Performing the Time Warp on stage at the opening of the PortfolioConstruction Forum Conference this year was an unusual way for Graham Rich to invite conference delegates to consider the issue of the legacy they want to create.
If the 2016 conference were, heaven forbid, to be Rich’s last, then his own legacy would be interesting to assess, as it would necessarily have to include his final performance.
But by highlighting the conflicts between long- and short-term thinking, Rich invited delegates to stop for a moment and think about what they are doing, in a much broader context than just their own business and industry, and at a much deeper level than just portfolio construction and investment solutions.
What is it that you are actively engaged in creating, in a big-picture sense, and what will you leave behind to future generations? Through the eyes of Jack Gray, Adjunct Professor of Economics at the UTS Business School, the answer is currently not pretty.
“I think we’re leaving a very poor legacy behind,” Gray told the conference.
Gray said there was a growing chorus of voices from within the finance sector, backed up by mounting empirical and quantitative evidence, that “we haven’t done a good job; that we’ve created something that is not in society’s best interests”.
“It’s been ignored of course … mainly because we have power, but it’s time we listened to that and started thinking about it ourselves and about what we can do to contribute to make it much better,” he said.
Gray said reconsidering the finance sector’s legacy requires a reassessment of some fundamental assumptions and the received wisdom about the sector and what it does. He said that rather than improving the efficiency of an economy and contributing to the overall wellbeing of society – as everyone likes to tell themselves, and anyone else who will listen – once a finance system reaches a certain size it starts to do the opposite.
A protection racket, and rent-seeking
It becomes what is essentially a tax on the economy; and it has in recent decades been a major contributor to inequality of wealth across society. A significant activity of the financial service industry is no more than a protection racket or rent-seeking.
“That’s just extracting some money and not adding any value,” he said.
“That’s what this business does.
“When you’ve got a very large financial system it reduces [economic] growth and it increases volatility of the economy.
“There’s any number of studies … showing that productivity per capita goes down as there are more people in finance.
“Why might that be? Because finance crowds out capital to be used for producing goods and services, and it crowds out talented people who would [be] better off as engineers rather than financial engineers.
“You do not need such a big financial sector in order to grow. Germany, Taiwan and South Korea are very vibrant, growing economies with quite modest finance sectors.
“And how large is too large? [An IMF report] suggests that once credit, for instance, becomes about 90 per cent of GDP, you are in trouble. You can expect to get very large and negative consequences on society and the economy as whole.”
Gray said that when the finance sector becomes disengaged from the real economy, as he said it is now, and is therefore disengaged from society, and it doesn’t add any value, “then this is a really worrying thing”.
So what’s to be done? A really good start would be for everyone engaged in the system to have the integrity to think seriously about what they are doing, what the results of their actions are likely to be, and to argue strongly and forcefully against what they find to be wrong, or to be producing results that run counter to the interests of society.
The finance system should be a mechanism for the betterment of society, rather than society being shaped to suit the needs of the finance system and its participants.
“Almost all groups argue self interest,” Gray said.
“As soon as finance is attacked, as soon as superannuation is attacked, people who hate each other – the banks and the super funds – all join together and defend themselves. Some of that is valid, and most of it is not. It’s purely self interest.”
The finance sector comes last
He said that each year the Edelman group conducts research into the public’s trust of a range of industries and occupations, and the finance sector invariably comes last.
“And if you look into the country-by-country of this … Australia is the worst of all of the countries. We are the lowest of the low in terms of trust. People do not trust us. I wonder why.”
Gray said little store can be put in surveys that purport to show individuals have low trust in advisers generally, but think their own adviser is wonderful. He said you’d suffer some industrial-scale cognitive dissonance if you were asked if you trusted your own adviser and said no.
He said there’s a very large disconnect between how much people inside the industry believe they can and should be trusted and the trust the public said it actually has.
“You can dismiss all of that and say it’s a market beat up and it’s rotten apples – no it’s not, it’s deeper than that,” he said.
Gray said “people who have been taking this talk from the inside” and pointing out the ills the financial system produces are laying the groundwork for “a legacy that would be well worth representing and having – that we spoke out from the inside about something that was going wrong”.
“Not many people do that,” he said.
“It’s part of being a professional. Being a professional, to me, means your self interest comes last; the interest of the organisation you work for is second-last; the next biggest interest is the client; and there’s something even beyond that, and that is the system as a whole.
“The accountancy profession has, as one of their beliefs, that your first responsibility is not to clients, but to the integrity of the system. Whether they live that belief is a different story, but at least having it there to me is a sign of a profession.”
