The one sentence summary
The financial sector has grown too large, is detached from ordinary life, and mostly trades with and talks to itself.
WHAT THE BOOK SAYS
- We depend on the finance sector to store money, manage payments, finance housing stock, restore infrastructure, fund retirement and support new business. But the vast majority of lending is within the finance sector. So what’s it all for? Are the people who work in it masters of the universe or servants of the people?
- The author argues that the industry’s perceived profitability is partly illusory, and partly an appropriation of wealth created elsewhere – other people’s money.
- The finance sector of most Western economies is too large, and volumes of trading in financial markets have reached absurd levels.
- The four functions that finance should provide are the payments system, the matching of borrowers and lenders, the management of our household financial affairs, and the control of risk.
- Search is the pursuit of new investment opportunities. Stewardship is the management of long-term assets that have already been created.
- The financial sector has grown too large, is detached from ordinary life, and mostly trades with itself, talks to itself, and judges itself by standards which it has generated itself.
- Meanwhile the outside world has adopted those standards, bailing out financial institutions that have failed all of us through greed and mismanagement.
WHAT’S GOOD ABOUT IT
- Ketchup economics is the exercise of comparing the price of bottles of ketchup without regard to the underlying value of the ketchup inside.
- The Efficient Market Hypothesis asserts that all available information about securities is in the price, but it isn’t – just because the market is frequently efficient doesn’t mean that it always is.
- Tailgating is when impatient drivers drive very close behind and demand you get out of the way. They may arrive marginally earlier, but the risks are very high as they often crash. In finance, this cognitive dissonance between “whose fault it is” belies a high probability of a small gain and a low probability of a large loss.
- A Martingale strategy is doubling your bet every time to recoup the loss you just made. It doesn’t work, and yet many finance companies do it.
- Liquidity is in a sense an illusion because it only available in the short term, and not when it is really needed.
- Every time you buy a share, you are buying it from someone who wants to sell. Many others have chosen not to buy at that price, which should give you pause for thought.
- “A bank is a place that will lend you money if you can prove that you don’t need it.” Bob Hope
WHAT YOU HAVE TO WATCH
- It’s a very detailed book – well written, but not suitable for dipping into. You need to follow the flow of the narrative.