Why Ignorance Causes Recessions
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We have come into the age of 24-hour news, social media and almost instant updates as to what is going on worldwide. The most recent economic recession caused by the massive American housing bubble sent reverberations worldwide and almost caused the collapse of the financial industry and the auto industry.
What strikes me more than anything that has happened recently is the average college educated person's complete lack of financial knowledge. I was having a conversation with a friend of mine who runs a successful multi million-dollar commercial real estate business and investing came up. His investing strategy was to give money to a broker and close his eyes. Yet he was unable to provide the annual returns his broker had generated over the last three years.
The more I thought about it and my own education, I realized that if I hadn’t found The Motley Fool early on, even with a college degree in business, I would know little to nothing about how to invest my money. An article on WSJ.com polled readers on what they would pay for shares of Facebook (Nasdaq: FB) -- the result was a stunning $200 a share, which would value the company at $500 billion. I like the potential prospects of Facebook but to value it today at $500 billion shows a complete lack of knowledge on not only Facebook, but how companies are valued and how they appreciate.
Tying this back into the recession it made me realize that people are educated in North America in sciences, humanities, and business but rarely if ever in investing and money management. It has become a common policy to strive to make more in the hopes of being able to spend more and incur bigger debt. We can blame advertising, marketing or major corporations for attempting to manipulate us into buying more, incurring more and more debt, but in reality, it’s a lack of knowledge that creates these problems.
How is money management not taught in high school, along with algebra and physics? I would imagine that having the ability to properly manage your money and understand how to invest it would be more important than being able to recite the periodic table from memory. Even when going to university specializing in business, I found that we had classes in marketing, economics, and management, but none in money management and investing.
If we had courses on how to properly manage our money from a young age, the likelihood of being more financially prudent as we get older would be considerably higher. Human nature seems to dictate economic bubbles are inevitable, and from tech to real estate we have seen it in the last two decades. Could this have been sharply curbed if there were a broader understanding of money by the general population? This complete lack of knowledge allowed a few well-connected, intelligent people to profit hugely on the downfall of the American economy.
Looking at a list of the companies that received the biggest bailouts, you see that they were all at one point well-run organizations. General Motors (NYSE: GM) received $51 billion of taxpayer money, of which less then half has been returned. The company made bad cars for the last decade and had a sense of entitlement that went along with being the number 1 seller of automobiles in the world. They have made strides since receiving the bailout funds, but should never have been in that position. If the people knew more about the way in which the market works and how companies are truly measured, this could have been a source of gross indignation much sooner.
I think the financial landscape would be much different if there were more of a focus on education and knowledge. There has been so much focus on financial oversight and new regulations since the American government had to step in and bail out major banks that we forget that this all originated from individuals purchasing homes they couldn’t afford.
Looking to regulate the banks without educating individuals seems similar to treating lung cancer with chemo but not telling the patient to stop smoking. Going back to the bailouts some of the largest and most established banks in the country had to receive government money to stay afloat. Bank of America (NYSE: BAC) was given $45 billion and was a big proponent of the need for these funds to be made available to banks to avoid a complete financial meltdown. These were the same bankers who jumped into the risky derivatives trading that brought the economy to its knees. It was paramount to a gambler losing his entire stack then going to the casino and telling them he needed all the funds returned or he could never come back and gamble.
BoA has returned all the funds but it should never be the role of the taxpayers to give money to the financial system that crippled their economy because they were looking to make a quick buck. It seems like old habits die young as we have seen with the recent $2 bilion loss incurred by JPMorgan Chase (NYSE: JPM) while again pursuing risky derivatives trades. Though the bank is easily able to handle this loss, it really isn’t the loss that is as alarming as the way they lost the money. JPMorgan received $25 billion in bailout money only to return the money and go back to making the same trades that got them in the original mess. This is obviously a culture where risk and reward are tied directly to your paycheck. The more traders make, the more they get paid. People are clamoring for JPMorgan to institute clawback causes that are in its bonus payments. Why this would be a discussion and not just automatically done is crazy to me. It seems we are travelling in Darth Helmet's ship from Spaceballs at ludicrous speed to the same fate we just recently narrowly avoided.
There needs to be a major push starting in high school with youngsters being introduced to money and money management and this should be carried on into university. Regardless, if you want to focus on philosophy or medicine, there should be core courses on money as it’s important in our society to be able to manage your finances, regardless of how you earn your income. Moving forward in the hopes to avoid future recessions, we should invest in educating ourselves instead of shifting the blame to the banks while keeping our blinders on, ready to run into the next bubble ahead.
mooseelz has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and JPMorgan Chase & Co. Motley Fool newsletter services recommend General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
