Bankers Saying ‘We Got Away With it’ Risk New Crisis, Kay Says

Date: Tuesday, March 23, 2010
Author: Bloomberg

Bankers are resuming the risk- taking practices that led to the worst financial crisis in a century, threatening to create even worse turmoil, economist John Kay said.

For “so many people I talk to in the financial sector, it’s kind of, ‘Phew, we got away with it, now we can get on with making money in the same old way,’” Kay, a visiting professor at the London School of Economics, said in an interview yesterday. “If we do that we’re going to end up, probably quite soon, with an even larger version of the kind of crisis we’ve just been through.”

Kay, whose book “Obliquity” will be published on March 25 in the U.K., has argued that banks should be split between retail operations and investment banking. Bank of England Governor Mervyn King said in September that an essay by Kay on the structure of financial institutions was “the most important piece written on the subject in 10 years.”

“We’ve had people talking more about regulation, but we haven’t had people thinking about banking and finance in a different way,” Kay said. “What we need to do is have much more structural reform of the financial-services industry. The biggest element of that is separating utility-type banking from casino banking.”

Kay argues in his book that people achieve complex goals such as happiness or creating a profitable business by pursuing them indirectly rather than directly. New banking rules that sustain the pursuit of quick profit won’t be enough to restore stability and trust in the financial system, he said.

Banking reforms should seek to exclude from basic banking services, such as payments and deposit-taking, people whose aim is just to maximize profit, Kay said.

Trusting Bankers

“I’d like to keep these people away from retail banks and retail financial-services companies, whose long-term health depends on building good relationships with customers who trust them,” he said. “People don’t trust the retail financial- services industry, and they’re right not to. If it behaves in the way it has and describes itself in the way it does, why would you trust it?”

Plans proposed by President Barack Obama and the so-called Volcker rule are a step in the right direction, Kay said. The principle, named for former Federal Reserve Chairman Paul Volcker, requires federal banking agencies to issue rules banning proprietary trading as well as investment in and sponsorship of hedge funds and private-equity funds at banks.

“The Volcker rules and Obama’s espousal of that is probably the most encouraging thing we’ve seen,” he said. “First of all it is the president of the United States who is willing to stand up and say ‘boo’ to Wall Street, and that’s something we badly need. Secondly it’s identifying the real issue, which is structural reform.”