Financial Technology. Fintech. The New Frontier of Business. Whatever turn of phrase you wish to use, there is something that came out of the crisis that very few people realised at the time but may have managed to change the very face of capitalism for the rest of human history. Computers have had a revolutionary impact upon any number of industries. But the developments of the last few years may have solved a great conflict in capitalist political economy. This is the impact that financial crises can have upon the economic growth and wealth accumulation of a nation.
A century ago, in 'Reform or Revolution', Rosa Luxembourg made a very insightful point about the unstable nature of the banking system and its rapid exchange in capital for which the banker has very little personal responsibility or attachment. In the 1980's, the neo-Keynesian theorists, led by the frankly brilliant Hyman Minsky, managed to isolate the mechanisms through which banking could wreak major damage. Some Marxist theorists have gone as far as to suggest that it will be the conflict between democratic expectations and a free banking system that would bring about the collapse of capitalism and the rise of the socialist utopia. Politicians have for decades tried to keep the genie in the bottle with varying levels of success. It seems that all the greatest minds in Government still struggled to find a permanent solution to the problem of greed and excessive risk taking. However, it may have transpired that it was not the economist that has saved the world, but the computer scientist. Banking failure is caused by a massive interlocking web of emotive responses and human interactions. One would think that you would need the social sciences to solve this issue. However, it turns out the anti-social scientists (a crude caricature, I know, but not one entirely without grounding) managed to come up with the eureka moment.
It is important to remember what banking is meant to do. No, it is not just there to allocate profit and extract surplus value. Banks are meant to serve as a mechanism of reallocating the risks that occur in market transactions, between those who are not in a position to bear the risk and those who are. However, banks often get greedy. Now, Boris Johnson may think greed is a marvellous thing but then he always was a bit of a swine. Greed is so damaging precisely because there is a misallocation of risk, or the taking on of the kind of risks that should not be on a major financial institutions asset sheets. The realisation that these risks have been misallocated results in a collapse of market confidence. At this point, you have a wonderful and time honoured recipe for produced one well baked financial downturn. The reason why greed is so bad? Because greed means that you ignore the signalling function of the market and misinterpret vital information. The techies' solution to this? Big data and the death of the middle man.
Big data allows you to have a framework and a policy horizon unlike anything else seen in modern human history. It is not enough for these firms just to make the primary data disclosed by the company look pretty. These firms will take terrabytes upon terrabytes of information and use it to give a good indicator of the direction that the market is going and the kind of risks that are attached to such an investment. This will allow investors to better plan their investment strategy and move towards a more risk averse strategy which is still highly profitable. The other major development it peer to peer lending. The other bug bear of the financial system is the need for leveraging against assets in order to function. This is when you use what you own to take out a much larger loan that you can invest in markets in the hope that one makes a profit. This is solved by peer to peer lending services. Now, any company with a server can facilitate (for an administration fee) lending between two individuals or firms without any personal responsibility for the success of the investment. This reduces the appetite for reckless borrowing on the parts of large financial institutions. Let's not forget that it was the reliance on money obtained by whatever means that resulted in the kind of incentives for LIBOR manipulation.
This kind of technology will not sink the traditional market players in the financial industry, especially in a post-recession framework where the greatest premium is placed upon trust and reputation. Large banks will still be far more effective in providing more complex products than algorithm driven start ups. But they have the potential to change the way in which banks act forever. Profit margins will be shaved, practices will have to be tightened up, and a more complete digital product set will have to be devised. There has been a large amount of disruption to the banking sector in recent years. This time, it is not a climate of fear that surrounds this disruption, but one of creativity. This is something we could all get used to.