Interview: John Kay

There are some bruised egos among the ranks of Britain's economic commentators, as the global financial crisis lurches from one tumultuous stage to the next. “What I think is of little importance,” groaned Anatole Kaletsky in The Times a few weeks ago, “especially as I have been wrong about so many aspects of this crisis.” Any expectations of a similar crisis of confidence on John Kay's part are dashed within seconds. Now firmly established as one of the country's leading economic minds, Kay exudes an air of swaggering intellectual self-assurance that belies his slight, silver-topped appearance as he sinks into a sofa at Blackwell's, where he's promoting his new book The Long and the Short of It.

Edinburgh-born and raised, Kay took his first degree here before proceeding to Oxford, and a glittering career that saw him take directorships at Halifax and the Institute for Fiscal Studies – as well as authoring a host of books and a hugely popular column in the Financial Times. But he still retains a fondness for his home city. “It is just one of the most beautiful cities in the world,” he says. “Also from your point of view as a student, it’s now a lively cosmopolitan city, in a way I think it wasn’t when I was a student here.”

That's all well and good, I suggest; but our lot could be forgiven for being more concerned for what awaits us after university. The graduate jobs market is looking increasingly bleak – particularly for those hoping to go into finance, with investment banks set to cut their graduate intake by 28 per cent this year. Does this herald a permanent shrinkage of the financial services workforce?

“To be honest, I hope so,” says Kay. “But I'm not sure. A lot of people, both in financial services and, interestingly, in government, seem to want to wake up and think the party can get started again. But that's not what we want to happen; I would hope the whole financial services industry will be less significant in the future than it has been for the last ten years.” He shakes his head. “When I was a student I had no more thought of going into a bank than going down a coal mine! The idea that finance is done by smart people just wasn't on the agenda at university.”

Margaret Thatcher's sudden deregulation of financial markets in 1986—commonly known as “Big Bang”—blew the traditional structure of the City out of the water, paving the way for two decades of stupendous growth. But according to Kay, the new meritocracy carried the seeds of its own destruction. “Socially-based class structure effectively regulated financial services in Britain for a very long time, and it didn't regulate it badly. It was a world in which you didn't have to write rules down; people learnt at their public school what they were. That's not a world that could be restored – but it was part of what made Britain strong in the industry.”

With the new City came vastly increased pay cheques to the leading players – a phenomenon that has provoked particular resentment since the credit crunch got underway, notably in the outcry over the disgraced former RBS chief Sir Fred Goodwin's reported £703,000 annual pension. Yet when Barclays' Bob Diamond scooped £100 million in a single year, his employers explained the decision in the simplest economic terms possible: that was what he was worth to the company.

“But the plain truth of that is that he wasn't and isn't,” cries Kay, giggling delightedly. “Just from the narrow shareholders' point of view, he's reduced the value of that bank to virtually zero. And from the public point of view he's inflicted immense damage. If the government were taking this seriously, they'd say to Bob Diamond that we don't want to see him here again!” Kay laughs heartily at his wisecrack, with the air of one thoroughly enjoying his safe ringside seat at a gory gladiatorial contest.

Others occupy a more precarious position – not least Gordon Brown, whose popularity has plunged along with the country's economic prospects. The Tories have seized the chance to pin the current recession on Labour's failure to regulate financial services, but Kay disagrees. “This isn't where I'm at,” he says, “wanting to get political with any of this. But I think that's fundamentally wrong, and also naïve about what regulations do. If there's a lot of burglary, then the fault basically lies with the burglars, and not the police. This is the fault of the financial services sector.”

Which is why, of course, the £37 billion bailout of the industry caused such outrage in many quarters, with protestors throughout Britain asking: “Where's our bailout?” “The only good answer to that,” says Kay, “is to say we're not actually bailing out the bankers; what we're doing is ensuring that the utility keeps functioning. The silly buggers who screwed it all up – we'll deal with them later. The first thing is just to get them off the scene.”

For Kay, the answer to our financial woes lies in “making banking boring again” – bringing about, partly through full nationalisation of the largest failed banks, a culture change to put an end to the “nonsense” of systematic foolishness by grossly overpaid traders. But might it not be too late to restore the implicit faith in the market that characterised the last two decades? Marxists are gleefully pointing to an ideological shift, with copies of Das Kapital flying off the shelves.

“My book is certainly outselling Das Kapital on Amazon!” Kay chortles. I persist: as China smugly parades the virtues of its “managed capitalism”, don't you think the Western model has been undermined by the current turmoil?

“No I don't, actually,” replies Kay, suddenly serious. “For me this stuff is an excrescence on capitalism, essentially. Real capitalism is about people making money, but money out of real products, real services that real people want. I have a cartoon in one of my books which is based on a real sign seen at a demonstration, saying 'Capitalism should be replaced by something nicer...'”

Kay's laughing again, as confident in the long-term prospects of the financial system as he is in his ability to understand it. At a time when experts are queuing up to proclaim their ignorance in the face of increasingly manic conditions, this one seems to be taking it all in his stride.