Other People's Money

Speaker(s): Professor John Kay
Chair: Professor Wouter Den Haan
Recorded on 20 October 2015 at Old Theatre, Old Building
Modern economies need finance, to enable us to make payments, transfer wealth across our lifetimes and between generations, allocate capital and maintain the corporate and physical infrastructure, and to help us manage the risks of everyday life. Instead, we have created a financial world that talks to itself, trades with itself, and is increasingly divorced from the activities of the real economy. John Kay explains how this came about - and what can be done to recreate a financial sector responsive to economic and social needs.
John Kay (@JohnKayFT) is an economist whose career has spanned the academic world, business and public affairs. Currently, he is a visiting Professor of Economics at LSE and a Fellow of St John’s College, Oxford. He is a Fellow of the British Academy and of the Royal Society of Edinburgh. He is a director of several public companies and contributes a weekly column to the Financial Times. He recently chaired the Review of UK Equity Markets and Long-Term Decision-Making which reported to the Secretary of State for Business, Innovation and Skills in July 2012. He is the author of many books, including The Truth about Markets (2003), The Long and the Short of It: finance and investment for normally intelligent people who are not in the industry (2009) and Obliquity (2010). His latest book is Other People’s Money.
Wouter Den Haan is Professor of Economics and Co-Director of the Centre for Macroeconomics.
The Department of Economics at LSE (@LSEEcon) is one of the largest economics departments in the world. Its size ensures that all areas of economics are strongly represented in both research and teaching.
The Centre For Macroeconomics (@CFMUK) brings together world-class experts to carry out pioneering research on the global economic crisis and to help design policies that alleviate it.

[@untwerf]

many thanks for lecture.. shame that his slides weren't shown though

[@JMan33]

Very interesting breakdown of the collapse and the entire system itself. The fact that it has its origins in gambling is fascinating. Completely agree that increased regulation will simply lead to increased complexity. Need to fracture the institutions, simplifying the trading (limit invest packages of CCC to AAA). Could go on but refreshing to hear. Actual enforcement of existing regulation needs to be addressed.

[@nicholashill1000]

There were lots of people who foretold the 2007 financial crash, but because they were of the 'Austrian school' of economics nobody wanted to take any notice of them.

[@johnnybizaro1]

+Nick Hill It is worse. source : _The Obvious Reason QE Doesn’t Work_ It was just a bail out for the rich.

[@CommonCentsRob]

+Johnny bizaro Explain how that is true.

[@johnnybizaro1]

CommonCentsRob Explain how it is not true? If you are wealthy it i works for you. If it is for majority , then it is a failure. Even the simple Austerity never works. Show where it worked?

[@CommonCentsRob]

Johnny bizaro QE definitely pumped up Wall Street investments but it was also the safety net of last resort for the economy and the middle class. Of course it allowed the government to continue double down on wasting money. I think you should worry about why everyone applauded the stimulus bill.

[@antpoo]

As he said in a previous talk, it’s better to be conventionally wrong than unconventionally right!

[@mindposeidon]

Excellent raised point about the Casablanca defense. The vox populi is incredulous that the big kahuna bank CEOs routinely plead ignorance of what is going on . The $64 ? then is: Why then does the BOD pay them so GD much? Its a real Catch 22.

[@jasongasca9869]

Is Dean Jones in this?

[@Rob-fx2dw]

Jon Kay has made some really good points here. Worth listening to by all means. Particularly the example of closing the room ( at -7:10 onward) and exchanging papers. . But his example of the piece of paper being traded throughout the room with the thing he does not explain is what would happen if that 'piece of paper' if it were not traded. Would that mean that when the same someone who had it in the first instance realised it was not worth what it was purported to be would that make any difference ? Would that mean when it is finally traded? Possibly less and possibly more but the price is likely to vary more greatly than a trade made shortly after the previous trade so the step from one value to the next would be greater as a result of increased exposure time to risks due to the time factor. The factor that he surprisingly missed out in these examples is risk which is always present in every transaction and cannot be eliminated as he later points out. It shows you cannot put out an example that proves something and leave out critical factors which may affect it and it should be pointed out to the audience lest they realise it and start to doubt other salient points he wants to get across. His other assertion that the trading would result in borrowing from the future is very doubtful if not completely wrong. This is since no more excess debt would be created since the sellers of the paper would have to pay off their debt with the money they had from the next trade. The debt is paid off in sequence after each trade. One cannot assume that the money gained from trading would be use for anything else. No debt increase there. As far as Bernanke is concerned Mr Bernanke was wrong and didn't see the writing on the wall in the time up to the crash but should have and has since has largely changed his story to say and even believe his own convenient fantasy version of what happened as has Janet Yellen. The information about his view of the credit default swaps is much appreciated particularly the distinction he makes between a bet (the coffee shop) and insurance (the agreement on replacement of the animals). The bigger issues which he also misses are - it does not mater who actually owns what of a business like Apple. the fact that someone else like the queen owns the location that Apple operates out of . Wherever they operate from is neither here nor there since who ever owns it receives a rent and wherever they operate out of the Apple people must pay that rent to the real estate operators who operate in another type of business. Apple's assets include patents and rights and the organizational abilities, brand value, knowledge and good will. The largest risk that the financial system had to endure overall and continues to be so is the large risk of changes in government legislation having an adverse impact on their operations. This had a huge affect on the housing industry in the USA where there was a severe financial shock (sub prime crisis) caused by the transfer of risk from the borrowers (mortgagees) to the lenders that was a result of legislative issues created by government. This factor was the largest one in the housing collapse which exposed banks to the losses resulting from having by law to take on this share of what was formerly the mortgagee's risk. .

[@minlu1570]

Great point on US housing collapse. It's the government/politicians want all the poors to have their own properties without building or build less public housing for the poor. The risks are indeed transferred to the investors. The banks are scapegoats.

[@gpk6458]

Questions at 46:50

[@srolesen]

hmm lol, now 7 years later I'm not sure the comment about Bill Gates behaving well is exactly on point