Other People’s Money: Masters of the Universe or Servants of the People

Lending to firms and individuals engaged in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3 per cent of that total (see Chapter 6).

.. The finance sector establishes claims against assets – the operating assets and future profits of a company, or the physical property and prospective earnings of an individual – and almost any such claim can be turned into a tradable security.

.. If securities are claims on assets, derivative securities are claims on other securities, and their value depends on the price, and ultimately on the value, of these underlying securities. Once you have created derivative securities, you can create further layers of derivative securities whose values are dependent on the values of other derivative securities – and so on.The value of the assets underlying such derivative contracts is three times the value of all the physical assets in the world.

.. If some members of that closed circle make extraordinary profits, these profits can only be made at the expense of other members of the same circle. Common sense suggests that this activity leaves the value of the traded assets little changed, and cannot, taken as a whole, make money. What, exactly, is wrong with this commonsense perspective?

Not much, I will conclude.

.. A country can be prosperous only if it has a well-functioning financial system, but that does not imply that the larger the financial system a country has, the more prosperous it is likely to be.

.. A remarkable feature of the global financial crisis is that most people in finance seemed to regard it as self-evident that government and taxpayers had an obligation to ensure that the sector – its institutions, its activities and even the exceptional remuneration of the people who work in it – continued to operate in broadly its existing form.

.. These four functions –

  1. the payments system,
  2. the matching of borrowers and lenders,
  3. the management of our household financial affairs and
  4. the control of risk –

are the services that finance does, or at least can, provide. The utility of financial innovation is measured by the degree to which it advances the goals of making payments, allocating capital, managing personal finances and handling risk.

.. The economic significance of the finance industry is often described in other ways: by the number of jobs it provides, the incomes that are earned from it, even the tax revenue derived from it. There is a good deal of confusion here, discussed in Chapter 9. But the true value of the finance sector to the community is the value of the services it provides, not the returns recouped by those who work in it.

.. I will explain how the regulation which has been applied with more and more intensity and less and less effect through the era of financialisation is part of the problem – a major part – not part of the solution. There has not been too little regulation, but far too much.