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How To Fix Finance

A better Finance is possible, one at the service of Humanity not at its expense

Capitalist Crumbs, an illustration by Richard Cole (2009), introductory of Chapter 3 in The Monfort Plan

The first thing to do when proposing a grand scheme on how to fix finance is to show one’s credentials. As it so happens with a civil engineer fixing a bridge, an architect fixing a building’s foundations, or a surgeon fixing a person’s heart, it is mandatory to present one’s accreditations prior to presenting the treatment to treat and subsequently cure a severe condition.

I completed a six-year Master’s and Bachelor’s in Telecommunications Engineering with distinction at Politecnica de Madrid, Telecom ParisTech and Universitaet Stuttgart in 2000. Subsequently I earned my MBA in Finance from College des Ingenieurs in Paris (France’s best and most exclusive business school) with the best overall academic performance in Finance (2001), a Master’s in Stock Markets and Financial Derivatives from Universidad Nacional de Educacion a Distancia (2003), a Master’s in Financial Analysis from Universidad Carlos III de Madrid, a Master’s in Financial Engineering from the University of California at Berkeley, a Master’s in Local Economic Development from the London School of Economics and a Master’s in Economic Policy Management from Columbia University. I worked three years full time in London and New York City between 2005 and 2008 for a triple-A financial guarantor. Since 2008 I have become a full-time Author currently writing my second book.

Jaime Pozuelo-Monfort’s four Master’s Degrees Diplomas in Finance

In Finance there is the practicioner, who typically does not make independent statements, and there is the thinker or academic. The former are big earners and usually have a huge conflict of interest when proposing constructive, blunt, fearless criticism and reform. Among the latter there are the orthodox and unorthodox thinkers. I am the unorthodox thinker and have a track record of proposing alternatives beginning with my piece “Redefining Capitalism” which I published in November 2005. Subsequently I published “The New Architecture of Capitalism” with Wiley Finance, a 500 page book. McKinsey&Co published its report “Redefining Capitalism” in 2014, 9 years after my piece to be precise, along with the same title. Of course McKinsey&Co will provide “no comment”, there is no explicit mention to my prior 2005 essay in their report.

I have been a columnist for EL PAIS/Cinco Dias in Spain (2006-2009), Roubini Global Economics (2008-2013) and finally The Huffington Post (2009-2016), oftentimes writing about finance and financial reform. My Master’s thesis at Carlos III was about Online Banking and at the London School of Economics about Microfinance.

Jaime Pozuelo-Monfort’s two Master’s Degrees Diplomas in Economics

Then there are the journalists who write for The Economist, The Wall Street Journal, Financial Times… most often lacking financial training, sometimes having earned the CFA accreditation (certainly not enough), who are fundamentally superficial and politically correct respecting the big sharks in financial services.

Then there are the Professors holding a doctorate in economics or finance. Many Finance Professors hold a doctorate in economics and then choose to pursue tenure in finance because of the demand for Professors at the top business schools and the higher pay involved, certainly higher than in tenure positions in economics. Among Professors with a doctorate in finance in academia, all are specialized in a subfield, for instance asset pricing, fixed income or real estate finance, are focused on publishing in the top journals and have little to no time nor interest to write a grand scheme on how to fix the finance and investment paradigm.

Capitalism is here to stay after the fall of communism. This is pretty obvious, bringing to the banker and the financier only apparent peace of mind. Even communist China has embraced capitalism. But capitalism and finance are running obsolete and are in desperate need of a radical turnaround.

Capitalism and finance serve the interest of the better off, almost exclusively. This is manifest in the World’s most capitalist country the United States where inequality, debt burden, the stock markets, and the public corporation have catapulted a few, a few millions, leaving middle class Americans stagnated now for decades. Globally capitalism has had its success story in China, but fundamental issues remain and many extremely poor countries, particularly in Subsaharan Africa, remain in an eternal trap of poverty. Finance, microfinance, banking, credit, financial inclusion have a key role to play in contributing to extreme poverty eradication in our lifetime, but first and foremost not this finance, rather a finance of a different kind, fundamentally different starting from the very roots.

Finance must be owned by the consumer not the banker and the asset manager. Today financial sophistication plays in the interest of investment bankers, asset managers, hedge fund managers, fintech now blockchain consultants, even regulators and Central Bankers. Tax havens continue to thrive. Offshore banking and over the counter trading remain. And it is all a financial architecture designed in the interest of the big corporation, which minimizes tax payments using loops, competition among countries to attract multinational firms’ headquarters, and tax code disparities well understood by many corporate lawyers. Two incredible sources of information reveal much has to change including Wiley’s “Capitalism’s Achilles Heel” and all the analysis undertaken by Tax Justice Network. I have personally met Raymond Baker and John Christensen and anticipate their battles do matter and shall be won.

The consumer in banking and finance, who opens a bank account, who asks for a mortgage to purchase a house, who asks for a student loan or uses a credit card, or invests in fixed income and stocks, has to become consumer activist and demand that his or her bank play fair and straight. Sophistication is not necessarily bad, it is not in engineering, architecture or medicine. But a kind of sophistication that elevates the better off, constantly, at the expense of everyone else does not serve a long-term purpose and vision of prosperity for all. Finance matters, so does financial education, which should be overwhelmingly present in schooling.

Then there is a fractured market with dozens of banks operating in small jurisdictions or nation-states. There there are national currencies running everywhere and a lack of optimum currency areas and thus regional currencies, which would if proposed and implemented, trigger integration episodes which would benefit the consumer reducing fees and commissions. A banking business is a business based on credit, loans and most important on fees and commissions.

Paypal or Triodos Bank claim to have changed the banking model, when in reality little to nothing has changed. Banks suffer from poor stock performance yet still maintain investor confidence. There seems to be a love affair between banks and large asset managers, the latter perhaps are aware they would not be able to operate in the absence of the former. In my three year full time experience in finance in New York City and London, before the financial crisis exploded, I could see the symbiosis between insurers, retail banking, investment banking and asset managers. Of course the press did little to nothing to denounce, announce and anticipate what was to come, because its journalists typically have no understanding of the complex underlying roots and drivers that determine the direction of finance.

Asset Managers manage today more principal than ever before. Trading has become increasingly automated and computational, and as a result short-term. There is even a subfield in finance called computational finance, fathered by Dr Domingo Tavella who lectured me at Berkeley. Some of the most relevant Finance Professors like Domingo Tavella or Stanford’s Durrell Duffie actually received doctorates in engineering in the 1980s. Finance, in the words of Berkeley Emeritus Professor Hayne Leland, was a field in which you could barely survive in the late 1970s. Sophistication came to financial markets with the incorporation of individuals holding doctorates in aeronautical engineering and physics. Five of my classmates from Berkeley including Valedictorian Jadong Li came to the Master’s in financial engineering with doctorates in physics. The issue of course is that most among the smartest individuals in the planet are serving money not humanity, while the rather mediocre end up in politics becoming the great pretenders. Finance needs to be fixed. Politics is fortunately defunct.

Now investment has to be more fundamental and less technical, more long-term and less short-term, more hard and less soft, hard as in hard assets like real estate, soft as in soft assets like stock. The charlatan kiddos from the Silicon Valley who now want the easy money to flow in in order to become billionaires in their twenties, are beginning to find out confidence bubbles also burst and IPOs, if inflated on day one, are likely to take a company in a downward spiral. Companies that began with a social purpose become now the antisocial network, encouraging younger and younger individuals to use their portals more and more often provoking addiction. Even hardware giants in the absence of visionary Steve Jobs know no other strategy than to improve the same smartphone, and sell it more often, more expensive to more individuals, possibly younger.

This is not the finance I studied and envision for a borderless, extreme poverty free World. The recommendations on How To Fix Finance will come in Part II, ahead.

To join J.P.Monfort Economics in your country send your Resume to [email protected]

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