{"id":31686,"date":"2015-06-18T03:00:57","date_gmt":"2015-06-18T07:00:57","guid":{"rendered":"http:\/\/quotulatiousness.ca\/blog\/?p=31686"},"modified":"2015-10-11T13:46:57","modified_gmt":"2015-10-11T17:46:57","slug":"john-kays-other-peoples-money","status":"publish","type":"post","link":"https:\/\/quotulatiousness.ca\/blog\/2015\/06\/18\/john-kays-other-peoples-money\/","title":{"rendered":"John Kay’s Other People’s Money<\/em>"},"content":{"rendered":"

John Kay<\/a> posts the introduction to his new book Other People\u2019s Money: Masters of the Universe or Servants of the People?<\/em> to be published in September:<\/p>\n

The assets of British banks are around \u00a37 trillion \u2013 four times the aggregate of the yearly income of everyone in the country. The liabilities of these banks are a similar amount. The assets of British banks are five times the liabilities of the British government. But the assets of these banks mostly consist of claims on other banks. Their liabilities are mainly obligations to other financial institutions. Lending to firms and individuals engaged in the production of goods and services \u2013 which most people would imagine was the principal business of a bank \u2013 amounts to about 3 per cent of that total (see Chapter 6).<\/p>\n

Modern banks \u2013 and most other financial institutions \u2013 trade in securities, and the growth of such trade is the main explanation of the growth of the finance sector. The finance sector establishes claims against assets \u2013 the operating assets and future profits of a company, or the physical property and prospective earnings of an individual \u2013 and almost any such claim can be turned into a tradable security. \u2018High-frequency trading\u2019 is undertaken by computers which are constantly offering to buy and sell securities. The interval for which these securities are held by their owner may \u2013 literally \u2013 be shorter than the blink of an eye. Spread Networks, a telecoms provider, has recently built a link through the Appalachian Mountains to reduce the time taken to transmit data between New York and Chicago by a little less than one millisecond.<\/p>\n

World trade has grown rapidly, but trading in foreign exchange has grown much faster. The value of daily foreign exchange transactions is almost a hundred times the value of daily international trade in goods and services. The annual volume of payments processed in Britain is \u00a375 trillion: about forty times Britain\u2019s national income. Trade in securities has grown rapidly, but the explosion in the volume of financial activity is largely attributable to the development of markets in derivatives, so called because their value is derived from the value of other securities. 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 \u2013 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.<\/p>\n

What is it all for? What is the purpose of this activity? And why is it so profitable? Common sense suggests that if a closed circle of people continuously exchange bits of paper with each other, the total value of these bits of paper will not change much, if at all. 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?<\/p>\n

Not much, I will conclude. But to justify that conclusion, it will be necessary to examine the activities of the finance sector and the ways in which it does, or might, make our lives better and our businesses more efficient. Assessing the economic contribution of the industry is complex, because there are many difficulties in interpreting reported information about the output and profitability of financial sector activities. But I will show that its profitability is overstated, that the value of its output is poorly reported in economic statistics, and that much of what it does contributes little, if anything, to the betterment of lives and the efficiency of business. And yet many things that finance could do to advance these social and economic goals are not done well \u2013 or in some cases at all.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

John Kay posts the introduction to his new book Other People\u2019s Money: Masters of the Universe or Servants of the People? to be published in September: The assets of British banks are around \u00a37 trillion \u2013 four times the aggregate of the yearly income of everyone in the country. The liabilities of these banks are […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[32,831,25],"tags":[436],"class_list":["post-31686","post","type-post","status-publish","format-standard","hentry","category-books","category-business","category-economics","tag-banking"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p2hpV6-8f4","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/31686","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/comments?post=31686"}],"version-history":[{"count":1,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/31686\/revisions"}],"predecessor-version":[{"id":31687,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/31686\/revisions\/31687"}],"wp:attachment":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/media?parent=31686"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/categories?post=31686"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/tags?post=31686"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}