Trust, Risk and, Yes, Yet Another Twinkie: A Letter from Woody Tasch

Dear Slow Money Friend,

Earlier this month, the New York Times ran a story titled “Speculative Bets Prove Risky as Savers Chase Payoff.” The story was interesting enough, citing statistics such as how much retail investors have in alternative investments, doubling the amount from $312 billion in 2008 to $712 billion in 2012, but what was even more striking were the comments posted to the article online.

Here are a few samples:

“Bernanke’s stated goal regarding QE and extended rate suppression was to force savers into riskier investments. … Central planning and rate manipulation come with consequences.”

“This behavior is a manifestation of central bank policies that deny the prudent and careful return on their savings. The saver is being punished for virtues that once were considered valuable in a free market economy as he or she is bullied into riskier assets by price fixing policies on money.”

“This article is about well-off individuals whose eagerness for high returns drove them to accept risks they didn’t take the time to understand. My gosh, how are they ‘victims’ of anything but their own greed?”

“The premise is to attack the investment products as bad, but in reality, many of the problems these investors faced were due to broker malfeasance. $470K for part ownership of luxury cars? Really? Last time I checked cars (except in very few instances) depreciate. What the people featured in this story need is to remember what Peter Lynch said: ‘If you can’t explain why it’s a good investment to a second grader, then it’s probably not.’ ”

“These investments promise diversification, but their complexity can hide an increased risk.”

*        *        *        *

Blame Bernanke. Blame brokers. Blame monetary policy. Blame greedy rich people.

Amid all of this blaming, the last of the comments is extremely telling: Complexity hides increased risk.

Today’s financial system is so complex and so abstract and so laden with layers of intermediation that no one seems to fully understand who is doing what to whom. Chasing higher financial returns, trust is lost. With the bonds of trust broken, risk increases dangerously.

Of course, problems of trust and risk pertain not only to hundreds of billions of dollars of alternative investments by retail investors, but also to hundreds of trillions of dollars of derivatives in the portfolios of institutional investors.

This would seem obvious to a second-grader if it were explained plainly. Let’s see: “When you get older, you can give all of your money to people you don’t know very well, for them to invest in things that neither of you understand very well, in places halfway around the world that neither of you will ever visit. Or you can take a little of your money and invest in people you know well, who live near you and are doing things that make you and your family healthier, like growing food.” Carefully note the phrases “all of your money” and “a little of your money.” Then answer honestly: How many of us would graduate from the second grade in this department?

Now, a few tens of millions of dollars of Slow Money may seem a rather ineffectual response to hundreds of billions and trillions of fast money zooming around the planet in incomprehensible ways, but it is not so.

The tortoise has something to say about this to the hare. Haste has something to say about this to waste. The local, organic beet has something to say about this to the Twinkie.

And the earthworm has something to say about this to the hedge fund manager.