Finance

If you read the papers, you will read about the news of central banks raising interest rates or starting another "quantitative easing program, and if you flip to the wealth section, you will read about bankers living the high life of luxury products and bespoke clothes and watches. There is a public obsession with money, banks and finance.

This I believed is an Anglo-Saxon ideal. The Americans and the British have pushed the ideal of the civilized and moneyed banker so much so that it expects everyone to aspire to be a banker but this is not true of other countries even Western ones. France and Germany have an industrial base quite unlike the British. Brexit has painfully shown how the UK is so desperately reliant on finance for economic growth. Chinese do not aspire to bankers, they aspire to be entrepreneurs. And in Japan, bankers are paid like the average salary man.

This obsession with finance forgets about the importance of industrialization. Manufacturing and industrial bases genuinely produce products that will benefit mankind. Cars, industrial equipment and consumer products all benefit mankind in one way or another even though there are cost involved such as sustainability and environmental issues. It create value in a sense which financial engineering not.

Financial engineering, in essence does not create value at all. There are many books on the alchemy of finance, of how money is created of nothing, and out of thin air. This is because financial engineering creates money simply only by shifting money. It can be argued that there are in essence providing a service by assisting companies, governments and people gain access to the capital markets. But it is really only providing a service, how much value and innovation can it create. Does it even justify the amount of money that they are paid for providing the service.

Value comes from innovation and making lives better and not by making markets more efficient. Making markets efficient should be a goal and not an aspiration. It is perhaps argued by some that financial engineering have helped many own homes with the advancement of financial innovation and credit metrics. But in effect, it can be done even without the help of all these financial engineering.

Take for example home ownership in America. It was made possible with creation of Fannie Mae and Freddie Mac which in effect guarantees the payment of mortgages by homeowners, this is coupled by the creation of mortgage-backed securities which allows banks to shift the loans out of their balance sheets and onto investors. This is really a shifting of money, and this can be done by governments had they been efficient in lending money to potential homeowners. After all, it was not unheard off that many in American had several mortgages and were betting speculatively on the upward swing of housing market and really are not home occupiers. In effect, the banks were earning large fees in originating the loans and then earning an credit spread on the loans as well and also once again for selling the loans to investors. There is really nothing of intrinsic value that was created.

We must instead focus on true innovation of which that will directly benefit mankind and not the cleverness in moving money around while earning a spread on the movement of these funds. We must focus on the products it creates rather than the money per se.