John Lanchester · For Every Winner a Loser: What is finance for?

Vol. 46 No. 17 · 12 September 2024 For Every Winner a Loser John Lanchester Share on Bluesky Share on Facebook Share Email Print 6602 words The Fund: Ray Dalio, Bridgewater Associates and the Unravelling of a Wall Street Legend by Rob Copeland . Macmillan, 352 pp., £22, August, 978 1 5290 7560 1 Show More The Trading Game: A Confession by Gary Stevenson . Allen Lane, 432 pp., £25, March, 978 0 241 63660 2 Show More Show More I t is easy ​ to misunderstand what contemporary finance is and does. Common sense, and the textbook, both say that finance is the business of moving money from A to B. There are times when money in place A, a saver’s bank account, say, would be usefully deployed in place B, a business needing cash to expand, or an individual wanting a mortgage to be able to buy somewhere to live. It’s easy to extrapolate from this that finance is mainly about supplying money to businesses and individuals that need it, as and when they need it. And modern finance does do that. But that isn’t what finance today is mainly about. In his indispensable guide to the current condition of the financial industry, Other People’s Money , published in 2015, John Kay talks about the state of the UK banking sector, whose assets then were about £7 trillion, four times the aggregate income of everyone in the country. But the assets of British banks ‘mostly consist of claims on other banks. Their liabilities are mainly obligations to other financial institutions. Lending to firms and individuals engaged in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3 per cent of that total.’ Lending money where it’s needed is what the modern form of finance, for the most part, does not do. What modern finance does, for the most part, is gamble. It speculates on the movements of prices and makes bets on their direction. Here’s a way to think about it: you live in a community that is entirely self-sufficient but produces one cash crop a year, consisting of a hundred crates of mangoes. In advance of the harvest, because it’s helpful for you to get the money now and not later, you sell the future ownership of the mango crop to a broker, for a dollar a crate. The broker immediately sells the rights to the crop to a dealer who’s heard a rumour that thanks to bad weather mangoes are going to be scarce and therefore extra valuable, so he pays $1.10 a crate. A speculator on international commodity markets hears about the rumour and buys the future crop from him for $1.20. A specialist ‘momentum trader’, who picks up trends in markets and bets on their continuation (yes, they do exist), comes in and buys the mangoes for $1.30. A specialist contrarian trader (they exist too) picks up on the trend...

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