ROB LEWORTHY: Welcome to
today's Talks at Google event. My name is Rob Leworthy. And I'm very pleased to
welcome John Kay today. John is an economist
whose career has spanned the academic world,
business and public affairs. John is currently a visiting
Professor of Economics at LSE and a Fellow at St
John's College, Oxford. He's a Fellow at
the British Academy and at the Royal
Society of Edinburgh. He's a director of
several public companies and contributes a weekly column
to the "Financial Times." He's the author of many books,
including "The Truth About Markets." And his latest book--
"Other People's Money"-- towards a financial system
for the needs for the economy rather than financial
market participants-- is published by Profile
Books and out now. Please join me in a
massive round of applause in welcoming John Kay. John. [APPLAUSE] JOHN KAY: People who don't
know very much about finance often ask me, what do people
in the city and on Wall Street actually do? And the answer is-- to an extent
that almost defies belief-- what they do is they
trade with each other. Let me give you some examples. World trade in goods and
services has grown a lot. We all know that. But World trade in
foreign exchange-- the amount that's traded on
foreign exchange markets-- is 100 times the total of
trade in goods and services. Some of you probably still
think that what banks do is they take your deposits
and they lend them out to businesses. Actually if I look at the
assets of British banks, then I discover that lending
to non-financial businesses accounts for about 3%
of their total assets. Lending to other
financial institutions accounts for about 70% of it. That is, what they do is
that they lend to each other and borrow from each other. The total volume
of assets that are subject to derivative
contracts that contract to buy securities at some price
or sometime in the future-- the total volume of
exposures under that amounts to three times the value
of all the assets in the world. And about 10% of that
each is held by JP Morgan or by Deutsche Bank. Some of you will have heard of
high-frequency trading, which now accounts for
more than half of all the trading on the London
and New York Stock Exchanges. That's essentially
done by computers that are programmed
with algorithms that trade with each other. And speed, obviously,
matters critically in doing this with the
result that a company called Spread Networks
has recently built a link through the Appalachians
which is designed to reduce the time it takes to transmit
data between Chicago and New York from 7.3 milliseconds
to 6.6 milliseconds. Just to give you some
idea of what that means, the physical irreducible
minimum is 4.3 milliseconds, which is the time it takes light
to travel from Chicago to New York. Now I think you might ask two
questions about all of this. One, what is it all for? And secondly, why
is it so profitable? Because if we shut
the doors of this room and lock them and spent the
rest of the day exchanging bits of paper with each
other, what we'd walk out with at the end
of the day-- in aggregate-- would seem to be very
much the same as what we walked into it with. What I'm going to talk
about this morning is what I call in
the book-- it's not an original word for me
and it's not a very nice word-- it's called financialization. It's essentially the process
over the last 30 to 40 years by which the activity I've
just been describing-- people trading secondary
assets with each other-- has grown to be such a
large part of our economy and such a dominant part
of the financial system. It's essentially the change
in the financial world that looks like that to
the financial world that looks like this. This was the plaque when
Lehman went bankrupt. It was actually sold for
quite a large amount of money. This was Gordon Brown opening
Lehman Brothers London. Well, I guess you guys
are lucky enough not to have a chief executive
who's quite like that in your particular business. But that's the impact
of financialization which I've been describing. And I want to point out
two consequences of that because lots of people think
that financial crises are inevitable. That is, they're
just something that happens, like hurricanes
or earthquakes that happen every few years. This is a story. It's a graph of
what has happened to the incidence
of banking crises over the last two centuries. And you can see a
rather clear pattern in this, which is you
get a steady increase across the 19th,
early 20th century. Then you get a spike in 1929
with the Great Depression in the early '30s. And then you get a period
of extraordinary stability from the Second World War
through to about the 1970s. And then the process which I've
described as financialization takes place, and you get this
steady increase again followed by the global financial
crisis of 2008 we're all familiar with. This is another
illustration of what has happened as a result of
this financialization process. There's been a lot of
talk about inequality in the last year or two. And you can see that
in the four countries I take on this slide--
Britain, US, France, and Germany-- in all four of
these countries, what you get in the first half
of the 20th century is a steady decline
in inequality. Then in two of the countries--
Germany and France-- you get a levelling out. But what you get in
two other countries-- Britain and the United
States-- is the sharp reversal of that trend. And that is clearly
very much to do with both the effect of the
growth of the financial sector itself and the impact
of the financial sector on the behavior of people
in large businesses. I could talk a lot more
about financialization and its origins
and effects, but I want to go back to the
question with which I began. If we are all sitting in
this room passing around bits of paper to each other,
how do we actually all make profits out of doing it? Well, if I go back to
that great crash story, I find out a little
bit about that story. Because perhaps the best little
book about the 1929 crash is by John Kenneth
Galbraith, who's one of the few economists
who writes well. I hope to try and
imitate him a bit. Galbraith created what he called
the concept of the bezzle. And what he meant
by the bezzle was that there's a kind of magic
interval between someone actually stealing some
money and the people from whom it's been
stolen finding out that they've lost it. And in that interval
both parties imagine they're enjoying
the same wealth. Now one of the ways we can
create profit is by bezzle. You see, I might have
this bit of paper here, which is called a
very complicated financial instrument. It's actually a subsenior
tranche of collateralized debt obligation based on
subprime mortgages, but you probably don't
want to know about that. You certainly don't want to
read the thousands of pages which the lawyers
have constructed to explain what's in it. And probably no one
in the world has ever read these 1,000 pages
that explain what is in it. All you need to know-- and it's
really quite important for you to know this-- is that
it yields more than 1% more than a US treasury bond and
it's rated by rating agencies as at least as safe
as a US treasury bond. Now I'd be willing
to beg-- I imagine you might be willing to pay
a modest premium for that. And actually when you
explain the attractions of it to your colleague
sitting beside you, she might be willing to pay a
little bit of a premium to you. And we can pass this
round and we can all make a little bit of profit out
of passing it on to each other. And I bet you at the back
over there are now thinking, can't we join in and make
profits in this kind of way as well? And what we can do is we
can pass this bit of paper around until everyone appears
to have made a profit out of it. Now one day someone is going to
discover that this bit of paper isn't worth as much
as people thought. But so long as that
hasn't yet happened, we've created a pool
of imaginary wealth which will benefit
everyone in the room. Now that's a caricature, but
not a very great caricature of what happened
between 2003 and 2008, which was that
banks announced they had made very large profits,
paid out a large share of these to their senior employees, and
then announced in 2008 that it had all been a mistake--
more or less wiped out bank shareholders--
and actually, as we know, needed lots of money from
taxpayers to keep them going. Another way of creating
this kind of bogus wealth is what I generally
describe as tailgating. I have a house in France. And those of you who
have driven in France will know that if you drive
in a French autoroute, you will find that unless
you're 20 kilometers an hour above the legal speed limit,
you will be tailgated by someone who's your tail,
flashing their lights, and trying to persuade
you to get out of the way. And the thing about tailgating
is it works 99% of the time. The tailgating driver gets
to his destination a minute or so earlier than
people who drive in some kind of sensible,
more rational way. One time in 1,000,
it doesn't work. But actually what
then happens is that there's a kind of
cognitive dissonance that separates the
accident, which happens one time in
1,000, from the behavior of which the other 999
times gave rise to in this. And there's always
a reason for that. Because the reason
there's an accident is that someone else made
a mistake on the road or there was an obstruction in
the way or something like that. So there's always an explanation
of why this happened. But actually the real
cause of the accident is the driving behavior
that gives rise to it in the first place. But these kind of
strategies, by which you can make sequences of
small profits punctuated by occasional large
losses, are characteristic of a whole variety of
financial market strategies. So for a moment
instead of talking about what it is that these
guys in the finance sector do, I'm going instead to talk about
what finance is actually for. Because let's be quite clear,
economies need finance. We need finance really
for four kind of purposes. We need finance, first of all,
to operate a payment system so that we can pay our bills,
receive wages and salaries so that businesses can
trade with each other. We need finance to help
us with wealth management. That means we need to transfer
wealth across our lifetimes because we have education
when we're young, eventually we'll be retired. The pattern of earnings
over our lifetime is different from the
pattern of consumption we want to maintain. We need finance for
capital allocation. That is to take the
savings of the country and translate them into the
capital stock of the country. To take our everyday
savings and build houses and roads and bridges
and businesses with all of that. And finally, we need finance to
help us with risk mitigation. Finance can help share the risks
of life among groups of people so that the costs of them don't
fall in such an extreme way on particular individuals. Now what I try to do in the
book, which people have found surprisingly
original in a sense, is to ask them the question
instead of asking what people in the finance sector
do, ask the question, what would a finance
sector that was devised to meet the needs of the
real economy actually look like in terms of these
kind of four functions? Now I don't have time to talk
about all of that this morning. So what I'm going to do is to
focus on one of them, which is actually risk mitigation. And in order to do that,
I'm going to introduce you to a rather elegant venue
in the United States, which some of you may have
heard of, called Jackson Hole. Because way back
in 2005, not long before the global
financial crisis, the Federal Reserve
Bank of Kansas held a beanfeast, which it does
every year as a matter of fact. But this one was to celebrate
the imminent retirement from the chairmanship
of the Federal Reserve of Alan Greenspan. And there were a whole series
of laudatory papers about him with one exception, which is
a guy called Rag Rajan who was then the Chief Economist of
the International Monetary Fund and is now a governor of
the Central Bank of India. And Rajan warned about
the tailgating problem which I've been describing. That is, Rajan said,
we have this problem with-- more technically you
call it heavily out of the money options, which is
going to come around and hit us in the
next few years. Anyway, what Rajan said
did not go down well-- to put it mildly. The discussant of
his paper was a guy called Don Kohn, who said,
by allowing institutions to diversify risks, to choose
their risk profiles more precisely, to improve the
management of the risks they take on, financial
innovations have made institutions more robust. These developments have also
made the financial system more resilient and flexible,
better able to absorb shocks without increasing the
effects of these shocks on the real economy. And Kohn was followed by another
Federal Reserve governor called Ben Bernanke then, who said
that banking organizations-- he said-- have made substantial
strides over the past two decades in their ability to
measure and manage risks, resulting in greater resilience
of the banking system. Another Federal Reserve member
called Tim Geithner said, financial institutions are now
able to measure and manage risk more effectively. Risks are spread more widely
across a more diverse group of financial intermediaries
within and between countries. These changes have contributed
to a substantial improvement in the financial strength of the
core financial intermediaries and in the resilience of the
financial system of the United States. Two questions that might
raise in your mind. One is, how could these
guys have been so wrong? And secondly, how was it
that the fact that they were so wrong was
actually no obstacle-- to put it mildly-- to their
subsequent advancement? It was Bernanke who succeeded
Greenspan as chairman of the Federal Reserve. Kohn, whom I began with, who was
then appointed as his deputy. And the third speaker I
talked about-- Tim Geithner-- became US Treasury Secretary
when Barack Obama became president of the United States. One thing you certainly
learn from that-- and it's relevant to
understanding finance-- is what another economist
called the unimportance of being right in large bureaucracies. [LAUGHTER] So that's one question
you should raise. But the other question is,
why were they so wrong? And they were so wrong
because they actually misunderstood the nature
of the risk process which they were facing. Now a French economist
called Michel Albert actually was an academic
economist who became chairman of one of France's
large insurance companies-- wrote a paper in
which he described two origins of the world
insurance industry. The first was this one. This is an image of
Edward Lloyd's coffee shop in the city of London. And in the 18th
century, English gents would gather in
Lloyd's coffee shop and take bets with each
other on all kinds of things. They would bet on the
longevity of King George I and other grandees. But one of the things
they liked to bet on was actually the
movement of tides and the movement of ships. And this developed in due course
into a marine insurance market. And you will know that
Lloyd's of London, which is the institution that
developed out of Lloyd's coffee shop, is actually still a leader
in world marine insurance. The other origin of
the insurance industry was here up in
Switzerland, where Swiss peasants-- Swiss
villagers-- would gather together and agree if
any of their animals died, the village would club
together to buy a new one. There were two ways then
in which insurance started. One was as the result of
people gambling with each other on uncertain events. And the other was mutualization,
socialization of risks so that we manage them
collectively rather than managing them individually. And that contrast
between risk trading as insurance and risk
trading as gambling remains important today. It became very important. And this is relevant to how
the financial crisis developed. In the 1990s, when
there was a-- one of the financial
innovations I was describing that was invented
was something called the credit default swap. And the credit default
swap was essentially an insurance policy for a loan. If you took out a credit
default swap, that meant you would pay or get
paid a certain amount of money if a particular loan
was defaulted on. Now the International Securities
and Derivatives Association asked the London QC Mr.
Potts whether this activity was gambling or whether
it was insurance. And you can see that
if it was gambling, it would be subject to
the kind of regulation and tax we impose on gambling. But if it was
insurance, it would be subject to the
kind of regulation and tax we impose on
the insurance industry. Which was it? Well, any of you who have ever
consulted lawyers in London will know that you will stand
a very high chance of getting the opinion you want when you
ask this kind of question. And the opinion that is wanted
and the opinion they got was that it was neither. It wasn't gambling, so
it couldn't be regulated as if it were a gamble. And it wasn't
insurance either, so it wasn't subject to
insurance regulation. That left the question
of what it was, but we can perhaps leave
that for a little longer in this talk. And that was important
to the development-- to the explosive
development, in fact-- of this market in credit default
swaps over the next decade or so. And most of these
contracts were actually written in London because
of this rather benign interpretation of English law. But by 2006-- Oh, right. Sorry. I should have mentioned that. If you want to-- no, we'll
leave that for a moment. We'll go back to
our Swiss villagers. What was going on in
the credit default swap market was pretty clearly--
by 2006-- not mutualization of this kind. It was actually gambling. So there are two mistakes that
these guys at Jackson Hole were actually making. The first was that they
thought they were looking at mutualization-- risk
sharing, risks spreading-- that was actually
designed to reduce risk, when actually it was
people taking bets with each other on what
would happen to packages of [INAUDIBLE] mortgages
in the United States. The second mistake
that they were making was a much more
fundamental one, which was that the kind of risks
they were talking about weren't the kind of risks
that bother ordinary people in everyday life. What bothers ordinary
people are risks that are to do with
illness and mortality. They're risks that are
to do with redundancy and relationship breakdown. They're risks now that are to do
with accident and catastrophe. And as it happened,
just as they were having their conference
at Jackson Hole, Hurricane Katrina was
blowing into New Orleans. That is actually
the kind of risk that actually matters to people. And it wasn't the
kind of risk that was being talked
about at Jackson Hole. The risk that was being
talked about at Jackson Hole was almost entirely a
risk that had already been generated within the
financial system itself by the kind of transaction
which I've been describing. So that by 2006 what we had had
got to in this kind of market was a world in which essentially
what we had was gambling. Some of you may have read one or
two of the Michael Lewis books. There was a recent
one which has partly a description of the
high-frequency trading and data link from New York to Chicago
I was talking about earlier. But an earlier book was
called "The Big Short." And "The Big Short" is about
one of the most successful hedge funds in the course of
the financial crisis-- a hedge fund which bet against
a batch of subprime mortgages in what was called the Abacus
transaction facilitated by Goldman Sachs. And this is the
guy who in the end became the fall guy for
that particular exercise-- a guy called
"Fabulous Fab" Tourre. And this is him writing
to his girlfriend. "I had some input
into the creation of this product,
which, by the way, is the product of pure
intellectual masturbation, the kind of thing which you
invent telling yourself, well, what if we created a
thing that has absolutely no purpose, which is absolutely
conceptual and highly theoretical, and which
nobody knows how to price?" Well, what you do is you
sell it to a hedge fund manager on the one
hand and you sell it to a group of dumb
bankers on the other. And that was exactly
what happened. That was actually
"The Big Short." And that was where Mr.
Potts opinion actually took us by 2008. The key point I'm
making is to say that instead of managing risks
effectively, what we have done is created, in
effect, a large casino for very substantial gambling
of this particular kind. This is not about
risk management in any real sense at all. It is the activity we were
talking about earlier when we talked about passing round
bits of paper to each other, believing we were all
making profits doing so. So that's where we are. What should actually
be done about it? Well, when I talk to
non-financial audiences, like this one, what most people
think is wanted, is surely we need more regulation
of the financial sector. I think that's wrong. I think regulation is, in
large part, part of the problem rather than part
of the solution. In a funny way,
Mr. Potts was right when he said these things--
these credit default swaps we were looking at were
neither gambling nor insurance. Because the reason
credit default swaps had come into existence
was to exploit the fact that the complicated ways in
which we regulate insurance companies are very different
from the complicated ways in which we regulate banks. So if you could dress up a
loan to make it look more like an insurance
policy, you didn't have to provide as much
capital as you would have if it had been simply a loan. That was the purpose of it. Although, by the time
Fab Tourre was here, it was simply a form of
very large-scale gambling. I think we need not
to focus on writing evermore complicated rulebooks
for the financial service sector, which is what we've
been doing since 2008, I think we need to address
two things-- the structure of the industry and the
incentives of individuals within it. And unless we focus on
these sorts of issues, we're not going to get either
meaningful reform, the kinds of behavior from the financial
sector which we want, or a financial sector
which actually meets the needs of the real economy. What we need to do,
in short, is to try and to create an industry in
which its profitability is related to its capacity
to meet the needs of end users of financial services--
the kinds of function which I described
at the beginning in terms of payment system,
wealth management, capital allocation, and risk mitigation. And we need to address some
of the personal behavior of individuals
within it as well. This is actually a rather more
senior member of Goldman Sachs [INAUDIBLE] being
interviewed in Congress about the Abacus
transaction we were talking about a minute ago. [INAUDIBLE] I'd like to end by
what's actually, in some ways, a
rather similar video, but it's quite a lot
older than that one. It comes from the great
wartime film "Casablanca." I don't think I can top that in
ending this presentation today. Thank you very much. [APPLAUSE] ROB LEWORTHY: So we have a
few minutes-- 10, 15 minutes-- for questions also. If you'd like to queue
behind the blue microphone in the middle. Whilst you do that, I will
kick off with a question. How do we educate
the public in general about these sorts of
really complicated financial transactions
and goings-on? JOHN KAY: Well, a large part of
the story is you don't want to. Partly in the financial
system as it is at the moment, if you don't understand
it, you shouldn't do it. But I don't know what's
under the bonnet of my car. I don't want to know what is
under the bonnet of my car. I actually want to
have enough faith in the reputation of
the car manufacturer to be able to trust in it. If I think of what
you guys in Google do, I don't want to know what's
behind the Google algorithms. And I don't have to know what's
behind the Google algorithms. What I want to do
is see if they work. And if they work, I'll use them. And if they don't work, I won't. That's how the market operates
as it should properly. You have enough
confidence in producers to actually buy products
you don't understand fully. And if you don't have that
confidence, you don't buy them or you certainly don't buy
them from that supplier. It's not a matter, I think,
of educating the public so that they can
penetrate all this. It's really a matter of
reducing the complexity and restoring the reputation
of people in the industry so that people can be more
confident in the financial transactions which they make. ROB LEWORTHY: OK, thank you. We'll take questions now. AUDIENCE: Hello. Thanks very much for the talk. Given that this behavior
seems to repeat itself over many, many years, the
people in those positions are-- some of them are
not dumb, a lot of them are very powerful-- what
hope is there, do you think, for us achieving the stability
that you showed in the '60s and '70s given that these
people have an inherent interest to do something that's in
contrast to most people's interest? JOHN KAY: It's a very
pointed question, because I think we all
understand the political power of certain parts of the
financial services sector which makes meaningful reform
very difficult to implement. And in the United States, the
problems of campaign financing are such as to make
it almost impossible. I fear that the answer to
that is what will make reform possible is the next crisis. And what, slightly
depressingly, I hope I'm trying to write in
this book is a sort of manifesto for politicians who are faced
with that next crisis, which they will be at sometime. Because one of the things
that went wrong in 2008 was politicians were
faced with a crisis and had no idea what to do. I've sometimes joked that
left-wing parties in Europe, which had been waiting for
100 years for capitalism to collapse under its
own contradictions, were thrown into
panic by the prospect that it actually might. But that is roughly
what happened. AUDIENCE: I'm curious to
know what kind of response you've gotten from the financial
industry with this narrative. JOHN KAY: That's
very interesting because it's a lot more
positive than you might expect. But the reason for
that is that the kind of people in the
financial industry who want me to talk to them
about this kind of thing are actually the
people of whom there are very many within the
industry who want to change it. That is, I've talked
over the last five years to a lot of people, particularly
in the asset management business, who are
people who would rather like to see a different,
more useful financial sector and who feel constrained
at the moment by a mixture of the organizations
they work for, the regulation to
which they're subject, the expectations of their
clients and customers to go on doing pretty much
what it is at the moment. But frankly, the Dick
Fulds of the world are not people who
ask me to talk to them and they're not
people I particularly want to talk to myself. AUDIENCE: Hi, there. Thanks for a great talk. You mentioned not being in
big favor of regulation. But when other people
talk about this subject, they often reference
the end or the repeal of the Glass-Steagall
Act and the combination of investment banking
and retail banking after the 1990s as a kind
of very important point and something that
we should go back to having that division
between investment banking and retail banking in
terms of regulatory setup to make sure that
that's the case. Do you agree with that? Or what's your take? JOHN KAY: No, I do
agree with that. And I'm not against regulation. I'm against
regulation of the kind we have at the moment, which
is the endlessly proliferating, complex rulebook. So the Dodd-Frank legislation
in the United States was 1,000 pages. And then you need tens
of thousands of pages to implement that
particular legislation. What happened? We had banking regulation
under what was called Basel I and Basel II. And, of course, the response
when these things didn't work was to invent Basel
III, which was even more complicated than these. This is a game that
has no end to it. We're just chasing our tails. And since the people
who are regulated are typically going to be
smarter than the regulators-- if only because they're
paid quite a lot more-- then that is not going to succeed. That's why I would
like to go back to the kind of
structural regulation you describe in Glass-Steagall. What happened in
Glass-Steagall was that it was introduced in
1933 and separated investment banking from retail banking
so that the house of Morgan was broken up into Morgan
Stanley, an investment bank, JP Morgan, a retail bank. And I would like to go
further and say, what does a modern investment bank do? It issues securities. It gives corporate advice. It undertakes asset management. It makes markets in securities. And it trades on
its own account. And I just listed
these functions and I say there's actually
a conflict of interest between each of these
functions and every other. So I would like to see an
industry structure that has smaller, more specialized,
focused institutions that were, as I described
earlier, trying to deliver the kinds
of services that people in the non-financial
economy want and whose profitability
depends on that. AUDIENCE: Thanks. AUDIENCE: Hi. You mentioned that
you want to focus on the incentives
of the individual in terms of reducing
this in future. In that vein, do
you think that there should have been more
criminal charges leveled against people involved
in the financial crisis? JOHN KAY: Yes, I do. The reason there haven't been
many criminal charges is partly to do with the politics
of the industry which we've been talking about. And it's partly to do with
the difficulty of establishing that people at the top
of the organization actually knew what was going on. So that when we talked about
that Abacus transaction, nobody went to jail for that. But Fab Tourre was fined
a modest part of his bonus for his part in
that transaction. [INAUDIBLE] and the people
at the top of Goldman Sachs didn't suffer anything at all. Goldman Sachs itself
paid a fine to the SEC, but that's just a certain
sort of blood money really, almost a part of
the cost of doing business. I think that means
we have to introduce stricter liability, which
means you don't actually have to demonstrate that
the people at the top of the organizations
knew about the wrongdoing in their organization in
order to be able to make charges and impose penalties. That's where I think we need to
go in order to make this work. AUDIENCE: Hi. You just mentioned that
more regulations was not the answer for this kind
of white paper passing around the room problem. And you said it was
more about incentives and changing the whole setting
of the financial industry. Can you elaborate
on that and explain what your thoughts are on how
we can actually solve that? Especially on the second point. JOHN KAY: Yeah. I think a lot of
the paper chasing is the product of creating
these huge markets and secondary assets. Now some of the way
of offsetting that is for people to understand
that in the long run this activity is not
terribly profitable. But a problem we
have there-- which is why people gamble in
all kinds of markets-- is even if it's
not, people believe it is going to be for them. And without changing
human nature, there's probably no
way we can change that. But what we can do
is we can create a world which is
much less dependent on these secondary markets. What we think of as the modern
stock exchange is, to my mind, a creature of the 20th century. Stock markets came into
being in the 19th century-- in the first instance for
railways and railroads. The reason was you had very
capital intensive businesses, like railways and
railroads, and you needed to raise these
large amounts of money to finance them in
fairly small amounts from very large
numbers of people. And that model was then
developed for breweries, for automobile plants,
for petrochemical plants, and so on over the next century. But modern business
isn't like that anymore, and modern finance isn't
like that anymore either. Modern business isn't like that
because companies like this one are actually cash
generative by the time they're even large enough
to obtain a stock market quotation. Why is Google a listed company? It's a rather interesting
case of a listed company in at least two respects. One is it came to market not
to raise capital for investment in its business in
the way in which these traditional companies did. It came to market-- if
there was any reason for it at all-- to provide a
liquidity event for employees and early stage investors in
Google so that they could get some value out of
their investment either personally or
financially in the business. There's a paradox there
that the stock market is now a way of getting
money out of companies rather than a way of putting
money into companies. And the second way in
which Google is interesting is, of course, the
extent to which it has multiple share classes
to enable the founders to keep control of the business
even though it's majority owned by other people. And the final aspect
of that is to say that we don't, in the
main, collect savings in small amounts from widely
dispersed individuals anymore. Our savings are very
largely institutionalized through mutual funds,
pension funds, and the like. And that means we can have
much more direct relationships between asset managers and
the companies in which money is invested. And I think we could and should. And that would be a more stable
way of creating and maintaining the kind of structure that there
is in this company where you actually have a group
of investors who are happy to sustain the
kind of founder control which is characteristic
of the business, but would also allow them
to change it if that starts to look wrong for the future
development of the business. AUDIENCE: So are you saying
that the financial sector should get inspiration from
Google and how we work? JOHN KAY: Well, I
think looking at Google and Google's relationship
with the financial sector is quite an instructive way
about thinking about the issues of this business. Because one other
important aspect of it is that a company like
Google doesn't need to own-- and mostly doesn't
own-- the assets which are used in the businesses
because their office blocks, their computers,
servers, and so on-- I don't know in the particular
case of Google how many of them it does own-- but
actually the majority of these modern
knowledge businesses, very few of the
assets in the business are actually owned by
the company concerned. I was quite amused to discover
that that flagship Apple store on Regent Street
is actually owned jointly by the queen and the Norwegian
government pension funds. ROB LEWORTHY: We'll take the
last two questions together. AUDIENCE: Together? ROB LEWORTHY: Yeah. AUDIENCE: Should we speak
at the same time, or? [LAUGHTER] So my question is-- JOHN KAY: I think it's me who
was to take them together. AUDIENCE: So in the last
US presidential election, it was pretty interesting when
Mitt Romney disclosed his tax rate, which was, I think, around
12%, because most of his income is obviously from capital
and securities and investment income. If you're a steel
worker in Pittsburgh and you pay 25% or 30%, it's
obviously pretty disturbing. So what do you think
should governments-- my question is, how do
you think governments should tax capital income
versus income from labor? JOHN KAY: I think what's
wrong in the United States there is-- and I suspect
the main reason Romney paid as little tax as he
does is not actually to do with lower tax
rates on capital income than on labor income,
but to do with the fact that there are many more devices
for avoiding tax in the capital income sphere than there are
in the labor income sphere. And I would like to do
quite a lot about that. I think I probably
should stop there in terms of talking about
this particular issue in this particular building. [LAUGHTER] AUDIENCE: Fair point. ROB LEWORTHY: Last
question then. AUDIENCE: So I suppose,
I think, it's clear that there's lots
of things wrong and that you'd like to
change and lots of people would like to change. But as you alluded to, there's
not the political strength to do them, partly
because there's so much money in the city
and in Wall Street that stops politicians from doing that. And I suppose that
strength would have to come from us, the people. So I wonder, is
there a need for us to be educated, like
Rob said, to demand that from our politicians? Because otherwise I feel like
that asymmetry of information of bankers saying,
we know what's best, don't get involved, will
stop us from ever changing. So do you think that's
the reason we need-- JOHN KAY: Yeah. I think you're right, when we
have a load of this unfocused, as it were, public anger. I remember going to
St Paul's churchyard when the Occupy
people were in it. And I saw a sign--
a banner-- saying, ban high-frequency trading. And I thought, ha,
at least there's somebody here who knows
what he's talking about. But it turned out
that there was nobody who knew what the banner was
about actually in St Paul's churchyard. So we actually have
to give some focus to that particular activity. And the big fear I have is that
if democratic politicians can't give a focus and a channel to
that public anger, what we get is what we're seeing
at the moment, which is people who will support
crazy guys from whatever parts of the political spectrum
whose main attribute and the only thing
they have in common is that they don't look like
conventional politicians. So in a way the rise of Donald
Trump in the United States and Jeremy Corbyn
in this country-- although they could hardly be
more different individuals-- are different aspects
of the same phenomenon. And I think it's a very
disturbing phenomenon and one where it
is likely to end-- may end up as it has
ended up before with some of these crazy guys
actually taking power. That's what we need to avoid
in order to stop ending things on a really depressing note. ROB LEWORTHY: Please join
me in thanking John Kay. Thank you so much, John. [APPLAUSE]
