John A. Kay is an economist, an emeritus fellow of St. John’s College, Oxford, and a writer. His academic area of interest includes the relationships between economics and business.
Other Peoples Money is about banking. He considers that investment bankers do not add value to corporate dealings, but extract large fees that support the large incomes earned by traders and senior employees at investment banks. He says that investment banking involves “bezzle” in the senses of the difference between the current market value of an asset and its true long-term worth, and the time between when a confidence trickster has stolen money from a unsuspecting person and when that person realizes the money has been stolen.
Most people need banks to deposit funds and draw funds. Banks that lend depositers’ funds to fund investment transactions put depositers’ funds at risk. Changes in banking culture have made complex bank regulations almost pointless. ( )

Johan Kay gives a detailed account of how the current financial system works, how it ended up this way, how it should work, and what changes he thinks are needed. I really enjoyed reading it, even though it is quite long and detailed. I am no expert on finance, but John Kay certainly gives the impression of knowing what he is talking about.

I have read several other books on the financial crisis before, and many of the themes and causes of the crisis described in them are brought up here to. For example: too big to fail, misaligned incentives, conflicts of interest, ineffective regulation, and politicians and regulators that end up working for the banks.

Here are some concepts and explanations that I liked that I had not seen before:

I liked the metaphor of tailgating – making small profits with a very small chance of catastrophic losses is like driving too close to the next car. You can save a few seconds, but you run the (small) risk of crashing.

Bezzle and febezzle. Bezzle describes the situation when embezzlement has not yet been discovered by the victim – at this point both the perpetrator and victim feel well off. A similar concept is the functionally equivalent bezzle (febezzle) where no crime has occurred – it is enough with self-delusion or mistakes. Like shareholders not realizing that apparent profits were in fact borrowed from their future selves.

“I’ll be gone, you’ll be gone” – profits (and bonuses) are measured year by year, or quarter by quarter, but the time-scale of many business projects are much longer.

Regulatory arbitrage – ways that the financial industry gets around regulation but still achieves the desired effect. Examples are Credit Default Swaps, the Eurodollar market, the repo market, and money market mutual funds. Attempts to stop these workarounds in turn lead to even more complicated regulation.

Finally, how a lot of the trading is only between financial institutions themselves, and how increased liquidity (for example from high frequency trading) is only present when it is not needed.

There are also two parables (at the beginning and end of the book) that are very good. The first is the stock market parable (“The parable of the ox”), where instead of weighing the ox, its weight is defined to be what people estimate it to be. And “The emperor’s guard’s new clothes” – on where the profits of the financial industry come from.

All in all a thorough and well-written book on what led to the financial crisis, and what could be done to avoid future ones. I learnt a lot from it, and really enjoyed reading it. ( )

Arrived Lausanne