Other People’s Money Summary, Review PDF

Other People’s Money offers a detailed breakdown of the financial sector: how it functions, how it impacts economies, and what it should ideally be – as opposed to what it currently does. 

The international financial sector has become a ruthless mechanism full of rotten parts. 

Find out what these parts are and how they can be eliminated and replaced.

You may be wondering if you should read the book. This book summary will tell you what important lessons you can learn from this book so you can decide if it is worth your time.

At the end of this book summary, I’ll also tell you the best way to get rich by reading and writing

Without further ado, let’s get started. 

Other People’s Money Book Summary

Lesson 1: Without fear of consequences, greedy traders triggered a global financial crisis in 2008.

Although many involved in the 2008 global financial crisis insist that it could not have been predicted, this is not the case. What actually happened was the result of years of reckless and self-centered behavior.

When everyone in the financial industry is driven by the need to maximize their personal wealth, what else can be expected?

This mindset has long been associated with the transition from savings and loan associations to large commercial banks.

When banks became shareholder-owned, bank executives were in charge of shareholders’ money, not their own. Since they had no emotional stake in the money, they bore no responsibility for any mishaps.

Since they had so little to lose, they could follow their avarice and make deals that greatly benefited them financially without jeopardizing their reputations or the reputations of those with whom they worked.

At the same time, credit default swaps and mortgage-backed securities (MBS) were introduced, further destabilizing financial markets and leading to a lack of accountability. The mortgage process and associated payments can only benefit a mortgage-backed security.

When bank managers got greedy and gave mortgages to people who could not afford them, this whole mess ensued.

This, of course, jeopardized the MBS that Bank A had been trading with Bank B. Bank A supposedly wanted to protect itself from possible defaults by trading CDS with Bank B.

Since Bank B was buying unsecured CDS, both banks went under when the underlying mortgages defaulted.

Both financial institutions ran out of capital and had to be bailed out by national governments.

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Lesson 2: Through lobbying and campaign contributions, financial institutions exert considerable influence on policymaking.

Friendships between politicians and wealthy businessmen are widespread. Some financial institutions even employ former government officials as consultants, giving them continued access to political networks and exerting a skewed influence in legislative and judicial bodies.

Against this background, it is perhaps not surprising that the financial sector is the most active lobbyist.

Between 2012 and 2014, the U.S. financial sector spent an estimated $800 million on lobbying. This does not include the $400 million in campaign contributions.

Anyone who wins that much money will likely feel obligated to give some of it back to the bank.

The influence of the financial sector is evident in the massive government bailouts that followed the 2008 financial crisis.

Moreover, a bad example was set by suggesting to banks that they could be careless, knowing that the government would eventually step in and clean up their mess. Almost immediately after the global disaster, everyone forgot what they had learned.

In retrospect, the banks’ carelessness in financing subprime mortgages – loans to borrowers with lower credit ratings and thus higher risk of default – was inevitable.

Big banks know that the government will always bail them out because they are too big to fail.

The fact that many people are unfamiliar with the complicated workings and esoteric jargon of the financial industry is a great advantage, because it allows those who work there to get away with reckless behavior and excessive greed.

Unscrupulous traders can take advantage of the fact that you, as a layperson, do not know the meaning of terms like “subprime” or “derivative” by claiming they lost all your money due to market volatility.

Before the 2008 financial crisis, it was widely assumed that highly paid financial experts would act rationally. The crisis revealed years of truly irrational and risky behavior.

We were the ones who had to foot the bill, regardless of our guilt or innocence.

Lesson 3: Regulations in the financial sector don’t always help

Regulations are a common topic of conversation when thinking about the financial crisis. Contrary to popular belief, many regulations had already been enacted, some of which stemmed from the devastating crash of 1929 and the Great Depression that followed.

The 2008 financial crisis taught us another valuable lesson: Regulations can have unintended consequences.

Implementing effective policy oversight becomes a challenge when new regulations are constantly being added. If there are too many restrictions, people will find ways around them.

Regulation Q’s attempt to cap interest rates on bank deposits such as savings accounts was also unsuccessful.

Banks in the United States began sending their customers’ deposits to European banks that were not covered by Regulation Q and then bringing the money back home in the mid-1980s.

Rather than deterring unethical business practices, as intended, this increased the workload of the authorities.

One possible response is to develop international regulations, a topic frequently raised at the G8 and G20 summits. Unfortunately, the results of these meetings have so far been disappointing.

Financial regulations make things more complicated for institutions, at the expense of citizens.

Introducing new regulations can complicate even the simplest transactions for the average customer. Placing our trust in people who claim to be experts in a particular field, but who are really just taking advantage of us, greatly strengthens our defenses.

The Securities and Exchange Commission (SEC) is responsible for regulating the U.S. financial system and promoting openness and public trust.

However, if the only information available to a person is written in jargon that might as well be in a foreign language, that person will have no idea what is happening with their money.

As long as the public is kept in the dark, the financial system will continue as usual.

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Lesson 4: Reform of the financial industry is essential, and the impetus for that reform must come from within.

While today’s politics are divided, there is agreement on the need to prevent the financial sector from enriching itself through questionable means that ultimately destroy ordinary people’s ability to save and force governments to bail out big banks at the public’s expense.

If we want to prevent another crisis, we must restore confidence.

A restructuring of the financial services industry is necessary to prevent professionals from putting their own needs above those of their clients.

An important step in this direction would be the separation of jobs within the financial system and the elimination of positions such as broker-dealer.

Brokers would not be allowed to act as traders or arrange financial transactions that personally benefit the broker, and they would only be paid for successfully brokering trades between two parties.

It is also unacceptable for financial institutions such as banks and brokerage firms to accept savings deposits.

The savings would be safe in the event of another major collapse, but the banks would not be able to do business with or pay off their customers. A bank’s greedy traders would also have much less disposable income, making them less likely to engage in potentially disastrous, risky trades.

Most important, however, is that the financial system actively encourages ethical behavior.

It is clear that the threat and occasional enforcement of billions of dollars in fines by SEC is ineffective as a deterrent to bad behavior. To establish ethical business practices, executives and managers must set a good example for their employees and reward them for similar practices.

However, this is easier said than done. The first step in any change is always the hardest.

Other People’s Money Book Review

Other People’s Money is a great book I’d like to recommend to anyone who is interested in business and finance. If you spend some time digesting the ideas, it might make a positive impact on your life.

The financial industry is a dangerous, self-serving beast that provides few benefits to the average citizen, as the recent banking crisis has shown.

Yet we know from experience that the financial system can work well when regulations are simplified and ethical business practices are the norm rather than the exception.

The financial system has the potential to be reformed into a useful and powerful system that strengthens our economy and raises our standard of living.

About the Author

John Kay is a fellow at St. John’s College, Oxford, and teaches economics there.

His articles are also regularly published in the Financial Times, and he is the author of two books, Obliquity and The Long and Short of It.

Buy The Book: Other People’s Money

If you want to buy the book Other People’s Money, you can get it from the following links:

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