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The city cartel

November 22nd, 2003

This Buttonwood column from the Economist deplores the fact that house prices in London are being bid up by City types who, he suggests, have enriched themselves at the expense of their customers (he’s referring to the mutual funds scandals, but these are just the latest of many). He doesn’t, however, ask the obvious question: Why do these City types crowd together in London (and New York). After all, the same City types are busy telling us about a globalised world, linked instantaneously by the Internet. And, as Warren Buffett has shown, they are right. You can get all the information you need to formulate market-beating investment strategies while sitting in Omaha, Nebraska.

The two halves of Buttonwood’s observation are linked by the much older observation of Adam Smith (quoting from memory here)

Men of the same trade seldom gather together, even for innocent merriment, but the meeting ends in some conspiracy against the public.

The work that financial institutions are supposed to perform, trading assets and allocating risk in transparent markets, can be done anywhere on the planet. It’s the stuff they want to do without any inconvenient records, and with the kind of trust that’s needed for conspiracy that requires clustering in a central location where social bonds can be cemented by eating, drinking and sleeping together.

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