Healey blurts it out

Local government minister John Healey has blurted out the ideology of our rulers. Councils, he says:

are in a different position from individual savers. They are intelligent, they’re well-informed investors…

This is not just false. It is the precise reversal of the truth.
The fact is that it is individual savers, on average, who are intelligent and well-informed, whilst it is the professionals who get it wrong.
It is not ordinary individual investors who caused the present crisis and need a multi-billion pound bail out.
And there’s quite a bit of academic research from around the world showing that individuals out-perform professional investors. Here’s Granit San:

We find a significant difference in the return patterns of stocks with different levels of trading activity by institutions and individuals. These differences indicate that institutions buy high and sell low. Our results show that the inferior performance of institutions relative to individuals is not due to trading in stocks with low risks. On the contrary, institutional performance declines both, when the performance is adjusted to risks, and when institutions take higher risks.

Here’s Ron Kaniel and colleagues (pdf):

We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell.

That evidence comes from the US. Here’s some from Norway:

Using unique data on month-end stock market portfolios of all individual investors over an eleven year period, we find that a substantial number of investors exhibit economically and statistically significant performance persistence.

And here’s evidence from Australia which shows that ordinary retail investors are not responsible for share price bubbles:

We conclude that individual investors, the category commonly assumed to be susceptible to cognitive errors in trading decisions, are not responsible for stock mispricings.

I don’t know of comparable robust evidence from the UK. But I have shown for years that almost all unit trust managers under-perform no-brain strategies, suggesting retail investors have little to beat.  And having met a fair number of fund managers and retail investors, I know which group I’d back in an IQ contest. Remember - the vast majority of individuals avoided reckless investments in over-priced buy-to-let schemes; the same cannot be said of banks.
Healey’s implication that individual savers are not intelligent or well-informed is, therefore, not based in the evidence.
It is, however, based in the ideology that underpins not just New Labour, but our entire political and boss class -  the presumption that ordinary individuals are hapless saps who need rules and orders from well-informed experts to protect them from their own folly.
But one lesson of the financial crisis is that this is plain false. What ordinary individuals need protecting from is not their own folly, but the reckless stupidity of spurious experts, be it in town halls or bank boardrooms.
Our political class, however, will never see this. As Upton Sinclair said: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Comments

[Tony Sharp]

I am a lowly councillor and I endorse Chris' message.

The presumption that ordinary individuals are hapless saps who need rules and orders from well-informed experts to protect them from their own folly is exactly what has transformed Britain for the worst.

Patronising and paternal politics is an insult to people. The state is relying on people to battle their way through these problems and thrive, as that will be the foundation for repaying the huge debts government have saddled us with.

[john b]

In context, there's an implicit "supposed to be" in Healey's statement.

"You can't expect Auntie Doris to learn how to read a bank's balance sheet before putting her life savings in an account, whereas if local councils aren't criminally inept they'll have at least one person on the staff who has some clue about accounting. So the ones who've fucked up can go swivel" might be a clearer way of expressing the statement.

(equally, the fact that £3bn of individual savers' money was in Icesave seems like a reasonable counterexample to your point about individuals not making stupid decisions...)

[ejh]

Hang on though, it depends which professionals and "experts" you're talking about.

I think most people who give professional financial advice are perfetly good at it. However, there's a difference between them and a small group of people with too much money who think they are intellectual masters of the universe and who behave accordingly.

It may well be that the first set of people are too respectful of the scond, and it's certainly true that the financial press are. But I think you should perhaps be more exact in defining who you mean.

Re: experts, I find the following column helpful:

http://flyingrodent.blogspot.com/2008/08/in-tyrannical-autocracy-of-rodent.html

[Bob B]

S&M: "The fact is that it is individual savers, on average, who are intelligent and well-informed, whilst it is the professionals who get it wrong."

C'mon. Councillors can be unbelievably stoopid and often think they know better than their professional officials.

Note the telling section in this description by the professionals of what happened in Hammersmith and Fulham in the late 1980s:

"The capital market fund was established without a specific resolution of the council and the council members received no report on the transactions. For the year 1987-88 the council resolved, on the recommendation of its financial and administration committee, to borrow to meet its capital and revenue payments during the year, and authorised the director of finance to arrange and administer the council's borrowing on its behalf." As a result, the council lost nearly £200 million.
http://www.cipfa.org.uk/panels/treasury_management/download/derivatives_oct07.doc

And remember the notorious Lady Porter and Westminster City Council?
http://findarticles.com/p/articles/mi_qa3724/is_/ai_n17171506

[Bob B]

And there's more: How about Nick Cohen's report in the Guardian about 10 years ago on developments in Doncaster which included the estimate that £60 million had been lost by the Council through fraud?
http://www.guardian.co.uk/society/1999/aug/08/1

[dearieme]

Good Lord, I assumed that no-one younger than me had read any Upton Sinclair.

[Bob B]

The usual rule of prudence is to bank and hold balances in the same currency as most revenues/income and spending accrue. Now try hard as I may, I have serious difficulty in believing that Kent CC, Transport for London and my local borough council etc had much income or spending in Icelandic Kronor. In which case, why in the effing 'ell were they keeping balances in an Icelandic bank?

Presumably, they did so because the Icelandic bank was offering unusually generous rates of return on balances either because Icelanders are remarkably friendly and generous people - except where access to Iceland's cod fishing grounds is conerned - or because the high rates of return were to compensate for the exchange risk and the risk of default. If the latter, isn't the Iceland government correct in refusing to compensate foreign governmental organisations on the grounds that they were already paid to accept the risk that they freely chose to take.

Of course, another possible reason why the Icelandic government might not want to pay compensation is because - according to a titbit on the BBC Today programme - Iceland has USD 4 billion stashed in foreign currency reserves against the equivalent of USD 100 billion in foreign currency liabilities. Ho humm.

[Mr Art]

Presumably a significant proportion of the 'individuals' in these studies are in fact inside traders...

[Bob B]

Of course, failing to understand economic issues is not altogether an unusual trait among leading politicians. For once Tony Blair had the correct insight:

"In truth, however, the political decision to create a single currency was taken first; the economics were treated as if they could be altered by political will. The reality is they can’t."
http://www.number10.gov.uk/Page9003

To avoid subsequent unfortunate disappointments:

"The issue of economics is not something I've understood as well as I should," McCain said. "I've got Greenspan's book." [December 2007]
http://www.boston.com/news/politics/politicalintelligence/2007/12/mccain_its_abou.html

[ejh]

This would be a definition of "understand economic issues" which invovles "declaring that whatever the free market decides is best"? I look forward to hearing more about this sophisticated position in the months and years to come.

[Bob B]

"Blair, Brown and Mandelson were determined to make Labour electable again by ditching unpopular Labour policies, such as unilateral disarmament, and forging a new agenda marrying free market economics with social justice."
http://news.bbc.co.uk/2/hi/uk_news/politics/6506365.stm

Personally, I've been posting for years that the notion of "free markets" is complete nonsense except for such places as the middle of the Amazon jungle or the Sahara Desert.

As for the rest of the rest of the world, we generally look to infrastructures of national laws, enforcement agencies and the courts to define and protect property rights and facilitate transactions. The intelligent discussion is about what systems of laws and regulations are the more conducive to better performance of national economies - when we have resolved issues such as to how we measure "better" in the context. There's no shortage of agreement now on the principle that financial institutions need new regulatory frameworks to prevent repeats of the present crisis downstream but the devil is in the detail.

[Bob B]

News update:

With the latest warning from the IMF, I think we can say with complete confidence that President Bush is assured of his unique place in history:

"The world financial system is teetering on the 'brink of systemic meltdown', the head of the International Monetary Fund (IMF) has warned in Washington."
http://news.bbc.co.uk/1/hi/business/7665515.stm

Never mind - vote the McCain-Palin ticket in the November presidential. Granted that McCain is even older than I am and by his own admission doesn't know much about economics but they say Sarah Palin has excellent credentials for taking on the presidency:
http://www.wikizapping.com/videos/item/5759

[Bob B]

News update 2:

"Sarah Palin, John McCain’s running mate, unlawfully abused her power as Alaska’s governor by trying to have her former brother-in-law fired as a state trooper, according to an ethics investigation released last night. It deals a significant blow to an already embattled Republican ticket just over three weeks until Election Day. "
http://www.timesonline.co.uk/tol/news/world/us_and_americas/us_elections/article4924041.ece

[Tom]

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