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.