Sunday, April 11, 2010

Financial literacy is the most effective shield against financial sharks

During the heights of the financial crisis of 2008, a recurring conversational topic were the financial sharks who got rich out of preying on the hard-earned savings of ignorant consumers.

I got some heat when I defended the young relationship managers hired by the banks to meet aggressive sales quota. I did not like the way people called them immoral and greedy. Abhorrent their behavior may be, how they behaved is similar to how the average person would have behaved given the same set of carrots and sticks.

The people at the financial institutions are the ones who are best armed with knowledge to teach financial literacy. However, the unfortunate reality is that they have the least incentives to teach financial literacy but every motivation to spread financial ignorance and even disinformation. When you think about the financial products they sell, maximum profit is made from the ignorance of consumers. It is hard to sell high commission products to a financially literate person. The most lucrative customer (or sucker)  is a rich, ignorant and greedy one. Hence, it is small wonder the retirees are an unspoken favorite target group of the financial sharks.

Ignorance is something all of us can improve on. You do not need to be highly intelligent to conquer it. Conquering it can at least protect the public from making basic financial mistakes like chalking up high credit-card debts to legalized loan-sharks. This is a fast route to bankruptcy. School teachers should use credit-card debts as an example to teach compound interest. This simple act might have saved some of their students from credit-card bankruptcy when they grow up.

It is more effective to work on one's ignorance than to blame "immoral" bankers who are being business-like in maximizing profits.

Another group that often gets the blame during the discussions are the regulators. On hindsight, deregulating the financial sector by Alan Greenspan and expecting the banks to self-regulate was a mistake. In my humble opinion (pardon me if you know better as I do not have a financial background), the mistake made was in expecting that it was in the interests of banks to self-regulate and not commit financial suicide. Actually, it was in the interest of the bankers to take excessive risks, earn excessive bonuses while the dancing carries on, then when the dancing stops, get taxpayers to pick up the tab and eject with a golden parachute (another round of excessive bonus). It was the smartest way to play the game and this is what you would expect when the brightest minds in the world move into the financial sector. This was clearly a case in which the free market fails. Regulators do have an important role to play in situations when the free market fails. Therefore, the solution to the financial crisis must come from the regulators, not bankers. More regulation, not less regulation.

Some victims of the Lehman Minibonds debacle insisted that the regulators should have protected them from the financial sharks. For practical reasons, I do not think it is wise for the public to depend on more regulation for protection.

There are powerful forces set against the regulators to legislate financial reforms. With the money that the financial services industry can muster, they can exert enormous political pressure on the regulators. Given the important role that bankers play in the economy, they will know powerful friends in high places. With their money, they might even have senior politicians in their pocket. They have many trump cards to play with. You can be sure they will play their cards very well as the excessive bonuses doled out will attract the finest minds in the world. Because of the much higher compensation, the regulators are up against superior minds. These problems are not as serious in Singapore as the civil service is known to be relatively corruption-free, fairly well-paid and therefore attracts its fair share of the bright minds in the country.
However, excerpts of this video (scroll to 0:56:34) show that even the most powerful, smartest politician of America with kind intentions to do good for her country has to eventually bow to the political might the financial sharks possess. The politician in context was none other than Mrs Hillary Clinton.

Certain hiring practices of the financial industry (in US) can "corrupt" even the best regulatory system designed with best practices to be incorruptible. By hiring regulators and paying them ridiculous sums of money to leave the job, bankers have carved out a most lucrative career path for the regulators. Existing regulators, consumed with envy and jealousy of the new-found wealth of their former colleagues, will see the bankers as their future bosses. Immense riches shall come to them once they too have successfully made the jump. They have to be careful not to set regulations that hurt the bank's profits because it is not in their interests to hurt their own future profits. In fact, it is in their interests to remove current regulations that crimp their future bosses' profits.  If this can happen in the US, it can happen in Singapore some day because human nature is the same everywhere. Can the people safely depend on their regulators to set policies that protect them?

Hence, the most effective shield the public can use to protect against the financial sharks is to count on themselves in acquiring financial literacy. One of our own regulators, the CPF board, has commendably been doing this job as a service to the public. Please visit their financial literacy website

Another good site which I highly recommend is which requires no introduction for Singaporeans. He is a rare breed who speaks out for people at the expense of his own interest without fear of offending powerful forces related to the financial industry.

1 comment:

  1. Today financial literacy is a necessity for those people who want to be financially secured and protect themselves from monetary problems. The more you know about money the easier is making right decisions for you. There are lots of different financial services and to use them successfully it’s necessary to know enough about them. Quite often consumers make mistakes just because they don’t know enough about the service or product they are going to use. For example, short term loans no credit check are very popular today but many people stuck in a debt circle because don’t know how to use them prudently.