The spreads on UK shares have grown ever narrower as the rise of trading has increased stock market liquidity. But somehow most Britons don't see shares as a store of value. They still prefer residential property, which takes months to sell at higher transaction costs.
The City has absorbed more and more top graduates from the country's top universities. But somehow it has become less effective in providing financial services and managing risk - the basic business of banking. The point is lavishly illustrated by the recent history of taxpayer bailouts and misconduct scandals.
Such paradoxes form the basis of Other People's Money, a withering account of the financial services industry by academic economist and FT columnist John Kay. Professor Kay authored the UK government's 2014 review into stock market short-termism, and his latest book elaborates this theme. But its conclusions are much more radical - and angrier.
"We live in Financial Times", advertises the newspaper slogan. Prof Kay describes the rising economic, political and social clout of the financial industry over the past three decades - a process he calls 'financialisation' that the latest crisis only seems to have strengthened. But this clout is based not on bona fide profits from wealth creation, he argues. Instead, it relies on the appropriation of wealth from the rest of the economy, which is both economically inefficient and socially corrosive. "We need finance. But today we have far too much of a good thing."
The appropriation of 'Other People's Money' is made possible by a merry-go-round of transactions between financial institutions. Just 3 per cent of the liabilities of UK banks consist of loans to individuals and non-financial companies. Mainly banks trade with other banks, using third-party capital - activity that merely depletes the capital. Hence the paradox of an expanding financial services industry that has reduced the quality of service it offers customers.
Bankers do talk about this problem. When Tidjane Thiam, former chief executive of Prudential who moved to Credit Suisse in June, was asked at this week's FT Banking Summit what he had learned about banking, almost the first thing he said "we need to do things for the real economy". The point was later reiterated by executives at HSBC and Macquarie. But Mr Thiam also mounted a defence of his investment banking division, and Barclays this summer ousted former chief executive Antony Jenkins after the head of its investment bank threatened to resign. It is very hard for management to face down the internal power of star traders.
Prof Kay sees hope in the UK ringfencing regime, which will separate retail banks from investment banks - the customer-oriented utility from the self-enriching casino. If implemented effectively, he argues, this reform will "starve the beast" of interbank trading. That's because interbank trading depends on the deposit base of retail banking for its government guarantee and appearance of solidity - and hence low funding costs.
But Prof Kay wants the fragmentation of financial services to go much further. He believes the conflicts of interest inherent in today's full-service investment banking model - the result of deregulation in the 1980s and subsequent M&A activity - cannot be successfully managed through 'Chinese walls', as regulators still hope. This kind of reform is completely off the current political agenda, which is addressing the 'too big to fail' problem by increasing capital requirements rather than dismantling universal banks.
The only change of note to result from Prof Kay's equity market review was the abolition of the requirement for companies to post quarterly trading updates. Some readers have written to Investors Chronicle to complain about a consequent lack of information. The book makes clear why Prof Kay found so little to tweak: he thinks the basic principle of regulating markets by creating a 'level playing field' through timely disclosure of certain information - with trading taking place only on the basis of that information - is a "fantasy" that inhibits engagement between companies and investors. Adding to the existing rule book would only have aggravated the problem.
Other People's Money describes the same self-referential world of unearned profits and wasted talent as Michael Lewis's Flash Boys, which it cites. But Prof Kay's analysis is more subtle, and will therefore not, I suspect, top the New York Times bestseller list, as Lewis's page-turner on high-frequency trading did. That's a shame, because Other People's Money is the most persuasive summary I know of the ills of modern finance.
