This important book is simultaneously a clear primer on modern financial systems and a scathing indictment of them. It acknowledges the essential role of finance in modern economies but levels three critical charges at modern financial systems: they are larger than necessary, they perform inefficiently or worse, and they transfer unjustifiably large sums of money to the financial sector from the rest of the economy. Financial sectors have become self-referential systems, preoccupied with trading within the sector rather than providing services to households and nonfinancial firms. Along with offering this detailed diagnosis, Kay suggests some prescriptions: separate deposit-taking institutions from those that handle most other financial activities; require that financial firms maintain adequate levels of capital, which would lower returns on equity and eventually lead to a market-driven reduction in largely superfluous financial trading; and impose strict liability on managers, since those who are richly rewarded should take the rap for any malfeasance that happens on their watch—and ignorance should be no defense.
Get the best of Foreign Affairs' book reviews delivered to you.
More Reviews on Economic, Social, and Environmental From This Issue