Don’t Wait for the Regulators

Posted by on 04/23/10 in America, Ethics, Government, History, Risk

The Revolutionary War was marked by many disturbing acts of cruelty, though one of the vilest took place not on the battlefield, but in the aftermath, when veterans of the Continental Army were left with Continental Dollars (their payment for military service) the value of which was uncertain at best and close to worthless at worst. Rather than the Treasury Department or Congress working with the veterans directly to help preserve the value of their earnings, a swarm of speculators emerged who exchanged the near worthless dollars for what they claimed was more reliable currency. The veterans were poorer, but at least they had something to show for their sacrifices. What was NOT common knowledge was that at least some of these speculators knew the intentions of the nascent US Treasury through their good friends and relations who worked there (including some of the speculators themselves); thus, they were highly confident that the value of the securities would be restored—as it was shortly thereafter.

Was their behavior illegal? Probably not. Were the speculators immoral? We think yes, but we know others would consider them enterprising risk takers (though their privileged and conflicted knowledge of policy changes mitigated their risk substantially). Was their behavior unprecedented? Absolutely not. Is anyone surprised to read that human beings are capable of such depravity? Likely not; indeed, it seems rather human. And yet…

Here we are, 220 years later, with many people hoping that new regulations will not only extricate us from the current systemic economic crisis, but prevent the next one. While noble, that seems a bit naïve.

While we, too, hope that regulatory and policy-making bodies will meaningfully refine their guidelines and enforcement practices to help mitigate systemic risk, we also are realistic. There always will be those who seek to game the economic system for personal profit regardless of the potential risk to the system itself. Some do so because they are greedy, others because they are pathological. Some are prideful and overconfident, others are insecure and needy. But this will not change. Neither political party will change it. Congress will not change it. Regulators will not change it. It was thus before Bush and Obama and it will be thus after they have long faded from view. It’s not about politics; it’s about human behavior.

The financial services industry consistently has demonstrated a lack of willingness or ability to police itself. Regulators and their Congressional overseers have proven their inability to stay ahead of and on top of many of the schemes and mechanisms developed specifically to thwart the system’s intentions. But all is not lost. For at the end of the day, nothing happens in the world of financial services without the express consent (and money) of the end consumer—that is, you and us.

If the Consumer (a.k.a. the Citizen, the Taxpayer, the Voter, the Client, the Homeowner, the Borrower, the Lender, the Shareholder, the Investor, etc.) learns enough about financial services to make informed decisions, decides that it does not like how business is done at certain firms or by certain individuals, elects not to support those firms or businesses, and takes business elsewhere, then and only then will structures and behaviors change. So long as the current system is highly profitable, it will persist.

Of course, the centerpiece of this utopian vision is that the Consumer must be well informed. To that end, financial literacy must become an essential element of an American education. One should not graduate high school without demonstrating basic competency in the mechanics of a capitalist system: How do banks work? What is the stock market? What are bonds? How are companies financed? What are taxes and what is their impact? What is an entrepreneur? What is a Pension and how is it funded? How can people manage their household finances? How should people evaluate major financial transactions (e.g. buying a home or car) as well as daily ones (e.g. using credit cards and check books)? How should one make financial decisions with others (spouse, children, parents, business partners)? How does philanthropy function and how is it paid for?

Finance is an interdisciplinary field so it is a natural fit for high schools committed to developing critical thinkers. It blends math, literacy, history, sociology, and even science. As much as any standard school subject, finance enables students to function more effectively in society, to become better advocates for themselves, and to avoid falling prey to the unscrupulous among us. Finance exposes students to strong philosophical components, fascinating mathematical concepts, logic, reasoning, numerous historical and cultural learning opportunities, and through it all, an opportunity to experience learning in the real world.

We will keep our fingers crossed that the investment industry and its regulators will take meaningful steps toward crafting a more transparent, more ethical sector; in the meantime, we will place our emphasis on nurturing more informed consumers who deserve better, are willing to demand it, and are not waiting for someone else to do it for them. A citizenry that has been gifted economic opportunity from the generations before us has an obligation to learn how to use that gift appropriately. In so doing, perhaps we will be able to pay that gift forward so that others may have a similar opportunity.