SHOW US, THE MONEY
Guest post by Dr. Anna Hedge.
Ever since writing this post, I’ve been meaning to write a follow-up about what finance concepts and functions people of ‘the Left’ should ideally understand. A mere two years later, having read Joris’s comprehensive and lucid banking blog over at the Guardian in the meantime, I thought it might be interesting to approach it from the other end of the telescope, and ask finance people what they wished the Left understood, and what misunderstanding(s) really irked them.
This piece isn’t a defence of ‘The City’ - they have clever people to do that, and very nicely besuited they are too: but unfortunately, there stalks abroad a cartoon of finance as a monetised game of Pass-the-Parcel, with no socially useful purpose. I think most people would concede that finance does have a social utility to some degree: the issue is how to make it ‘better’, not abolish it completely. Money and banks evolved for a reason, after all. But to make things better, we need to understand the rationale and relationships within the current system - or like someone pulling a loose thread, we risk unravelling the whole tapestry in such a way that we harm those that the Left should want to protect.
I asked two questions on Twitter:
‘Finance types, what key concepts/functions should lefties aim to understand about ‘the City’?’
‘What misunderstanding of their role/function really ticks finance people off?’.
Interestingly, the first question got a LOT more traffic than the second, suggesting either quiet self-confidence, or that whilst the Left don’t understand certain key concepts, City people aren’t really that bothered. What the political implications of this might be, I leave for you to decide.
This brings me to selection bias. I asked these questions on Twitter. Most of the responses I got were via finance people who follow me, whom I suspect skew broadly more Left than most in the City (they do after all, put up with my inventively swearing at George Osborne at regular intervals) - and certainly more so than for example, the British Bankers’ Association. Working in finance does not automatically indicate a probable direct descent from the baby-eating Bishop of Bath and Wells, any more than being ‘left’ indicates a tendency to sandal-wearing vegan pacifism.
The responses to my questions broadly split into two groups: those that concerned people, and those that concerned financial products and markets.
● Governance and the principal/agent problem (management vs shareholders); workers in the City are ‘labour’ not ‘capital’.
● FCA registration. How regulation might create, not lessen risk due to gaming.
● The skew in the distribution of bonuses.
● Identification of ‘finance person’ with ‘tax expert’; “you want me to go to my boss and suggest we shouldn’t use this perfectly legal method of reducing our tax bill? Hahahah. Nope”
● Although the money is good, as motivation it is often a side-effect. People like the work.
● Not everyone in the City is a mathematical whizzkid. A substantial minority are Arts graduates.
● The default position that ‘City = bad’; role of banks in the economy; relation between debt and savings
● The difference between revenue and profit
● Difference between fixed income, foreign exchange, equity and credit products
● Risk. Speculation. Incentives.
● The ‘hot potato’ motivation for trading volume.
● Equity markets are tiny compared to bond and debt markets
● Credit creation. Asset and liability management. Duration. Collateral. Yield curves.
● Why shareholders might legitimately expect a return on investment.
One irritant that cropped up again and again was the lazy equation of ‘bankers’ with ‘finance’. Not everyone is a
banker; not all banks are created the same - a high street (retail) bank is not
an investment bank. There are two broad ‘sides’ in finance, buy-side (investing
institutions) and sell-side (who offer investment services to the buy-side).
The difference in function between these two sides drives their incentives and
market behaviour. Understanding this is crucial for successful reform.
There is often a demand for more regulation from the Left, to “bring an end to casino-style banking”, for example. However, blanket regulation that doesn’t acknowledge the different roles and institutions within finance risks doing far more harm than good, because all regulation creates incentives & a potential for gaming. A well-meant desire to end, for example, ‘speculative behaviour’ could end up creating risk as investments generating good returns whose risk profile was well-understood and managed is perforcedly dumped in favour of less well-known products. It is important to remember that investing professionals have a duty to maximise returns for their clients – not to mention that those clients are likely to go elsewhere if someone else can make a better offer. To put it more simply: no-one sensible should want to risk forcing yield hunters onto the portion of the financial map marked ‘Here Be Dragons’.
Regulating markets is one thing: regulating the behaviour of individuals working in those markets is often presented as being simpler (as though markets weren’t composed of people!). One proposal often aired is that bankers be ‘licensed’ because of the potential harm they can inflict on society. Leaving aside the conflation of ‘bankers’ with finance that I mentioned above, this ignores the fact that the FCA has a fast, effective and brutal way of ‘de-licensing’ financial practitioners: pull their registration. Everyone above a counter clerk requires FCA registration. No registration, no job. Fin. This doesn’t mean that the exams couldn’t be improved, but to say there’s no test or badge of fitness to practise is plain wrong. It also leaves unaddressed who would license ‘bankers’ - other finance professionals, as with medics and the GMC? I can only imagine the howls. Politicians? Lawyers? Er, no thanks. Answers on a postcard, please.
Another area often marked as being overdue for a sternly-worded rule book is bonuses. Oh God, bonuses. The awful truth is (and it IS awful): when handling extremely large amounts of money, in a system where money is a marker, rather than a trip to a petting zoo, or a lifetime supply of socks, some people will get large amounts of money for hitting their targets. Some. But a lot will not. Since the distribution of bonuses is highly skewed, the people receiving humungous bonuses are comparatively few in number. That money ‘sticks’ is a function of society; I can hear lefties yelling that this indicates we should abolish money. Fine. You go first, Russell.
That said, I’m no fan of the ‘we must pay squillions to attract the best’ defence of large bonuses: it’s an argument that has endured through some frankly sub-par decision-making (shine on, you crazy Diamond). I know many people who work in finance because they like the intellectual challenge: the money is a side-effect. How about creating a financial system that people would be as proud to work for as the NHS? Trust in financial institutions may be low now, but it wasn’t so long ago that ‘My word is my bond’ really meant something. Whilst I would never, ever argue for no regulation at all, it’s worth noting that without someone being prepared to be on the other end of a trade, any finance professional or institution is finished. A lot rests on trust and reputation. It will take a great deal of work to restore trust in finance, but on progressives’ own logic, no person or institution should be regarded as completely beyond redemption.
Speaking of logic, the Left might like to ponder the following: it might be hard to see a Thomas Pink-beshirted trader as ‘labour’, as opposed to ‘capital’, but that’s what s/he is. If City workers didn’t get bonuses, that money would have to go somewhere else: probably to capital, given that increased taxation is completely off the cards as things stand. Arguments about capital ratios for banks aside (frankly, way above my pay grade), it’s an odd conception of left justice which consciously or not advocates rewards for capital (pity the poor pensioners getting dreadful returns on their savings) and bewails them for labour (City bonuses are a terrible thing).
I have offered a view of finance as a monetised game of ‘Pass-the-parcel’, sealed off from wider society. But this raises the question - where does the money these wizards juggle come from? Well, in an odd mirroring of Left arguments about the size of welfare budgets, one source is pension funds. Dissolving/ abolishing/confiscating the money sloshing around in ‘the City’ would have negative consequences for a LOT of people, many on low incomes – i.e. the vulnerable people whose well-being is the Left’s first concern. We need to make sure any reform doesn’t harm them.
And it is this which terrifies me about so much discussion of finance and the City: the potential that unforeseen consequences of well-intentioned but ill-thought-through reform has to hurt the very people whose money bails out the system when it falls down. If the Left is serious about system change, it needs to understand what it’s taking on & what victory would look like. Knowledge is power.
Anna Hedge is an economist and author of the blog EconomistaDentata, where the original version of this post appeared. She is @drlangtry_girl on Twitter.