I recently read Other People’s Money by John Kay – a great book exploring the role of finance in society, the transformation in the sector and society at large brought about by financialization, the structural causes of the financial crisis and ways to reform the financial sector to serve society again rather than itself.
So, what is finance for?
In the words of John Kay, finance can contribute to society and the economy in four principal ways:
First, the payments system is the means by which we receive wages and salaries, and buy the goods and services we need, as well as enabling business to contribute to these purposes. Second, finance matches lenders with borrowers, helping to direct savings to their most effective uses. Third, finance enables us to manage our personal finances across our lifetimes and between generations. Fourth, finance helps both individuals and businesses to manage the risks inevitably associated with everyday life and economic activity.
According to Kay, the evolution of finance in the last thirty years has increased the role of trading over relationships through the process of financialization. It has increased the complexity of the sector, increased the risks to the economy and transferred to itself a greater share of national income without improving the quality of the four key services it provides to society.
Here are a couple of salient paragraphs from the book.
The finance sector of modern Western economies is too large. It absorbs a disproportionate share of the ablest graduates of our colleges and universities. Its growth has not been matched by corresponding improvements in the provision of services to the non-financial economy – payments systems, capital allocation, risk mitigation and long-term financial security for individuals and households. The process of financialization has created a structure characterized by tight coupling and interactive complexity, and the resulting instability has had damaging effects on the non-financial economy. […]
The belief that the profitability of an activity is a measure of its social legitimacy has not only taken root in the financial sector but has spread its poison throughout the business world. […] There has been a wide failure to distinguish profit generation from wealth creation, or to see the difference between the appropriation of resources and their production, and a willingness to license activities that border on fraud and which sometimes cross that border. Both supporters of the market system and its critics have failed to recognize that the trading floor of the investment bank is not the epitome of the market economy but an excrescence from it.
I took the liberty to quote two extended paragraphs from John Kay’s book hoping they will provide a motivation for you to pick up a copy of this very insightful and authoritative work.
What are we to do about it?
I am a very big proponent of DIY when it comes to large scale system change. No point in waiting for government action when we can take matters in our own hands and start moving the system in the right direction.
The first thing you should consider is moving all your banking business including your mortgage away from the large four banks and towards a regional bank or a credit union. This would be a no-risk way to support your local economy. While the regional banks and credit unions in the US control about 20% of the deposits in this country they are responsible for more than 50% of local lending.
The other thing you can do is learn the basics of portfolio management and investing (maybe by signing up for my webinar series) and shift some of your personal savings from the opaque and over-intermediated financial system towards your local economy and investments aligned with your personal values. You might want to look for a Slow Money group active in your area and join it to turn local investing into a fun team sport activity!
I am looking forward to supporting you in your quest to align your investments with your values and leave a positive legacy behind.