Financial Literacy … for Bankers!
           A year ago, as part of his 2009 crisis budget, Finance Minister Jim Flaherty created a Task Force on Financial Literacy. The goal was to equip Canadians with more knowledge to traverse the minefields of high finance. This week, just in time for Flaherty’s next budget, the Task Force released its initial “consultation” report.
           On one level, this is a noble and useful exercise. The more Canadians are wary of financial shysters and payday loan-shops, the better. If financial literacy means a balanced introduction to finance (how it works, as well as how it doesn’t work), and if it covers all components of Canadians’ financial well-being (including public pensions, income security programs, employment and unemployment, home ownership, wages and inflation, etc.), then I’m all for it.
           But there’s a risk that financial literacy initiatives go off track in unintended and damaging directions. Some so-called financial education is in fact a disguised advertisement for the mutual fund industry – shilling for government-subsidized investment vehicles and the magic of compound interest. The chair of Mr. Flaherty’s Task Force is CEO of Sun Life Financial; the vice-chair is head of BMO Nesbitt Burns. We might be forgiven for worrying that a self-serving sales pitch or two might just sneak into their recommendations.
           Worse yet is the temptation to blame the victims of financial chaos for their fate – implying that if Canadians had read the fine print, they wouldn’t have bought those sub-prime mortgage bonds after all. This, of course, is nonsense. It takes strict regulation, not “buyer beware” consumer education, to stop the manipulative, unproductive practices that were at the core of the latest meltdown.
           In the buyer-beware vein, for example, the Task Force report claims “a financially educated population will be better able to weather economic downturns.” How, exactly? If I lose my job, and I don’t qualify for EI, understanding the pitfalls of credit default swaps will hardly help.
          After all, it wasn’t mom and pop investors who caused the Great Financial Panic: it was self-dealing, manipulative, and immoral financial executives. Perhaps it’s they, not average Canadians, who need the financial primer. To that end, I’ve taken the liberty of preparing a simple curriculum for a brand new course. Here’s a child’s guide to financial literacy – targeted at the bankers and brokers who need it most!
Lesson 1: What goes up, must come down. Brokers love to boast about “creating value” whenever the stock market rises. But the financial casino depends more on mood swings and collective psychology, than on real wealth. The herd never runs one way or the other for long.
Lesson 2: You can’t build a house out of paper. Paper is useful for writing letters, for decorating walls – and always comes in handy in the bathroom. But for the whole house to remain standing, the foundation and pillars must be made of stronger stuff. We should never confuse exuberance in the paper markets with real prosperity.
Lesson 3: Buying paper is not a real “investment,” anyway. The Task Force encourages Canadians to save more – which is odd, since our sudden increase in national saving is both a consequence and a cause of the current recession. What the country actually needs is more investment: not buying paper securities, but spending on real capital (both private and public). We need bankers to focus less on their own trading (the source of most of their recent profits), and more on financing real economic growth.
Lesson 4: When the music stops, find a place to sit down. Lehman Brothers, and others like it, collapsed when the daily paper chase suddenly seized up – leaving them holding the wrong paper. It wasn’t a classic “run” on the bank; instead, the sudden paralysis of confidence revealed that there was nothing holding the whole thing up. With less leveraging and speculation, we’d have banks that can stop for breath, without collapsing entirely.
Lesson 5: In tough times, turn to the nanny state. Ironically, the Task Force’s goals include “promoting self-sufficiency” and “reducing pressure on social programs.” Yet during a crisis to which their own greed and irresponsibility very much contributed, Canadian financiers were saved by a $200 billion government backstop. Luckily most survived (and are now again paying themselves billions in bonuses). But today’s bankers should know better than most that every society needs a strong social safety net.
           That’s the kind of practical knowledge that could truly protect Canada against the next great meltdown. Because without a change in behaviour at the top of the pyramid, all the financial literacy in the world won’t save us the next time the music stops.
The actual report can be viewed at (http://www.financialliteracyincanada.com/documents/Consultation_Report.en.pdf). The task force is taking written submissions until April 30th.
and additional lesson!
Don’t be surprised when worker’s and the public go a bit mad on the streets with general strikes and such when international bankers call for squeezing countries in the way the current wave of fiscal austerity is starting to come crashing down on the beaches of public services and spending precipitated by stimulus spending due to the financial meltdown.
Nothing is accidental in the world of Finance, there is always a well thought out plan carefully being executed in the shadows sometimes presented as a contingency measures to the citizens and their government.
Germany bailed out its banks to the tune of 480billion Euros and UK banks needed an 850 billion pound bailout by its government. All with no conditions attached whatsoever. When Greece needed to borrow paltry 25 billion Euros at a competitive rate from its EU partners it was shunned. Germans told to sell of its Islands, its natural and national treasures and public institutions as debt redemption and had to endure slurs of being communists and lazy. The new government under pressure brought in very unpopular austerity measures in its budget, but could not draw any concessions from its Euro community strict members. Greece’s newly elected Prime Minister had to go on a tour to convince the heads of other European states as to his country’s financial viability. As a last resort, the Greek government issued bonds at twice the going rate of Germany due to the market risk. The bonds were oversubscribed and the government wisely prohibited the Hedge funds from participating.
Well, there had to be a reason for unnecessarily protracted degradation of Greece and its citizens and governments in the media and politicians of its EU members. Of course the founders of EU were anticipating this situation and took advantage of Greece’s misfortunes and this scenario to announce a surprise development.
Germany’s Finance Minister Schaeuble has said their government is going to push for the immediate creation of a European Monetary Fund modeled on IMF with similar powers and competencies to deal with situations like Greek debt crisis and will deal with such matters concerning Eurozone members only.
http://www.businessweek.com/ap/financialnews/D9E9AQLG3.htm
The rationale is this will prevent Speculators from ganging up on a weak member and ravaging its economy.
The elected governments do not want to deal with or don’t have the gumption to ban naked selling or regulate short selling. There was never any acknowledgement that Greece was a victim of co-ordinated short selling. And the predators have already moved on and staking out their next victim.
Traders Seek Out the Next Greece in an Ailing Europe
http://www.nytimes.com/2010/03/04/business/global/04bets.html
Indeed, some banks and hedge funds have already begun to turn their attention to other indebted nations, particularly Portugal, Spain, Italy and, to a lesser degree, Ireland.
The role of such traders has become increasingly controversial in Europe and the United States. The Justice Department’s antitrust division is examining whether at least four hedge funds colluded on a bet against the euro last month.