Making finance serve society

Further to my post on Friday of the video of Brooksley Born and Anat Admati‘s remarks at the Finance and Society conference in Washington last week, Anat Admati sent me a link to the text of her talk on the weekend. Whether you watched the speech or not, the text is well worth the time. Read it here: Making Financial Regulations work for Society.

I have written over the years about the life changing epiphany I had in 2000, when I realized that having captured governments, finance was designed not to prudently advise and support the real economy, but to trick and rob its customers and taxpayers. Professor Admati notes that her epiphany happened in 2008:

My life changed starting end of 2008. Fortunately for me, I didn’t lose my job or my house. I still do research in finance, currently on the forces that shape corporate funding decisions and how they can lead to excessive use of debt and great inefficiencies. But I am no longer in the silo I occupied and I talk to many more people both in other academic fields and outside academia. I teach a course entitled, like this conference, Finance and Society, which draws from multiple fields, including finance, economics, accounting, law, and political science. Even psychology, philosophy and sociology can bring insights.

What changed my life was seeing bad research and false or misleading claims, including from academics, affecting policy. Innocent people, powerless and often ignorant of the issues, are harmed by bad policies.

…Among what’s most wrong with the financial system and most essential (and possible) to correct is that, even with new rules so far, there is still too much opacity and hidden risk and too much reliance on debt funding. There is no justification for this situation. Yet, an enormous amount of nonsense has tricked policymakers into tolerating it.

After six years of discussing these issues with many and writing to explain, I am very disappointed to see that so much nonsense continues to be uttered and to impact the debate. It might take another harmful crisis, or more, to make progress. What we are tricked into tolerating, even subsidizing, is the equivalent of allowing trucks full of dangerous chemicals to drive at 120 mph in residential neighborhoods (and having trouble actually measuring actual speed), which burns lots of fuel, harms the engine and risks explosions. We rush to do whatever it takes to fix the trucks should they implode, since they deliver essential fuel. We may even give the drivers, safely ejected, jobs as policemen during repairs… Lower speed limits, we are told, will “harm growth” or send deliveries to a “shadow trucking system” around the corner that, for some reason, we can’t send the cops to patrol.

Making the system more transparent and dramatically reducing the reliance on debt would be hugely beneficial. All claims against this approach are nonsense, spin and flawed excuses. Among the benefits, it will improve, stabilize and correct distortions in credit markets, and reduce the incidence and intensity of boom and bust cycles and costly crises that bring prolonged recessions.

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