structural reforms, intending to supply a blueprint for the future. Kay feels that regulation is part of the problem as is too much government involvement. He looks at financial crises in the United States, UK, and the Eurozone and feels that financial executives are using other people's money to enrich themselves and that baby boomers are profiting at the expense of future generations. Since policymakers did not restructure after the last crisis, Kay says they will get another chance after the next one. VERDICT Not for the merely curious. If words such as financialisation, demutualization, securitization, and intermediation are exciting, it's a definite read.-Bonnie A. Tollefson, Rogue Valley Manor Lib., Medford, OR © Copyright 2015. Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.
(c) Copyright Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.
Review by Kirkus Book Review
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. Copyright Kirkus Reviews, used with permission.
Copyright (c) Kirkus Reviews, used with permission.
