The financial collapse of 2008—centred on subprime mortgages—was my first real exposure to the insanity of the “financial sector.” Until then I’d been to young to really pay attention, but suddenly the preposterous games being played with the world’s economy came into sharp focus. When they lost, the world lost, but they didn’t.
Kay goes back to first principles, asking what purposes the financial system is meant to serve, and measuring just how far the modern financial economy has moved from that ideal.
The point of finance, he argues, is to connect savers and borrowers — end-users, that is, not financial intermediaries. The test of a financial system is whether a household with surplus funds, say, and a company or government needing to borrow for investment can be connected at low cost and in a way that makes both parties better off. Correctly understood, all the institutions that lie between such end-users exist to serve this underlying purpose.
In Kay’s view, modern economies have lost sight of this vital point. Finance has come to be seen as an end in itself, as though the global economy exists to serve Wall Street and the City of London rather than the other way round. If you applied that mindset to electricity generation, for instance, the absurdity would be obvious: You don’t generate electricity for its own sake.