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Friday, 30 January 2009

Democratising The Financial Markets

One of President Obama's first acts has been to berate Wall Street executives for taking the sixth largest round of bonuses in history at the taxpayers' expense.

That the US President is suddenly under public pressure to do this demonstrates not only the depth of public anger but also the gulf in public knowledge about how the financial markets work. My own perception is that intensive regulation - ironically designed to protect the financial system and the general public from the kind of risks now occurring - has funneled the world's investment funds and opportunities into a cloistered environment in which only a privileged few are trusted to connect them. Enormous rewards for those few are simply a bi-product of that regulatory outcome. And it's unsurprising that those rewards should remain high as the flow of investment capital runs dry in the face of intensifying demand from cash-strapped banks and corporations.

But all the participants in the financial system must now recognise there's a new seat at the table. While governments and central banks have always been big players in the financial markets, their new role as sole marketmaker has pulled up a chair for the taxpayer. This new player demands to know how "my money" is being used, and has the benefit of increasing media attention focused on finding that out. This in turn casts each government leader in a role similar to that of an investment banking chief executive at a perpetual AGM. Voting may be over for the US President, but now the lobbying for a multitude of special resolutions begins. For Gordon Brown, more torture awaits on both fronts.

So how can governments and their leaders escape this predicament? How can they hand off their role as marketmakers, and let the taxpayer get back to running the store?

Certainly one lever they can pull, amplified recently by Niall Ferguson, is to "de-leverage" the entire system by funding yet further bank write-offs and re-writing consumer mortgages at more affordable rates (which has happened many times in the UK sub-prime mortgage sector).

But this seems to assume the financial system will remain more or less the same. And I don't believe it will. I certainly don't believe that taxpayers will ever completely turn their backs on finance again. Indeed, as emerged at WeBank, it seems we are moved to generate a new system with a new set of rules.

The attack on 'excessive' bonuses challenges the notion that matching investment capital and investment opportunities should be a rarefied activity reserved for the anointed few. Carry that challenge through and you have a set of simplified, transparent marketplaces that are substantially open to all, in a direct sense, albeit still facilitated by a skilled few in an open and transparent way. There is already a trend in this direction with individuals spread-betting and investing in contracts for differences on various plaforms. But that's still way too sophisticated to be deemed reasonably accessible to all. A process of further simplification, with increased openness and transparency, would be entirely consistent with the development of directly accessible consumer marketplaces around facilitators in travel, auctions, retail, betting, entertainment, personal finance and trade finance markets during the past decade. In those marketplaces, the role of the facilitator has been to enable consumers to seize control of their own experience and keep much more of the value that was previously retained by suppliers.

In this sense, the "democratisation" of the financial markets may be seen as very much a logical step, rather than anything terribly radical. It will be important to get the rules right - just as that has been critical to the success of many other consumer platforms already out there. But openness, fairness, transparency, and both governments' and taxpayers' determination to get out of this mess, ought to be reliable guides.


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