Reinventing The Financial Markets: Back To Basics

People across Europe and other parts of the world are increasingly feeling disconnected with the financial world and in all likelihood the discontent will only grow if the sector is unable to connect or reach out to the common folks on the main street.

I believe people do understand that an efficient and a well functioning financial system is essential to the development of society and the overall growth of any business and entrepreneurship around the world. Their discontent is not with the importance or the role the financial sector plays but how the system that was supposed to deliver prosperity has let them down.

 It is important for us to understand the growing dissatisfaction and mistrust of many in the society with the world of finance and how it operates. The general sentiment of people on the street is that financial markets operated as casinos and the banks along with other financial institutions laid bets with people’s money and walked away unpunished giving a financial horror show for folks on the street who are still struggling to keep afloat. Also the recent unfolding events of the past few months including of the LIBOR scandal, JP Morgan hedging fiasco among others has dented the reputation of the financial market even further.

 I remember having a number of discussions with my colleagues in the financial world on this subject and before critiquing folks protesting on the streets of Greece or Spain we all need to retrospect and ask ourselves just how many of us operating in the financial sector came in with a passion to change the world and create a system that worked for common folks everyday. The reality is sheer greed of some in the market and profit making at all cost drove the entire industry to its current mess.  The financial system as we know it is BROKEN.

 Since its humble beginning in 14-17th century the sector has gone through many CRISES and has also kept getting complicated or as others would say sophisticated for the understanding of common folks on the street. Over the years the generic description of the financial world for many on the street got limited to indices i.e. DOW, FT 100, S&P 500 among others and tracking their daily performance became a trend with the help of financial media who developed platforms to report the daily performance of these INDICES on a minute by minute basis to the world. So in short the financial world got INDEXED and these indices became a gauge of the overall health of the economy.

As the market grew so did the creation of complicated financial products and the sector got populated with a large pool of service providers to create demand for the such products. So imagine a common man who could pop into a shop and buy a shoe of his or her choice after trying it buying a complicated financial investment product became a totally different experience. This meant most folks bought products without a clear understanding of what it was and had to rely on the expertise of their financial advisors or firms selling those products and some entrusted their savings to professional firms to invest wisely on their behalf.

 Any system that works on trust requires the practitioners to take responsibilities and maintain integrity at all times but unfortunately the system was let down by people and firms who were mainly in it to get RICH quick and were driven by sheer greed. If the only goal and aim of an enterprise is quick profit at any cost it is not hard to understand why mis-selling will thrive in such environment.

 The big picture is, businesses derives profit from folks in the society which is always the end customer. Unfortunately some of us ignore that perspective but without real interaction and developing a strong relationship with customers no business survives. So for the financial system to work efficiently on a sustainable basis the society should feel that the system is fair, accountable and serves as an important pillar supporting its general well being otherwise we will always find ourselves in them and us type situation and this we know is a recipe for disaster. So the onus is on the policy makers and the financial market to deliver a financial system that is safe and fair and connects closely to the folks on the street.

 The markets need to understand that complicated products are not the answer and in all honesty, no one understands them fully. This does not mean the death of INNOVATION. In fact innovation is good for the market and also for the folks on the main Street, but innovation should bring simplicity.

 Fixing the financial system will require re-inventing it. Regulatory oversight and the policies governing the financial markets will need to be focused on removing the existing complicated layerings and simplifying the markets and its operation. Firms creating and selling financial products or assets should be willing to take responsibility and explain in simple terms the pros & cons of the product they are selling. I believe it’s Einstein who said “If you can’t explain it simply, you don’t understand it well enough”. The local community banks and financial advisors will need to be more proactive and transparent.

On the macro level the central banks, the government agencies and the market participants have all got a very important role to play. They will all need to develop new skills and tools to better understand the financial market of 2012 and the future.

It will also require going back to basics and creating a system where the market participants will look beyond just profit and their usual what’s IN IT for me approach. It will require leaders  who truly believe that they aren’t just responsible to their shareholders but also to the folks on the main street who make up the society with a clear understanding that their action or inaction will sooner or later have a direct or indirect impact on others.

A society is made up of many actors with different interests and needs so it is worth noting that envisioning a financial system where everyone was happy is probably not a realistic expectation but without a prosperous society a company won’t be able to survive in the long run. The contribution of the financial sector and the role it plays in the overall growth and development of the real economy which directly benefits the society is a very significant one. Banks and other financial institution across the world have served their local communities for centuries.

 The CRISIS serves as a reminder on how closely linked the main street and wall street really is and it is in the interest of wall street to have a vibrant main street and vice versa.