John Kay

The value of Modigliani-Miller – like any good model in physics or economics – lies as much in the questions it raises as in the truths it reveals.

The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure.

The theory that the right answer to the gap in information and knowledge between the investment bank’s structured products division and the person in the street is to give the person in the street more information is absurd.

There is a loss of intimacy in knowledge and understanding, and a reduction in subtlety and flexibility of approach that comes from insistence on judicable principles and rigid rules. But the prevalence of regulatory capture is such that it is often a price well worth paying.

Two years after the collapse of Lehman, the case for structural reform of the financial system rather than closer supervision of behaviour and the prescription of ever more elaborate rules is stronger than ever.

Anonymity is often the most effective means of telling truth to power: and sometimes the only one.

While there may be some economies of scope in the provision of financial services, they don’t in any event compare in order of magnitude with the collateral economic damage imposed by recent failures in the financial sector.

The Independent Commission on Banking headed by Sir John Vickers which the coalition Government has established will be told that such a separation between utility and casino can’t be done – although it was done in Britain for most of the 20th century.

More competition and a reduction of the conflicts of interest between different financial services activities is the antidote to gouging. The separation of retail and investment banking would begin a move away from the transaction-focused, sales-driven culture of recent years and reassert the development of long-term relationships with customers.

The modern cult of the heroic chief executive is at the root of the problem. Greater shareholder activism may help, but the most valuable restraint would be more effective checks and balances within the company itself.