Will Ortel, a journalism student at the College of Idaho in Caldwell, Idaho, sent me a few questions about financial literacy for a project he’s doing. They’re good questions, so I’m blogging the answers:
Financial education for the layman is a shambles normally organized towards paying bills on time and managing credit cards. This prompts most Idahoans to think "who is this guy" when I explain what a CDS contract is or how short selling works. Is detailed financial knowledge something that most Americans should have? What is it about financial understanding that makes it distinct from engineering or psychological understanding?
I’m very happy that someone who knows what a CDS contract is or how short selling works is attending journalism school — the world of journalism desperately needs financially-literate reporters. On the other hand, there’s absolutely no need for most Americans to understand these things — any more than they need to understand what makes an airplane fly, or how beta blockers work.
Some people are interested in the world of finance, especially now, when troubles on Wall Street seem to be the proximate cause of the worst macroeconomic recession in living memory. So journalists who can clearly and accurately explain such things are to be treasured. But it’s no weakness not to understand how banks’ balance sheets are constructed, or even what a balance sheet is. People need a certain level of psychological understanding to perform their daily duties, which is why life with autism can be so very hard. And some basic personal-finance literacy is a good thing too. But beyond that, there’s no reason people should be expected to understand the mechanics of Wall Street unless they particularly want to. In that sense, yes, it’s much like engineering.
Coming from the standpoint of protecting small investors from hazy information that they might receive, could you support conceptually the establishment of a test to see who was capable of trading individual stocks and bonds (as distinct from vanilla mutual funds)? Can you think of anything that you would want to put on such a test?
It’s true that individual stocks are incredibly risky things which most people should avoid — much riskier than most hedge funds, which most individuals are not allowed to invest in. But I don’t think there’s much evidence that financially-sophisticated individuals make for better investors. If anything, they suffer from overconfidence bias, think that they have some kind of an edge, and make even bigger bets as a result. Giving people a financial-sophistication test might even be counterproductive in that sense: Americans would barge into the markets armed with their "qualification" to trade stocks, and then proceed to lose a fortune.
The much-heralded blog era has begotten the rise of personal financial journalism, perhaps typified by yourself. To what extent do you think that econobloggers parsing news for lay readers will catch on? Do you see yourself as parsing news for lay readers or providing insightful (and occasionally hilarious) commentary to moderately informed dorks (like me) around the country?
I like the idea of "personal financial journalism" meaning "financial journalism written with a personality" rather than "journalism about personal finance". Econoblogging is exploding right now: when I started the Economonitor blog at RGEmonitor.com in September 2006, one person could pretty much keep on top of most of it. Today, that’s unthinkable, I discover great new blogs constantly, and the best of them can become extremely popular and influential very quickly indeed.
That said, I don’t think that most of them are necessarily aiming at what you call "lay readers": a blog is naturally very conversational, and one tends to like to converse the most with people at more or less one’s own level. So you won’t find too many blogs spelling out what a basis point is, or explaining that bond prices move in the opposite direction to yields. So count most of us in with the "commentary for moderately informed dorks" crowd, I think. For lay readers, sites like The Big Money might be a better bet.
If the audience of a news organization with high overhead demands a Jim Cramer or Ben Stein figure, how can that organization deliver a more responsible figure instead and stay solvent? How would you characterize my optimism that the nature of financial journalism might improve?
Well, I’m on the record as liking Suze Orman: just because you’re a financial celebrity doesn’t mean you’re as idiotic as Ben Stein. And I’m not sure how hiring Ben Stein is likely to improve any news organization’s solvency — he doesn’t come cheap.
But one good thing about the internet is that people can become brands without having to be on the television. And since appearing on TV is a great way of becoming incredibly stupid, then with any luck the age of the internet will usher in a new generation of finance pundits who have made their name by the quality of their ideas rather than the recognizability of their faces.
The much-maligned Gawker Media, it’s worth noting, dispenses a pretty large amount of generally-excellent financial advice on such sites as Consumerist*, Lifehacker, and Jezebel. All of it is vastly more useful than anything you’ll get from Cramer or Stein. So the trend is in the right direction. Stein adds no value for the New York Times, so eventually he’ll be dropped. It’s just sad that it has taken so long.
*Update: As Gari points out in the comments, Consumerist is now part of Consumer Reports, not Gawker Media. I should know.