There has been some uproar in Britain over whether the Business Minister, Vince Cable, who predicted the financial crisis, respects the City of London aka British financial sector. I weighed in on the argument as follows, and I think what I said applies pretty well to Wall Street too:
The reality is that the City hasn’t earned respect. It is divided into:
- A Traditional Value Add Sector that raises needed capital for business, provides insurance and foreign exchange for trade etc. and a transparent efficient home for savings. This sector, when it does its job, I respect and we need. Unfortunately it has rarely in recent years been the driver of British economic activity, let alone manufacturing in the UK, which it does not understand or care to finance. And as a transparent efficient home for savings it is a joke.
- A Casino Sector that speculates on the traditional sector. Some limited amount of its activity is useful to make markets work, but most of it is not. Instead it involves the creation of products of products of products and is not useful and destroys value in the real economy. Indeed as Warren Buffet termed them, this sector produces products that are ‘weapons of mass financial destruction’. That it should focus on this is also an admission that the City cannot make money in its traditional role, that needs knowledge and skill in the real world. This value destruction sector dominates the City, and sucks the talent not only out of the traditional sector, but also out of the real economy, taking engineers, science grads away from real activity and making them into quants aka croupiers. It will also destroy the City’s international reputation in the long run, and its ability to attract overseas funds, except it is currently a bit protected by the fact that the other financial centers round the world are equally inept. A world wide network with the efficiency of British Leyland circa 1970. (Or General Motors circa 1980)
- A Criminal Sector. And finally there is the third, untalked about City sector, the sector that launders criminal money from the drugs, prostitution, tax evasion, and other criminal enterprises that I suspect are upwards of 20% of the City. These funds should be identified, seized and returned to the countries where they were illegally generated. And the other global tax and criminal money havens closed down at the same time by concerted international action some wet Wednesday when no one is expecting it. Who knows crime might even drop….
Bernie Madoff representing Sectors 2 and 3: