Other people's money : the real business of finance

353 Pages·2015·2.95 MB·English

by  Kay

O T H E R
P E O P L E ’ S
M O N E Y
The Real Business
Finance
of
J O H N K A Y
OTHER PEOPLE’S MONEY
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ALSO BY JOHN KAY
Obliquity
The Long and the Short of It
The Truth about Markets
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OTHER
PEOPLE’S
MONEY
The Real Business
of Finance
JOHN KAY
PUBLICAFFAIRS
New York
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Copyright © 2015 by John Kay
Originally published in Great Britain by Profile Books Ltd.
Published in the United States by PublicAffairs™, a Member of the Perseus Books Group
All rights reserved.
Printed in the United States of America.
No part of this book may be reproduced in any manner whatsoever without written per-
mission except in the case of brief quotations embodied in critical articles and reviews. For
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A catalog record for this book is available from the Library of Congress.
LCCN: 2015944758
ISBN 978-1-61039-603-5 (HC)
ISBN 978-1-61039-604-2 (EB)
First US Edition
10 9 8 7 6 5 4 3 2 1
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The directors of such companies, however, being the managers rather of
other people’s money than of their own, it cannot well be expected, that
they should watch over it with the same anxious vigilance with which
the partners in a private copartnery frequently watch over their own . . .
Negligence and profusion, therefore, must always prevail, more or less, in
the management of the affairs of such a company.
ADAM SMITH, The Wealth of Nations, 1776
When I speak of high finance as a harmful factor in recent years, I am
speaking about a minority which includes the type of individual who
speculates with other people’s money—and you in Chicago know the
kind I refer to.
FRANKLIN D. ROOSEVELT, presidential campaign address,
Chicago, 14 October 1936
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Contents
Prologue The Parable of the Ox xi
Introduction: Far Too Much of a Good Thing 1
PART I: FINANCIALISATION
Chapter 1 History 11
The Road to Pottersville, 11
The Rise of the Trader, 16
New Markets, New Businesses, 23
From Crisis to Crisis, 34
The Robber Barons, 42
We Are the 1 Per Cent, 46
Chapter 2 Risk 53
Cows, Coffee and Credit Default Swaps, 53
Chasing the Dream, 61
Adverse Selection and Moral Hazard, 69
Chapter 3 Intermediation 77
The Role of the Middleman, 77
Liquidity, 84
Diversification, 91
Leverage, 95
Chapter 4 Profits 101
Smarter People, 101
Competition, 106
vii
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viii CONTENTS
The Edge, 108
Regulatory Arbitrage, 113
I’ll Be Gone, You’ll Be Gone, 118
How Profitable is the Finance Sector?, 126
PART II: THE FUNCTIONS OF FINANCE
Chapter 5 Capital Allocation 135
Physical Assets, 135
Housing, 140
Property and Infrastructure, 145
Large Companies, 150
Financing Small- and Medium-Size
Enterprises, 154
Chapter 6 The Deposit Channel 163
Household Wealth, 163
The Payment System, 170
The Activities of the Deposit Channel, 177
Chapter 7 The Investment Channel 185
Managing Wealth, 185
A Bias to Action, 193
The Role of the Asset Manager, 197
PART III: POLICY
Chapter 8 Regulation 205
The Origins of Financial Regulation, 205
The Basel Agreements, 208
Securities Regulation, 213
The Regulation Industry, 216
What Went Wrong, 220
Chapter 9 Economic Policy 227
Maestro, 227
Financial Markets and Economic Policy, 234
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CONTENTS ix
Pensions and Inter-Generational Equity, 238
Consumer Protection, 245
The Economic Contribution of Finance, 247
Chapter 10 Reform 255
Principles of Reform, 255
Robust Systems and Complex Structures, 261
Other People’s Money, 267
The Reform of Structure, 270
Personal Responsibility, 276
Chapter 11 The Future of Finance 281
Epilogue: The Emperor’s Guard’s New Clothes 293
Acknowledgements 295
Notes 297
Bibliography 311
Index 321
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