HERE is a suggestion for Goldman Sachs: make an immediate £1bn donation to a special new fund for financial and economic education. Then try and rope in a few more of the big banks and financial institutions, all of whom may be happy to stump up to deflect the tidal wave of populist anti-bonus and anti-City sentiment headed in their direction. Soon enough, you would have a multi-billion pot of cash and the ability to launch the biggest ever private multimedia and face-to-face educational campaign, focusing especially on the UK, Europe and North America, with everything from free seminars to TV infomercials.
The challenge is immense: innumeracy and financial illiteracy are rife among the public. Many people fail to grasp fully even the most basic of financial products. Even fewer understand properly elementary statistical concepts such as compound interest, let alone more sophisticated ideas such as probability distributions, all of which are crucial to inform consumer decisions as well as understanding the modern world. Tens of millions of people are unable to work out how much they need to save if they ever wish to retire; there is also limited understanding of basic economics or of how to value assets, such as property.
While this is most obviously relevant for consumer-facing financial institutions, such as retail banks, IFAs, insurance companies, pension providers and the like, it is indirectly of equal importance for wholesale institutions such as investment banks or hedge funds. If the public doesn’t grasp or trust finance – and sees it as an obscure art practiced by rip-off merchants who merely shuffle money about, while taking a cut for themselves – it will hate all financiers, especially those who earn vast incomes. It will also be more likely to believe the simplistic explanations of the credit crisis peddled by the political establishment and most of the media – while being unable to draw on an intellectual framework or body of knowledge to assess the claims and counter-claims they hear on TV. The result will be terrible public policy and a populist, vote-winning wanton destruction of the City, Britain’s most important industry, employer and taxpayer, rather than its sensible reform.
The principle of caveat emptor – let the buyer beware – is at the heart not only of capitalism and trade but also of Western civilization itself. If individual liberty is to mean anything, individuals must accept responsibility for their actions. But gross ignorance among the public has facilitated the blame game; everything is always said to be missold, never missbought. A central theme at the heart of the SEC’s prosecution of Goldman is that large institutional investors who specialised in buying into sub-prime mortgage products were too stupid or weak to be able to do their own due diligence and research properly. This is a deeply depressing view. Unless the public is taught the basics of finance, statistics and economics, no progress will ever be possible. It is time for Goldman and other banks to put their hands in their pockets – big time.
The government’s decision to lift the flight ban last night was long overdue. While there was certainly a danger at one point and some restrictions were needed, much of the hysteria was over-done and yet another display of the health and safety, eliminate-all-risk culture that now pervades Britain. Thank goodness sanity has returned.