10.18.2008

Good Financial Information Matters More Than Ever - WSJ.com - Sent Using Google Toolbar

Good Financial Information Matters More Than Ever - WSJ.com

Good Financial Information Matters More Than Ever

From John Moody to Suze Orman, financial writers deserve our thanks.

By ROBERT J. SHILLER

more in Opinion »

The subprime crisis along with its associated financial and economic problems is due, in good measure, to some failures of democracy -- financial democracy, that is. Many working-class people and first-time home buyers who took out high loan-to-value mortgages with adjustable rates did not have ready access to information about what they were doing -- the kind of information easily available to wealthier people -- and so made serious mistakes. By the same token, many people who bought securitized mortgages had little access to financial advice that might have warned them how risky these instruments really were.

Fortunately, this country has a history of financial democratizers who have made the financial system work for the people as well as it does, and who have made the U.S. financial system, despite its flaws, the envy of the world. Now, deep into a financial crisis and awash in a newfound culture of financial complexity from 401K plans through reverse mortgages, it is worth reflecting on their past achievements, and considering what lessons they carry for the resolution of the current crisis.

John Moody, along with John M. Bradstreet and Henry Varnum Poor, democratized finance by inventing credit ratings to be made available to the general public. When Moody published a statistical manual in 1900, followed by a system of rating securities with categories Aaa, Baa etc, and a series of investor-advice books, he provided reams of information to everyone, for just the price of a few books. These beginnings led to the development of Moody's Investor Services and other rating agencies. The securities rating system has now spread from the United States to the whole world, and helped make possible the capitalist explosion of growth and prosperity.

Moody left behind an autobiography, "The Long Road Home," 1933, and so we can glean some of his motivations.

Though Moody was a democratizer, he was not acting out of populist philanthropic motives when he launched Moody's. As he makes very clear in his autobiography, he did it to make money. But there were other things he cared about besides making money. People asked him around 1900, why give away all this information so cheaply? They told him he might expect to make a lot more money as an underwriter, middleman or bond salesman. But he recognized that was not his personality, and that "there was that 'literary' or writing bent of mine. To bring out a book -- even a mere compilation -- fired my imagination far more than could any dreams of becoming a successful banker."

He called it a "writing bent" but as is plain from his autobiography, it might be considered an impulse to speak perspicaciously and openly to the people. A "writing bent," connotes an impulse to consider the interests of a broad reading public, and publishing tables of statistics and ratings, as well as the various investing advice books Moody wrote for retail investors, is just that.

Moody was not selfless but he cared about people, and he cared about ethics. His autobiography was filled with admonitions about speculative bubbles that draw in unsuspecting investors (as he himself had personally experienced). He wanted to provide the careful information that would prevent financial misfortune for the average family. He was obsessed with ethical behavior and musings about his traditional Roman Catholic religion. He wrote about moral dilemmas, and his refusal to accept money under terms that would bias his ratings.

It is ironic that the rating agencies today are sometimes blamed for the subprime crisis. We have come to expect perfect behavior from them, and do not give them credit for the multitudes of other crises that never happened because they disseminated the information to prevent them.

Another great financial democratizer, and one with great resonance for today's generation, is the popular personal financial adviser Suze Orman. Her 2005 book is entitled "The Money Book for the Young, Fabulous & Broke." This is a great title. But more than that, Ms. Orman is a success because she knows how to reach many people, and shows some sympathetic understanding of their concrete problems.

Her readers know they are fabulous, as the title of her book implies. Each of them has a unique talent and genius. But they have made mistakes that have gotten them into trouble financially. They need to get the information in synch with their emotions. They do not want to be told blandly to diversify their portfolio, for they have higher aspirations and needs than that. Maybe not everything she says is on target, but on the whole she tells them what they find they really need.

She was not the first to warn of the housing crisis. In fact, in her 2005 book, published at the height of the housing boom, she says "a home is flat-out the best big-ticket purchase you will ever make" and she gives no warning of the housing debacle we have since observed. But to give credit where it is due, she did warn in that book that adjustable rate mortgages "can become a nightmare soon after" when rates reset upwards. She warned readers not to accept lenders' judgments about how much is OK to borrow. Moreover, she provided detailed advice about the total cost of owning a home with advice to "set your own budget."

Ms. Orman has spawned a legion of emulators -- popular financial advisers to the masses. None of these writers or media personalities is perfect. They can get caught up in a boom psychology just as anyone. But, these media figures represent a new hope for preventing further crises by arming the average family with the information they need to protect them from the tantalizing but ultimately dangerous elements of too-good-to-be-true bubble psychology.

The subprime crisis is evidence that, despite significant progress, we still have a long way to go in developing financial democracy. This nation needs to consider how it can help the great mass of investors better handle financial affairs -- not only their homes, but credit, loans, medical, and retirement planning. We need to think more about how investment professionals with a bent to communicate good and honest information can make a decent living serving the broad public doing absolutely what feels right to them, not just in book publishing or in business television, but in all aspects of the financial system.

Mr. Shiller, a professor at Yale and chief economist at MacroMarkets LLC, is the author of "The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do about It" (Princeton, 2008). He is also a member of the committee that oversees the monthly Standard & Poor's/Case-Shiller home-price indices.

Please add your comments to the Opinion Journal forum.

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit

www.djreprints.com

More In Opinion

Related Articles and Blogs from WSJ.com

Sponsored by

Click here to find out more!

Email Newsletters and Alerts

The latest news and analysis delivered to your in-box. Check the boxes below to sign up.

WSJ.com Email Features
More Information on WSJ Features

The email address  is already associated with another account. Please enter a different email address:

Newsletter Signup

Thank you !
You will receive in your inbox

null

Email Newsletters and Alerts

The latest news and analysis delivered to your in-box. Check the boxes below to sign up.

WSJ.com Email Features
Submit

The email address null is already associated with another account. Please enter a different email address:

  • New! To sign up for Keyword or Symbol Alerts click here.
  • To view or change all of your email settings, visit the Email Setup Center.

Thank you !
You will receive in your inbox.

People Who Viewed This Also Viewed...

NEW! Are you on Facebook?
See what content on this site is popular with your friends! Learn more »
Your Facebook Friends Are Reading
Provided by SeenThis?
What's This?

You're seeing a preview of SeenThis? — a Facebook application that helps you discover the latest news, videos and more by showing you what's popular with your friends — both on Facebook, and on sites like this one.

Have a Facebook account? Get recommendations for content popular with your friends by adding the SeenThis? app.

Once you've added it, look for the "Your Facebook Friends Are Reading" section in the sidebar.

Click to add SeenThis? now »

About SeenThis? | Privacy | Feedback

Most Popular

Journal Community

Hello

Your question to the Journal Community Your comments on articles will show your real name and not a username.Why?

Why use your real name? The Journal Community encourages thoughtful dialogue and meaningful connections between real people. We require the use of your full name to authenticate your identity. The quality of conversations can deteriorate when real identities are not provided.

Please enter your first and last name

Create a Journal Community profile to avoid this message in the future. (As a member you agree to use your real name when participating in the Journal Community)

Notice:

Your participation access with Journal Community has been disabled due to violation of Journal Community Guidelines.

If you feel you have reached this status change in error, please contact TBD@wsj.com

Copyright ©2008 Dow Jones & Company, Inc. All Rights Reserved
Posted by at