On January 30th, Bow Group Research Secretary Luke Springthorpe interviewed renowned economist Professor John Kay (pictured) at a Bow Group event.

A former Director of the Institute for Fiscal Studies, Visiting Professor at the LSE, Financial Times Columnist and founder of Said Business School of Oxford University, he has recently Chaired the Kay Review of UK Equity Markets and Long-Term Decision Making

Key points emerging from the interview, which is viewable on Youtube via http://www.youtube.com/watch?v=IwXyIjDHCzU were:

• The regulatory approach isn’t about more or less, but is about learning lessons. The financial sector being one example, we see that regulation is growing and one of the lessons of regulatory history is that regulations that are based on detailed supervision of corporate behaviour rarely work but it is not a lesson we have learned. “What we have now is a whole regulatory industry consisting of more than just regulators but compliance officers, a whole battery of consultants and lawyers involved in mediating. You go to meetings where these groups are involved and get the impression they are talking to eachother and for eachother. What’s more, when regulation takes the form of a wildly complicated form of rules and being left to compliance officers, it becomes regarded as a nuisance to operational officers who become interested only in how to minimise the effects of regulation.
• Recent years have seen a deminishing role for equity investment, with share buybacks being commonplace and even IPO’s often only representing liquidity events for early stage investors.  The structure of ownership has also changed significantly in that small investors have been replaced by large asset managers and a long chain of intermediaries.
• The Financial Transactions Tax in Europe is almost as unsatisfactory as our own Stamp Duty Reserve Tax, which “gives us the worst of all worlds, attacking long term savers and exempting short term investors”. Furthermore, it “doesn’t address the problem of short termism and HFT is not the source of short termism in the corporate sector”
• His book ‘Obliquity’, in which he concluded “The most successful companies often aren’t those that are most profit oriented, and it was this phenomenon that promted [him] to write [his] book Obliquity.”
• Quantitative Easing (QE) and that “What we have seen so far is a withdrawal in the face of an adverse reaction and whilst we will see a winding down, we have landed ourselves with an extraordinary monetary policy and we shouldn’t believe that we have solved the underlying problems. The benefits for society have been limited.”
• Sources of power of the banking industry in lobbying (23 mins) and the need to think much more systematically about how we develop the financial sector to work for users rather thank having banks that trade with eachother. The problem being that trading and regulation has taken primacy over relationships.
• Where will the next crisis originate? (31 mins) We have two possibilities: one being the Emerging markets fallout as a result of the wind down of Quantitative Easing, and the other being the slow burn of the Eurozone crisis which still hasn’t gone away given that bad debts have only been swept under the carpet with much of the poor quality collateral still not being acknowledged as such.
• Scotland & its future in the Union (38 mins)