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Other People’s Money

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Other People’s Money

Masters of the Universe or Servants of the People?

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Professor John Kay says the rich and powerful financial industry is more harmful than useful to the real economy.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

Professor and Financial Times columnist John Kay deftly explains the development and ramifications of the current global financial system. He discusses how to restructure it to make it safer, sounder and more useful to the real economy. Kay maintains that financial firms – with the complicity of regulators – contribute little to everyday industry and commerce. His interdisciplinary and comprehensive approach, offered in plain English, makes frequent use of anecdotes to elucidate hard truths. You’ll find that Kay offers an iconoclastic perspective on the financialization of the global economy. While always politically neutral, getAbstract finds that his analysis presents a useful counterpoint for industry professionals and for anyone who works, pays bills or otherwise relies on the financial system.

Summary

“Far Too Much of a Good Thing”

Finance is necessary so that real economies can operate. The financial sector should undertake four essential jobs: 1) manage the system of payments; 2) bring together the suppliers of capital, or lenders, with the users of capital, or borrowers; 3) facilitate household financial management and estate planning; and 4) assist businesses and individuals with risk management.

However, since the 1960s, the global financial industry has grown far beyond its proper role of serving the real economy. Today, the exchange of financial instruments – cash and securities trading among financial institutions – dwarfs the trade in real goods and services. The more than $2 trillion of transactions processed daily on the US’s Fedwire is “about 50 times the US national income.” Prosperity requires a financial system, but “it is possible to have too much of a good thing.” The financial industry is extremely profitable but not because it creates new value. Instead, in many cases, it appropriates wealth created in other sectors.

Modern financial globalization started in the 1960s with the Eurodollar market. Eurodollars were an unintended consequence...

About the Author

John Kay, a Financial Times columnist and a professor at the London School of Economics and at Oxford University, is a board member of numerous public corporations.

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