Current Thinkers on Our Financial System

Originally published 12/14/2009 at FPA's All Things Financial Planning Blog

Robert Schmansky, CFP(r)

If you’re like me, you might prefer to get your news from sources who think a lot like you — people with similar political views, topical interests, as well as the same basic reference point of the world, its problems and solutions. But, when it comes to fixing a system that involves all of us, we might need to reach out and hear what people that disagree with us think.

In a recent blog, I wrote about behaviors that I hope we as individuals and families learned from the financial collapse, and will continue with in order to get back to life as we felt about it pre-2007.

On a macro-scale it may be more important to understand what we should have learned about the behavior of our financial system to avoid the next one.

There certainly has been no shortage of reports and theories on its causes, as well as prescriptions to prevent the next catastrophe. Legislation is working its way through Congress, industry groups have formed to make sure their collective voices are heard, and experts are expending time and resources to get their thoughts into the discussion.

So, what is the lesson we should have learned?

With the goal of including a range of voices speaking about a problem we all face, I’d like to introduce ideas from a few prominent pundits on the economy who may just have solutions.

Perhaps the most widely known and provocative commentator on the financial system today is my fellow Michigander, Michael Moore. Moore’s recent movie,Capitalism: A Love Story, is one of the first to address the topic after the collapse. It won’t be the last.

Moore’s basic belief is that capitalism is the root of the problem. In this and other pictures he has made, Moore likes to take us back to what one of the other pundits I will describe would call the “Jimmy Stewart days.” He’s often nostalgic for a simpler time, when virtuous men were starkly pitted against greedy evil-doers — and won!

The problems with looking in the rearview are many; the capitalism of the last 20 years wasn’t the capitalism of Stewart’s Bailey Building & Loan. But, as politically charged and anti-free market as Moore’s views are, his observations of the problems aren’t disputed even by those on the opposite end of the political spectrum.

One such person, a capitalist par excellence, is John C. Bogle, founder of Vanguard Funds. In his most recent book, Enough, Bogle wrote a masterful piece on this and other problems with the financial system, including how the incentives of those working in the system too often place self-interest above their customers. Wall Street has taken up what Bogle refers to as salesmanship rather than stewardship, or, in other words, companies are rewarded more for placing their short-term interests above their customers long-term objectives. Bogle believes that a combination of regulation and education is the solution to diverting the next downturn.

Another interesting industry voice offering solutions to prevent the next economic crisis is Dr. Laurence Kotlikoff, a professor of economics at Boston University.

I tend to believe Bogle and Kotlikoff might be closer in the political spectrum than with Moore, but when it comes to solutions they have different thoughts. Whereas Bogle sees the mutual fund industry as one of the devils, Kotlikoff believes they just may be the solution to much of what ails the financial system.

From a recent interview about his upcoming book, Jimmy Stewart is Dead: Ending the World’s Financial Plague Before It Strikes Again, Kotlikoff stated that the structure of mutual funds, as intermediaries and stewards of their clients assets, would be perfect for regulating companies in the future. The fund industry survived the downturn without a bailout, and a complete overhaul of the corporate structure that moves toward transparency and disclosure may provide information on which companies are the best stewards of your savings, insurance protection, and investments.

Do any of our pundits have the answer? I’ve left out some of their finer points in this blog to hit the points I think are worth considering together. I believe like Moore that the system failed (though it certainly wasn’t capitalism alone), and like Bogle that education is a key component of a stable economy.

But perhaps as Kotlikoff points out, the answer already exists, and we simply need more information on which companies are managing our investment with them prudently.

What form changes ultimately take will be determined over the coming months and years. In the meantime, I would like to hear more from all sides, so please share your thoughts in the comments section on what changes are necessary for our financial system.


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