Eminent UK economist and Financial Times columnist John Kay reportedly believes that the global financial system is broken and that there is a simple remedy.

It is broken because bankers have lost the plot. They have, he alleges, become detached from servicing real businesses and people: it is “an industry that mostly trades with itself, talks to itself, and judges itself” against its own unworthy standards.

This populist diagnosis does not quite ring true. An industry can’t make profits by trading with itself; in that world, one bank’s revenue is another bank’s cost. Moreover, in New Zealand at least banks are closely involved in lending to private enterprise and homeowners. In January 2016, lending to New Zealand residents outside the financial sector accounted for 77% of our registered banks’ total assets.

In the case of the US it is clear that profits were being declared in part by advancing depositors’ and investors’ money to people to buy homes they could not realistically afford. This process was aided and abetted by well-meaning government regulations, government agencies Fannie Mae and Freddie Mac, and irresponsibly-assigned high credit ratings to the repackaged loans.

Kay’s simple remedy appears to be “harsher penalties for the individuals, not the corporations, who handle other people’s money, subject to criminal and civil penalties”.

Of course any sound system of voluntary exchange must have effective penalties for fraudulent behaviour. Kay’s proposal for harsher penalties for such wrong-doing has some appeal in this context, although the bigger problem may be the failure of regulators to prosecute fraud adequately in the first place.

Furthermore, a sound system must embody caveat emptor (specifically those who chase higher returns must accept a higher risk of loss). Bankruptcy is an essential discipline under a ‘for-profit’ system. The ‘too-big-to-fail’ philosophy that took root in the 1990s amongst regulatory authorities virtually guarantees irresponsible risk-taking in banking. In New Zealand the $1.6 billion bail-out of depositors in South Canterbury Finance gave a perverse signal to risk-takers.

In short, diagnoses that bash bankers likely don’t get to the heart of the real problems. But Kay is surely right to be deeply concerned both about the weaknesses in the current global system and the need to avoid adding to the perverse incentives created by poor quality government regulation and offensive taxpayer bail-outs for risk takers.