Snippings

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Modern banks – and most other financial institutions – trade in securities, and the growth of such trade is the main explanation of the growth of the finance sector.  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 – is literally an insignificant part of their balance sheets. For British banks today, it amounts to about 10% of their total assets.

From Robust and Resilient Finance – John Kay:

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Many aspects of the modern financial system are designed to give an impression of overwhelming urgency – the endless ‘news’ feeds, the constantly changing screens of traders, the office lights blazing late into the night, the young analysts who find themselves required to work 30 hours at a stretch.  But very little that happens in the finance sector has genuine need for this constant appearance of excitement and activity.  Only its most boring part – the payments system – is an essential utility on whose continuous functioning the modern economy depends.

From Robust and Resilient Finance – John Kay:

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Only its most boring part – the payments system – is an essential utility on whose continuous functioning the modern economy depends.  No terrible consequence would follow if the stock market closed for a week (as it did in the wake of 9/11) – or longer; if a merger were delayed, or large investment project postponed for a few weeks; if an initial public offering happened next month rather than this.

From Robust and Resilient Finance – John Kay:

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This requires reintroducing to the financial sector the modularity and redundancy which characterise robust and resilient engineering systems and which recent decades have foolishly sought to characterise as inefficiency.

From Robust and Resilient Finance – John Kay:

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Interestingly, at the time that I was reading this excellent paper by John, I see in the Financial Times that the same lack of resilience is now manifest in the UK’s retail sector.

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The story of Britain’s empty shelves, like that of its unpicked strawberries and unprocessed chickens, is the story of how migration combined with a weakly regulated labour market and hugely powerful retailers have allowed some goods and services to become unsustainably cheap. The system shaved money off our shopping bills but it wasn’t resilient.

From UK truck driver shortage signals a broken labour market | Financial Times.

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This is an area where “the blockchain” (to use the generic catch-all demotic phrase meaning “some form of shared ledger technology”) might actually help.

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The unplanned evolution of the financial services network contrasts with the conscious design of other utility networks, such as electricity.  The overriding need for system stability is embedded in the thinking of everyone engaged in electricity supply.

From Robust and Resilient Finance – John Kay:

Is it time to think about some kind of National Wealth Service?

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The complexity of modern finance has been designed and has operated principally to benefit financial intermediaries rather than users of financial services.  The claims of Greenspan, Geithner and others that the innovative use of new instruments made the financial system more robust were false.  Interdependencies between financial institutions have increased to a point at which the system as a whole displays fragility born of complexity.

From Robust and Resilient Finance – John Kay:

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In the 1970s, David Henderson, an economist with extensive experience in government, had delivered for the BBC a series of lectures on ‘the unimportance of being right’: ‘one thing that you might think would count, but which in fact is given no attention whatever, (in securing promotion to positions of influence) is whether your advice has been any good’.

From Robust and Resilient Finance – John Kay:

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Michel Albert, a French economist turned insurance company CEO, offered an entertaining account of the development of the global insurance market in the eighteenth century… The English traded risks, the Swiss mutualised them.

From Robust and Resilient Finance – John Kay:

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Modern financial economics treats risk as a commodity like milk or coffee.  People have different preferences and capabilities in their approach to risk and their ability to manage it, just as they have different tastes in food, or farm different kinds of land, or hold different agricultural skills.

From Robust and Resilient Finance – John Kay:

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Neha Narula, who is leading Project Hamilton, the name of the Fed-MIT collaboration

But Narula sees the opportunity as revolutionary. “If we were able to create a well-designed interface to a central bank digital currency, we could do for the transfer of value what the internet did for the transfer of information, which is create a platform for innovation,” she said at the recent hearing.

From What is a digital dollar and how does it work? — Quartz:

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