June 20, 2016
Sir, David Pitt-Watson, an executive fellow of finance at London Business School writes: “Few had spotted… chronic failures in the system; for example, that on the best evidence available, for more than a century, the financial system has created no productivity increase in its task of taking our savings and investing them in productive projects”. And “that’s why LBS has introduced a new required course for its masters in finance, [which he teaches] called the Purpose of Finance.” “Students must learn the purpose of finance” June 20.
I am a London Business School, Corporate Finance graduate, 1980. Since my first Op-Ed in 1997, and then as an Executive Director of the World Bank 2002-04, and afterwards, I have held, among other in around 50 not published letters to FT, that bank regulators, so irresponsibly, never ever defined the purpose of banks before regulating these, and so completely ignored that the main purpose of banks was to allocate efficiently credit to the real economy.
In 2007 I even sent a letter to FT commenting on an article by David Pitt-Watson, in the sense that he had not understood the role of regulators in creating the distortions in the allocation of bank credit.
My problem was, and is, that I did, and do not, belong or behave, in accordance to the mandates of any inner circle, whether of LBS or FT.
Therefore when Pitt-Watson writes: “Before we launched the course, I researched what other masters in finance degrees taught. I could not find a single one that is explicit in teaching about purpose,” he is confessing to the worst of problems… the groupthink of regulators, of finance professors and of financial journalists.
I am pinning my hopes on artificial intelligence. That has at least no ego that refuses to admit to its mistakes.
And artificial intelligence would never ever have risk-weighted BB- rated assets at 150% and AAA rated at 20%. It would have known that banks would never ever create excessive financial exposures to what is perceived as risky, that only happens with assets ex ante perceived as safe.