As I re-read Jeff Jarvis’s ‘What Would Google Do’ I couldn’t help but re-appreciate it at the same time. Having read it before my foray into sales and trading and now after, the rule of transparency and its negative effect on the middle man in any transaction really hit home. He highlights the movement first in the debt market, especially on the retail (read: average consumer) side. The fact is a lack of transparency was a major cause of the subprime crisis in 2008 with the vague mortgage pools, and the subsequent fact that investors did not really know what they were buying. What happens when the market does a 180 degree turn, when investors go from pooled to individual? Is this already happening in the debt market, and what does it mean for the markets in general?
The counter argument to this is obvious – investors need scale, and the sheer manpower required to invest in every mortgage individually would have been impossible and unprofitable. However, take one step further back. The only reason investors needed the scale (fundamentally speaking) was because of the volume demanded by buy side firms, who don’t want to invest $100 or $1000 dollars, but rather millions. That volume, in turn, was driven by individual clients and company funds, which pooled their money together to push the scale on the buyside firms. So we then see the root of the scale issue – the individual investor.
So that brings us to the next question – if scale is causing issues, why do investors use managed plans and mutual funds? In my humble opinion, it is for two major reasons. One, lack of skill – they do not know what to invest in, what it will yield, and what it involves. Two, they do not know what will happen, they fear the market, which may be highly justifiable, or maybe not. What do both these reasons boil down to? Transparency.
In a transparent market, what you were buying, what it yielded, who you were buying it from, what they were getting for selling it, would all be easily accessible and understandable. Perhaps basic skills would be needed, but ideally basic principles and a transparent environment could help individual’s successfully invest their own money. As Jarvis purports, what if individuals could choose exactly who to lend their money too, instead of buying a pool of loans? I read a story, I read about the individual, what they plan to do with my money, and I decide whether or not I want to invest. I see a company, I see what they are doing, and I decide whether or not I want to invest. That also solves the second obvious counter argument – that pooled funds exist to provide different levels of risk/return. As an individual, I could look at peoples profiles, their history, etc. and decide that for myself.
Now take it one step further. Let individuals track their successes and failures. Make that information easily readable and understandable. Help them understand their blunders and failures, as well as providing built in safe-guards. Measure that against safety variables the user could enter themselves. Lending money to someone who hasn’t paid it back 4 of the last 5 times? Be careful, perhaps seek out an individual who has a history of successful repayment. By making the market more transparent, it becomes easier to see which investments are good, and which are duds.
However, that leads to the crux of this post – it removes the intermediary. It’s a conflict of interest really, the intermediary makes money off scale – lower the cost to the producer, keep the cost to the consumer flat. It is in the interest of the intermediary to keep the products bundled – that’s how they make money. What happens when users can go directly to the source though? What happens when instead of buying two shares in Fund A, I can lend money to John Doe to start a business, buy a car, or put money down on a house? I get full disclosure on John Doe – his credit history, his story, whatever other information he wants to give out. The experience totally changes.
My second thought is, if this were the case, what would happen to volatility in the markets? If the traded volumes go down, and interest shift from a purely monetary to an emotional and monetary level, would people be indirectly incentivized to hold onto their purchases? I lent money to John Doe because I believe in John Doe’s story, I have no interest (and little incentive) to resell/repackage that loan to others. Maybe removal of scale even limits potential complication of the markets? I don’t know. Perhaps the idea is limited to debt – to loaning and borrowing, but perhaps not, only time will tell. As Jarvis would say, it’s about time the financial industry got Googlized.