Joris Luyendijk is a journalist, a writer and above all, he is an anthropologist. In his latest book, This Can’t Be True (Dutch: Dit Kan Niet Waar Zijn), he dives into the City of London to find out what is wrong with the banking system. The book is not academic nor is it difficult to read. It narrates several interviews that Luyendijk held when writing a blog on banking for The Guardian Online. The interviews tell the story and take the reader through the wondrous world of global finance. Luyendijk acts as the medium, asking the questions and interpreting the answers. For a finance student, much of the book seems unnecessary at first. We (are supposed to) know how a bank works, what the difference is between retail, commercial and investment banking, how the regulation system works, what the risks are of financial products and how incentives are given to employees. Nonetheless, there are important reasons why finance students should want to read the book.
Through the eyes of the beholder
Luyendijk doesn’t know much about banking when he starts his journey through the city. He uses this lack of knowledge to construct the setting and to help the reader gain familiarity with the terminology, systems, functions and institutions involved. Although a finance student should not need this introduction, there is still something to gain from this method. After studying financial markets for a while, it can be very difficult to imagine what the financial system looks if you lack that knowledge. Since the crisis, everyone has a strong opinion on bankers and their dreadful bonuses. We have seen this once more in the past week after the executive board of ABN AMRO accepted a raise in base salary. Although everyone agreed that the raise was well within the rules, rules that were democratically established in parliament, the board was blamed for a lack of understanding of the public opinion. The public opinion, however, is not always a well-informed opinion. This is especially the case for the most complex and often most important subjects, such as healthcare, social security and also the financial system. What Luyendijk offers to finance students is not so much an introduction to the world of banking, but rather an introduction in the mind of those who are unfamiliar with that world. Luyendijk discovers the competitive climate in the trading rooms, the long hours, the lack of job security and crucially: the lack of morality.
The UvA is providing the (mandatory) course Ethics in Finance this year in the MSc Business Economics – Finance track for the first time. It is clear that this field is rather undeveloped in finance. For the lecture, the UvA had to rely on a guest lecturer from the Erasmus University Rotterdam. She also explained that it took a while for her PhD research to find a supervisor, because the topic was not very popular. It is true that economics, and finance as a part of it, is a science that does not care about morality that much. A basic assumption is that an individual maximises his own utility. The most we usually do is including the utility of others in the utility equation of that person, but he will still act based only on his own equation. It is a convenient simplification with interesting outcomes. Think of financial regulation. The most important reason for this regulation is because the bank only cares about his own equation and not about social costs or gains. As a result, he will not appreciate the downside risk to its full extent and he will take more risk than is socially optimal. This is the lack of morality in practice. It is not that the bank is an evil institution, but it just doesn’t care. Its business is creating value for the shareholders, not creating value for society.
What we can learn from the book by Luyendijk is that this lack of morality is no longer sustainable. Banking is such an important part of society, that it needs to take responsibility for its role. The lack of knowledge of the public on the banking sector becomes a problem when banks are using this information asymmetry in a way that destroys value for society. The crisis of 2008 has led the public to distrust banks for some time to come. Luyendijk tells the story of people that would rather not say that they work for a bank in public, because of the negative reactions they might receive. It shows how bad the reputation is of an industry that is build on stability and trust. How to approach this issue, is a much more difficult question, and one that Luyendijk doesn’t really address. It could be intrinsic, from the banking sector itself, or from the regulator’s side. Recently, bankers in the Netherlands had to take an oath in which they promise to take account of the client’s interests. It is a sign of a new attitude within banking, at least in the Netherlands.
Luyendijk’s book is an introduction to a world where earning money is the primary goal, be it for the company or for the banker himself. The book argues that this attitude needs a change. It has corrupted the way banks operate, the way its employees behave and has endangered the stability of more than just the financial system. Whether the bad portrayal of the banking system is always completely fair is not clear. It certainly isn’t true that the competitiveness of the City is comparable to the situation in, for instance, the Netherlands. What the book shows most of all, is how an intelligent person with no specific knowledge of banking feels after diving into it. He feels that the system is broken and needs change. The banking system needs to improve its reputation for the sake of both the banks and society. Finance students that read Luyendijk’s book will understand that there is still a long way to go.