Thursday, October 1, 2015
Kay, Other People’s Money
If this sounds familiar, I can assure you that Kay presents his case in a fresh way. In the process he offers what amounts to course on “clever” banking. For instance, he describes how banks have engaged in regulatory arbitrage, fiscal arbitrage, accounting arbitrage, and jurisdictional arbitrage.
He counters the claim that high-frequency traders contribute to market liquidity in the sense that, as a result of their activity, markets would be able to meet a sudden or exceptional demand without disruption. They problem is that they provide no capital to the market. “Speculators,” he suggests, “can help provide liquidity when they bring capital to the market and the scale of their activity is moderate relative to the activities of long-term investors. Matters are quite different when the dominant mode of market trading involves short-term speculators trading with each other. Ticket touts can serve a useful role at popular sporting events when demand may exceed supply: but when the majority of tickets are in the possession of ticket touts, the price will be volatile—determined mainly by the expectations of other ticket touts about future prices—and the needs of genuine fans ill served.”
Kay is at home with, and has opinions about, a wide range of issues that touch on finance. He claims, for example, that “probabilistic reasoning does not play a large part in our lives because the situations in which it can usefully be applied are limited. We deal with radical uncertainty [the unknown unknowns] through storytelling, by constructing narratives. … This, not the Panglossian world of ‘the Greenspan doctrine’, is the world in which business is conducted and securities are traded.”
Kay also believes that, although “transparency is a mantra in the modern world of finance, … the demand for transparency in intermediation is a sign that intermediation is working badly, not a means of making it work well. A happy motorist is one who need never look under the car bonnet. … The demand for transparency in finance is a symptom of the breakdown of trust.”
Other People’s Money is a book that many people, especially those satisfied with the status quo, will undoubtedly argue with. But it should sharpen their views, and perhaps even here and there change them.