Feb 20, 2009

Telegram to Barack Obama: A Suggestion for Curing Financial Ignorance

Dear Mr. President,

The ongoing economic turbulence has been both fascinatingly thought-provoking and deeply troubling. While I believe that more good than bad will ultimately result it's obvious that a public formerly in denial of its excesses will naturally underestimate the required depths of its impending catharsis. It’s my hope that the public and media will take a reflective deep breath and appreciate how long this healing process will take.

The list of problems we now face is lengthy and undeniable complex. Few economists would argue that our administration's first concern should be to buffer the dramatic free fall in output that has resulted from a multitude of factors: increased job losses, less availability of credit, deteriorating confidence, shifting demographics, a stronger dollar, and a higher propensity to save (rather than spend). The methods by which one cures this economic downward spiral are being debated across the globe in every media forum known to man. Rather than weigh in on this discussion I'd like to begin thinking about what comes next. Once aggregate demand is restored to a more palatable trajectory a different set of important societal challenges will emerge.

#1.) How do we dismantle the ideological trap doors that led us into our current state of financial chaos?

#2.) How do we recreate a financial system that aligns the interests of its employees with those of its shareholders, the financial system, and the public at large?

#3.) How do we empower individuals to better understand their own personal finances in the context of the increasingly complex and ever-changing global economy?

The purpose of this note isn't to delve into the lengthy discussions of challenges #1 and #2 though I would argue that the keys to their resolution lie in curing the ills of challenge #3. And while most would not consider challenge #3 as the most near term critical it's certainly an issue that is consistently and mysteriously overlooked despite its importance.

I applaud your administration for establishing a committee aimed at harvesting the public's collective knowledge for help in solving the endless problems we now face. It's this type of intelligent humility that consistently evades many of society's important interactions, most certainly at its own peril. In this spirit of knowledge sharing I would like to make a policy suggestion that I strongly believe to be imperative for solving the root cause of our current state. This administration should introduce policy requiring one year of mandatory student education on the mechanics of global capital markets and personal finance.

The multidisciplinary curriculum will avoid espousing one-track convention wisdom and focus on building a framework to understand our manufactured financial architecture from varying critical viewpoints. The class recipe would consist of these ingredients: three parts history, three parts corporate finance, three parts personal finance, two parts applied macroeconomics, two
parts sociology, one part accounting, one part comparative literature, and one part psychology.

The most basic assertions of modern economic thought will be stripped bare and discussed at length. What is Gross Domestic Product (GDP) and why is its growth synonymous with economic progress? What is inflation and how is its control crucial to our prosperity? What purpose do banks serve? Why is the stock market supposed to increase in value over time? What are the origins of credit and why have economies all over the world become so dependent on it?

While exploring the history of modern capital markets students will consider why central banks like the Federal Reserve were created and how they operate, gold backed currency versus fiat currency economies, and how monetary and fiscal policy levers are used to guide sustainable growth and moderate inflation. Students will examine the gears of our economic engine by following the money trail that begins in FDIC insured savings accounts and ends up as bank loans in the hands of small business. The role of banks as this crucial lending intermediary should provide another important centerpiece for lengthy discussion.

On the topic of personal investments we will begin by surveying the dense layer cake of financial instruments representing the incremental risk and potential return to which an individual can gain exposure. Students will think about what shares of company stock actually represent, under what
conditions they may increase in value, and how this investment differs from gold bullion, US Treasury Bills, farm land, corporate bonds, a barrel of crude oil, foreign currency, baseball cards, a cask of whisky, or a piece of art. They will read selections from Mackay’s Memoirs of Extraordinary Popular Delusions and the Madness of Crowds and Taleb’s Fooled by Randomness alongside more conventional investing canons like Graham & Zweig’s Intelligent Investor and Schwager’s Market Wizards. Academics, journalists, and financial practitioners will help source reading material from recent magazine articles, psychological studies, Wall Street research, Op-Ed pieces, and blogs. The class will undoubtedly require a module on credit, examining the purpose it serves, and the various implications of buying assets with borrowed money.

While the complexity of our financial system has been allowed to increase exponentially there has been almost nothing done to help society decipher the implications this has for its members. It has now become painfully clear that financial education deserves the same attention in schools as classes in science, math, social studies, and language. I urge this administration to rise above our country’s quick-fix mentality and set into place an educational policy that will make a long lasting difference for generations to come.




Erik Holmberg said...

Intelligently written.

I'm not a very wordy person, some might say a straight talker.

I don't have an answer all the way through, but I have bits and pieces of something that might lead to an answer.

What you have proposed is a great start and a large piece of the multi-pronged approach.

I learned how to save money from my parents. Their actions, attitudes, beliefs, and values were instilled in me. I suspect you or your other friends might say the exact same thing.

I think this represents another prong, but I'm not sure how to use this knowledge to develop the solution thoroughly.

The conflict is that you are moving the teaching about saving from the parents to teachers, and not only that, you are moving it to a later stage of people's lives. A stage where it is probably harder for people to learn how to save...

If I can make a broad sweeping statement, I would say the a lot of people in college are insulated from worrying about money.

At the same time there is this growing trend of parents offloading parenting tasks on teachers at all levels.

Modestmerlin said...


I'm not specifically saying that lack of savings is the problem. To be sure, there are many moving parts here while all related are almost impossible to address at once.

Your point about shifting the onus of teaching from parents to schools sounds analogous to sex education. In the case of financial literacy I'd argue that parents are just as ignorant as their kids (no offense mom and dad). Think of it this way - many people currently get their financial education from speaking to their financial advisors or by reading brochures put out by Fidelity, Charles Schwab, and the like. The fundamental conflict of interest is that professionals in the financial service industry don't have to have your best interests in mind in order to make money. Woud you want Exxon teaching your kids about environmental safety or McDonald's setting up classes on proper nutrition?


Clint said...

If you could get rid of the financialese at the beginning, I would like it even more.

I consider myself well-educated, and I will admit, I don't have a clue about investing money, the stock market, etc. I would have benefitted from such a class, and probably should have taken a class in college. (I avoided classes that involved numbers...)

To be simplistic, I understand the dangers of debt, and not spending more than I make. I think these are probably two of the very simple ways that people, and the US, and world got into trouble economically.

I think you eluded to this at the beginning, but I can't be sure because I didn't understand all of it, is the use of credit to pay for things. There are couples in my neighborhood who have nicer and newer homes and cars than I do, that don't seem to correlate to their occupations. They are spending money they don't have in order to live the lifestyle they want.

This may not be true in NYC, but people think they are entitled to have a nice home as soon as they get married, or a nice car as soon as they start working.

my family stayed in a very cheap apartment until almost 2 years after I graduated from law school, and drove the same crappy cars, until we could afford a home.

Anyway, this is beginning to rant.

Liked your letter. Take care

Modestmerlin said...

This letter is in need of an update/re-write.