global financial crisis is inevitable, but we should avoid being too
preoccupied with what happened in 2008, says a leading British
in Deutsche Bank - one of the world's biggest financial institutions
- hit a 30-year low this weak, sparking fears of another banking
Kay, a visiting Professor of Economics at the London School of
Economics and author of books such as The Truth about Markets and
Other People's Money, said the finance sector has grown too large and
become an industry that mostly trades with itself, talks to itself
and judges itself by its own standards.
told Nine To Noon that while the risk of another global financial
meltdown was very real, it was unlikely to be sparked by the same
issues that created the last one.
kind of regulation we have introduced since then is designed - as
this kind of regulation after a crisis always is - to ensure we won't
have exactly that crisis again and we won't. But we will have other
crises and possibly more serious crises, because the fundamental
dysfuncionality of the world financial service we have created are
still very much in place, and there has been no real attempt to
address them since 2008."
said those dysfunctionalites had been growing in the financial sector
since the 1970s.
basically the way relationships in the financial sector have been
turned into a world that is dominated by transactions and trading in
anonymous markets. So when I was at school in Edinburgh way back in
the 1960s, banking was the Royal Bank of Scotland, and banking was a
career for boys in my class who didn't get good enough grades to go
into universities, they became bank managers. And what we now know is
that they ran the Bank of Scotland better than the much smarter
people who were running it by the time these banks collapsed in
financial meltdowns were seen with the emerging market debt crisis in
the 1990s, followed by the "new economy bubble", the the US
housing market collapse and the current Eurozone crisis.
Kay said that while these cases sounded significantly different, they
all had the same origin.
is, people see something, a change that is really happening in the
world economy. And what happens is that people who are early to spot
these trends move into them and make money out of them. What then
happens is that other people see this happening, move in and they try
to profit from it as well. You get this herding behaviour which leads
to massive asset mispricings, then all that falls apart and then
governments and central banks act to pump money into the system to
try and mitigate the damage and that sets up the fuel for the next
with automated trading, where trades were made in the blink of an eye
through computer algorithms, were also part of the problem, said Mr
said there were several reasons why politicians had not addressed the
fundamental issues with the financial sector.
is that it's always easier not to tackle a problem, so people in 2008
said we can look at the fundamental problems later, the immediate
priority is to keep the show on the road. And you can see that by
2010 the show was back on the road, so why bother?
other is that this industry is pretty hard to understand and some of
the ways in which money is made is very complex. I don't think
fundamentally the issues of what we need a financial service to do
are that complex, but the extent to which it is dressed up makes it
seem like an arcane mystery.
the final reason is the large political power of the financial
industry. In the US it's not just campaign funding, you're seeing an
election happening at the moment which is very largely fuelled by
Wall Street money. Although we also see quite interestingly the
popularity of candidates who's main claim to fame is that they are
outside the mainstream and conventional politics."
said the main motivation for the behaviour that caused the various
crises was simple - people are making very large amounts of money.
I'm not particularly against people making very large amounts of
money, but I don't think it's an activity that is valuable in its own
right, and when the large amounts of money that are being earned are
being created not by adding value by providing goods and services
that we all want, but by a process of trading with each other, then I
think we lost sight of our main purposes."
to the full Nine To Noon interview with John Kay here: