Equality and Financial Knowledge

Most Americans outside of the financial industry have very little understanding of how banking, investing, trading, and the various other components of finance work. That banks take deposits and give loans most people grasp, but throw in leverage, interbank loans, portfolios, proprietary trading, or many other activities that are deeply threaded in with deposit taking and the layman is lost. The same is true of investment; buy stocks and if the price goes up, you made money. Buying stock in a company that manages a portfolio of government bonds? Once again, I think most people's grasp beyond the cultural fundamentals is thin.

Now, you could easily say I'm patronizing Joe the plumber. I have very little knowledge of organic chemistry, which no doubt contains as much as nuance and probably more than finance; why should Joe bother divining the likes of arbitrage or ABS tranches? My answer is the very thing I sat down to explore: the idea that understanding how money works, or can work, would greatly alter both how people use it and how money works in the first place. I mean first off there's the fact that by not investing even a tiny slice of his income, Joe is passing up life-changing profit - profit that is constantly garnered by the in-the-know, that is, the rich. Now, the trick lies in the reality that there isn't some magical asset that everyone just needs to realize they should buy. Their are tons of such assets - funds, equities, indexes, CDs.

So now that I've gotten that far in writing that, I see two flaws in my reasoning that I'd have to overcome to keep pushing the point.

1. People can't buy most financial assets (as far as I know). If they thought corporate bonds or Brazilian government debt were good buys, they don't have direct access to them. They either don't have the bulk to buy those things in the huge chunks they exist in (hey, I think I just figured out why they say investment banks "make markets"), or the things aren't traded in publicly accessible exchanges.

2. You have to beat inflation. If people aren't going for big returns (which was going to be my next point - people should play it safe, but start playing when they're still young), they risk getting run over by inflation.

So my initial excitement over the power of financial democracy via knowledge is a bit diminished... but I'll have to think on those two problems.

To summarize the original idea: if people know how financial markets worked, they could engage in them and exploit them the same way the wealthy and the financiers themselves do. Supporting that idea: the industry fights tooth-and-nail for tiny, marginal leads over competitors; if you're not concerned with beating the guy next to you, just making a modest return, you can spend much less time and be much less expert - thus managing your portfolio without quitting your day job.