Courtesy of Jaime Falcon.
Laurence D. Fink’s October 8 editorial in WSJ is entitled How to Restore Confidence in Financial Markets. A more appropriate title would be How to Restore Confidence in Financial Markets Without Making Financial Markets More Worthy of Confidence.
Mr. Fink’s editorial begins with the assertion that investors are hesitant to invest because “markets are missing the two components essential for confidence: trust and certainty.” Mr. Fink goes on to name the following cures to this predicament:
- Educating young people in such a way so as to convince them to invest in equities so that they can realize what he asserts will be annualized 8% returns,
- Action from the financial sector and government that convinces individuals that the financial sector’s interests align with those of investors, and that the financial sector is part of the solution to what ails our markets, and
- Addressing the complexity and ambiguity in our tax code, and improving transparency in the financial sector.
Mr. Fink’s idea of “education” entails convincing young people to invest in “the markets” which, he asserts, will deliver 8% annualized returns and a secure retirement. Mr. Fink states that five years of “doom and gloom headlines” have left potential investors believing that the “markets are stacked against them”. According to Fink, if we “educate” these young people to again have confidence in markets, and to believe that financial sector interests align with those of investors, it will mean a better future for them and for our economy.
I too advocate educating young people about finance and economics. But my conception of “education” involves teaching people about those markets so that they are empowered to make appropriate investment decisions. One thing we have all learned from the crisis is that it is imperative that individuals living in a capitalist economy learn how markets function. This includes understanding risk and return, conflicts of interest, and how warped incentive systems can cause bad behavior. It also includes understanding how rent-seeking industries use the lobby system to write legislation that benefits themselves at the expense of everyone else in the marketplace. That is education – actually informing people of facts, and then arming them with analytical tools that enable them to make reasoned decisions about their own risk and return options.
Mr. Fink’s “education” will not, for example, include a discussion of the unaddressed problems in the credit rating agencies. The warped incentive systems at play in the ratings agencies have not changed. The executives in those ratings agencies have not changed. And the disastrous conflicts of interest that led to completely compromised ratings have not changed. Educating young Americans about finance and economics and their future has to include an in-depth look at why those conflicts came into being, how they led us to disaster, and why they have not be addressed.
Mr. Fink’s education will also not include a class on why the tax code is so complex and why there is so little transparency in the financial sector. The tax code has 70,000+ pages because of rent-seeking. Special interests lobby for outrageous tax loopholes that cost everyone in some small way, but reward the special interest in a huge way. And, although transparency is fundamental to free markets, we have opacity. Opaque and impenetrable legislation does not naturally come into being; law is made opaque and unnecessarily complex because lobbyists and industry make it so. That too is almost always a hidden subsidy to a special interest, that costs everyone else in some small way. Why do legislators allow lobbyists to create a monster of a tax code and legislation that is impenetrable and costly to society? Because legislators are also conflicted. Legislators are campaign fund-raisers. And the funds come from special interests who are rent-seeking via the tax code and legislation. And legislators, and their staffs, are often thinking about their future K Street or Wall Street careers.
Mr. Fink’s use of the term “education” is disingenuous. What he is really advocating is reprogramming young people who just witnessed a seriously compromised financial system hit a wall. Young people need to be educated about money, finance, economics, and the abominable behavior of our politicians when it comes to lobbying. That will help equip them to make sound business decisions for themselves.
The real irony in this is that if we had a government that was not captured by rent-seeking industry, we would have simple transparency-friendly legislation, a tax code that could be read over lunch, and a financial sector that is actually worthy of our trust. If we had legislators that prevented industry from gaming our legislation and tax code to benefit themselves, we would enjoy real transparency and a financial sector whose interests would align more closely with those of investors.
You would not know it based on the actions of Ben Bernanke, Tim Geithner, and Mr. Fink, but there is an alternative to ignoring systemic issues and “educating” people to convince them that our compromised system is more worthy of trust than it was 4 years ago. That alternative is actually doing something that makes the financial sector, and financial markets, more worthy of trust. The most direct method, and one that will not require legislators having to eliminate their own enormous conflicts of interest, is what worked in 1933; we need our own Pecora Commission to conduct proper investigations and to educate us (in the traditional sense of the word) about what is working and what is not working. Once we have that, we will be at least moving in the right direction in terms of correcting systemic issues that hinder confidence in our markets.
Mr. Fink is not talking about a “solution” at all. He is talking about doubling-down on dysfunction and convincing a new generation to go all-in on a compromised political economy. Young people do need to be educated about finance and economics so that they are equipped to undertake the risk assessments necessary to handle money in our capitalist economy. And they need a transparency-oriented legal framework that makes that analysis and decision-making possible. Education is about empowering people by giving them facts and analytical tools; it is not about convincing them to ignore inconvenient truths, and that 8% annualized returns are theirs to enjoy by doing so. The right thing to do is to clean up the mess we have, and to educate (using the traditional sense of the word) our children so that they can look forward to a more stable and healthy economic future.