A Cautionary Tale

Robert J. Schiller, the guy who called the dot.com bubble early and who called this latest bubble, the housing bubble, early has an article in the Wall Street Journal that is worth reading.

The subprime crisis along with its associated financial and economic problems is due, in good measure, to some failures of democracy -- financial democracy, that is. Many working-class people and first-time home buyers who took out high loan-to-value mortgages with adjustable rates did not have ready access to information about what they were doing -- the kind of information easily available to wealthier people -- and so made serious mistakes. By the same token, many people who bought securitized mortgages had little access to financial advice that might have warned them how risky these instruments really were.

Fortunately, this country has a history of financial democratizers who have made the financial system work for the people as well as it does, and who have made the U.S. financial system, despite its flaws, the envy of the world. ...

John Moody, along with John M. Bradstreet and Henry Varnum Poor, democratized finance by inventing credit ratings to be made available to the general public. ...

Moody was not selfless but he cared about people, and he cared about ethics. His autobiography was filled with admonitions about speculative bubbles that draw in unsuspecting investors (as he himself had personally experienced). He wanted to provide the careful information that would prevent financial misfortune for the average family. He was obsessed with ethical behavior...

Another great financial democratizer, and one with great resonance for today's generation, is the popular personal financial adviser Suze Orman. Her 2005 book is entitled "The Money Book for the Young, Fabulous & Broke." This is a great title. But more than that, Ms. Orman is a success because she knows how to reach many people, and shows some sympathetic understanding of their concrete problems.

Her readers know they are fabulous, as the title of her book implies. Each of them has a unique talent and genius. But they have made mistakes that have gotten them into trouble financially. They need to get the information in synch with their emotions. They do not want to be told blandly to diversify their portfolio, for they have higher aspirations and needs than that. Maybe not everything she says is on target, but on the whole she tells them what they find they really need. ...

The subprime crisis is evidence that, despite significant progress, we still have a long way to go in developing financial democracy. This nation needs to consider how it can help the great mass of investors better handle financial affairs -- not only their homes, but credit, loans, medical, and retirement planning. ...