Eric Lonergan believes it is our failure to grasp the true function of the financial system that has led to crisis
In their daily commute on trains or the underground, most bankers read the financial press, work on their BlackBerries or dream about what to do with their bonuses. Eric Lonergan mulls over philosophical principles about life and money, and their deeper meanings.
Observing passengers on the train into the City, the M&G investments fund manager wonders how the bankers and civil servants can be so immersed in their own thoughts that they can, for example, remain sitting comfortably while pregnant women are left to stand.
"People are myopic towards themselves and others," says Lonergan, one of a small group of managers of M&G's $2.4bn (£1.5bn) hedge fund. "We've an illusion of independence, when we're closely interconnected."
One of the best examples of this misunderstanding, according to Lonergan, is our wrong-headed concept of money and the financial system – the real reason behind the credit crunch, he thinks. He has become so exercised by the fallout from the crisis that he has written a book summing up his thoughts. It is titled, simply, Money.
His purpose was to show that while most of us understand money as a way of individual accumulation, we miss its real point: money is a social utensil with the real goal of finance to insure risk. "Accumulation doesn't make us fulfilled – that comes with relationships and how we spend our time. We don't need to think of money as an accumulation tool, but in its function. It's supposed to serve us, it is social," he says.
Some bankers failed to see this deeper function of the financial system, as they focused on their own gains. "In the industry there's lack of thought and reflection about quality of life," he says, referring to bankers who are in the profession just for the money. "We need to regulate better. You might get better bankers by paying them less – there will be less propensity to take risks."
But blaming it all on bankers would be a mistake, he says. The fault was collective: "Greedy bankers are trivial components. The crisis reveals total lack of understanding about money and finance."
Finance has always existed as an insurance, a way of sharing risk. Stock markets' main function is to allow new investors into a company, avoiding a situation where one party bears all the risk. Similarly, securitisation – where a loan is packed, diced and sold to other investors in the form of bonds or notes – is another way of reducing potential trouble hitting one single party. This technique, widely criticised as "casino banking", has existed since farmers traded agricultural debts in the 14th century, Lonergan says.
"When I hear [Bank of England governor] Mervyn King describing banks as 'casino banks', I think they don't seem to know the purpose of the financial sector at all."
Lord Turner, chairman of the FSA, the City watchdog, suggested last year that the financial sector had grown "too big". But Lonergan claims such an assertion is like saying we have too much technological development: "We didn't provide the best source of insurance, but people still need to hedge risk. Maybe a lot of it was mad, but the principles were right."
Economists have also ignored finance for decades, mostly because the discipline is hard to model, given its high human factor. Rare are the economics textbooks that dwell on the financial system, with its risks and less predictable behaviour. Most textbooks will say that stock markets' main role is to enhance an efficient allocation of capital – far from their true risk-sharing purpose, the fund manager says.
Lonergan has been thinking about these issues since he was a teenager, being raised by an Irish father, an academic at Trinity College, Dublin, and an Italian mother, who also taught at university, in Ireland, in the 1970s. As an undergraduate at Oxford, he read Marx, who taught him that to understand politics and the intricacies of society, one should also know economics. Following a Masters at the London School of Economics, he started a career in the City because "markets tell a lot about people, what people think and feel – markets are an experiment of human behaviour".
But it was when a friend at the School of Life, a London centre that encourages thinking about life, suggested Lonergan should write a book (Money, The Art of Living Series, Acumen Publishing, 2009), that he put his ideas on paper. In his book, Lonergan says we don't "get" finance because humans have been caught in a "short-termism" that doesn't let us see the future unfolding – "and finance is all about the future.
We have evolved in a short-term environment, we haven't had the futures that we could have planned for – psychologically, we're very short sighted. Governments, rules and stability are fairly new and many countries still don't have them."
Citizens, though "understandingly angry about the credit crunch", also fail to look ahead and understand the financial system. "People are still saying that borrowing is bad, but that's what they do when they deposit money in a bank. They're lending to the bank, so the bank can lend to another person."
Governments failed in their response to the crisis by, for example, letting US investment bank Lehman Brothers go bust, a move that sparked panic – "and panic destroys insurance, as the system comes down at once".
The Bank of England's quantitative easing is another mistake. Instead, the Bank should print money and hand it to consumers – as US Federal Reserve governor Ben Bernanke suggested doing in Japan years ago. Any inflation rebound could be offset by higher interest rates: "The big mistake is to tolerate such high unemployment – people want to work. This is a failure of the mind."
The credit crunch was one big, collective mistake: "We behave like tribes. Finance is not certain, but behaviour is, so that's why people tend to repeat another person's mistakes."
Still, he believes societies will be better off after the credit crunch as institutions will be more accountable. "Banks will be better regulated, fiscal and monetary policies will be better. There will always be opportunism and myopia, but there'll be less tolerance."
The big lesson, though, is that "we need to be much more aware of the human factor". Whether people offer their seats on a train to those who might need them more needs to be brought into books, boardrooms and balance sheets. The credit crunch has taught us we just cannot get rid of human nature – however much governments, bankers and economists would like to make life steady and predictable.
Eric Lonergan - CV
Born 9 April 1971, Dublin.
Education Read PPE at Oxford University, master's in economics and philosophy from the London School of Economics
Career Cazenove, JP Morgan Cazenove as managing director, responsible for economic and strategy research. Currently at M&G as a member of the macro team
Family Married with two daughters
Hobbies Playing the guitar, reading philosophy
Favourite holiday Florence, Italy
Copyright Speakers Corner 2017