Dear politicos: quit oversimplifying money matters

When it comes to financial advice, politicians might not be the best advisers. Photograph: Mark Lennihan/AP

Massachusetts attorney general Maura Healey has decided to get tough(er) on fantasy football, suggesting that no one under the age of 21 should be allowed to participate in what's really just another form of gambling.

Like it or loathe it, it's hard to argue with Healey's logic, or her ability to enforce new rules on companies like DraftKing and FanDuel. What I dislike is the broad, sweeping, and apparently thoughtless analogy she used when discussing what to do about fantasy sports.

Healey discussed what she views as "legal" forms of gambling, and threw stock market investing into that category.

"We play the stock market," she said. "There are different ways in which gambling may happen."

Now, I have no idea how Healey approaches her own investing. For all I know, she does gamble: perhaps she throws darts at a list of stocks or mutual funds pinned to a wall, and picks her portfolio that way. Perhaps she devotes two hours to day-trading stocks, in between her official duties. Maybe she loads up her portfolio with risky initial public offerings of biotechnology companies, and is simply expressing her views in the wake of a lot of losses in recent years.

News flash: investing in stocks can be gambling, but it shouldn't be, and only when it's done recklessly or without adequate research or information is it so. In the stock market, you're buying assets that have real appraised values – history suggests that over the long haul, the value of a diversified portfolio will appreciate. In fantasy sports? Picking an (imaginary) team and hoping they'll do better than that of anyone else isn't the same. You don't own the players; they aren't under contract to you.

The problem is that people listen to politicians, even if they tend to distrust them as a class. And lots of politicians with axes to grind or political scores to settle end up voicing large, sweeping generalizations about the world of money. Generalizations that, if we all took them seriously, could cause us to make big missteps.

For instance, while Maura Healey chooses to see stocks as "gambling", should you avoid investing in the stock market? I wouldn't advocate random, indiscriminate investing in risky stocks, but shunning those with strong fundamentals based on someone else's misconception, and making your retirement nest egg suffer as a result, is another matter altogether.

Politicians weighing in on money matters is a venerable bipartisan tradition, but Republicans and their pundits seem to have been at it more actively of late. Most notably, they argued that Barack Obama's 2009 stimulus plan would inevitably result in catastrophic inflation, destroying the value of financial assets like stocks and bonds.

The logical response? Load up on inflation-protected Treasury debt, in the form of the fixed income securities themselves, or some of the exchange-traded funds backed by these "TIPS", or Treasury inflation-protected securities.

And that would have been a costly error: either these securities have lost money outright or trailed most other asset classes since 2009. The Pimco 15+ Year US TIPS, just one of those ETFs, has lost nearly 7% so far this year alone.

An alternative would have been to bet against or shun Treasury bonds. But that would either have cost you a lot in losses or mean that you forfeited the chance to participate in a $1tn bond market rally. Sure, all bull markets end eventually, but since when has that been a reason to avoid joining a party? (Unless, that is, research convinces you that the party is already over.) Sitting sulkily on the sidelines and insisting that what you can see happening right under your nose isn't right, or shouldn't be happening, might be politically pure, but it's financially foolish.

Related: Hillary Clinton plans sweeping reforms to curb the 'abuses of Wall Street'

At least some of those who lost money outright were the politicians themselves. Eric Cantor, the former Republican congressman who was House majority leader, had shares in an exchange-traded fund that would have responded to any decline in the value of Treasury bonds by soaring, exponentially. (An additional twist to this tale is the fact that brief periods of profitability for Cantor's fellow investors arrived in 2011, when bond prices plunged amidst Congressional battling over raising the debt ceiling.)

But generally, Republican pundits have been pretty bad at suggesting where you should put your dollars. Gold, both Ron Paul and Rand Paul have suggested, should become the basis of US monetary policy once more. Many true self-described conservatives love investing in the precious metal. The problem is that it hasn't paid off for any of them and could be even less appealing in future, given interest rate trends.

Gold actually costs investors money to own. Not even the Paris terrorist attacks prompted a surge of enthusiasm for gold, now trading near its six-year lows.

Politicians can do other damage, even if they aren't making implicit suggestions about what you should or shouldn't be doing with your money.

For years, Republican rhetoric has sought to persuade Americans to vote against their financial interests. This draws on a long-standing social and political trends revealed in a Gallup poll a decade ago: while only 2% of respondents described themselves as "rich", 31% though it was at least somewhat likely they would become rich. And if you think you might be rich one day, why would you want to change a system that benefits the rich?

The figures may have changed, but not the attitude.

On top of that, there's a mismatch between what politicians say and what they do, revealed most tellingly in the case of Donald Trump. Days after he railed openly against the excessive wealth of hedge fund managers and their apparent ability to get away with murder, the Republican presidential frontrunner unveiled a tax plan that would give a third of the benefits of big tax cuts to the top 1% of Americans – those hedge fund managers included.

Democrats aren't immune. In the most recent debate, Bernie Sanders declared that the business model of Wall Street is fraud. If true, that would suggest that whenever a bank opens a checking account or processes an ATM transaction or issues you a plain vanilla fixed-rate mortgage, it's doing so with the intent to defraud you, and we should all avoid using a bank or financial institution, employing any of their products or services to protect ourselves.

Now, I'm not suggesting that Wall Street isn't out to make money from you – that's clearly the case. Neither would I argue that financial institutions don't look for ways to make excessive profits, and do so at the expense of those who can least afford to pay ever-higher fees for routine transactions. But that's a far cry from suggesting that they are sitting there doing nothing but figuring out ways to siphon money out of your account fraudulently.

OK, so exaggeration is key to political rhetoric; I understand. Having written about the financial crisis and delved far more deeply than I enjoyed into the murky waters of what makes Wall Street tick over the last two decades, I understand where Sanders is coming from. The years leading up to the financial crisis witnessed a lot of fraud; financial institutions have coughed up some $190bn and counting in fines.

For all those who suffered thanks to financial chicanery, that's cold comfort. Especially when they see JP Morgan Chase head honcho Jamie Dimon and Goldman Sachs CEO Lloyd Blankfein pocket compensation packages in the seven or eight figures year after year, and watch as even those most responsible – those on the front lines, the architects of the "liar loans" and those who marketed them to people who clearly couldn't afford them – get off scott-free, in contrast to the jail terms handed down to previous generations of banksters.

Related: Beware journalists bearing tips: you don't need supposed business insiders

But the existence of fraud within a system doesn't automatically mean that the system itself is fraudulent. And arguing that Wall Street is simply a fraudulent scheme allows us to avoid discussing the real issue: that sheer ineptitude and shoddy risk management, coupled – to a toxic extent – with the greed that always has run rampant in the world of finance not only was the key factor in determining the crisis but still exists today.

Nor does Sanders seem to behave in a way that completely reflects the implications of his sweeping statement. His own financial disclosure forms reveal that while he banks at a credit union rather than a big bank, he has two credit cards and has used Wall Street-provided or assisted products such as mortgages, a pension and (in the case of his wife) investment funds.

So don't respond to Sanders' dismissal of the financial system as nothing but a fraud by buying gold (yup, that again) and stashing it under your mattresses, in the belief that a savings account and 401(k) will be vulnerable to that fraud.

All of the Democratic presidential candidates propose reforming and overhauling Wall Street, and I'd be the first to cheer on any such initiatives. (Even though I know that in the case of bankers, if you build a 10ft regulatory or legal wall, some bright lawyer will construct a 12ft ladder to overcome that barrier on their behalf.) Here, too, though, it's worth looking past the rhetoric to examine what is really being suggested.

Reining in speculative activity on the part of big financial institutions, or speculation done in ways that could damage the integrity of financial markets, is crucial. But addressing this simply by slapping a fee on all stock market transactions – a popular proposal – will hurt mutual fund investors, not just hedge fund managers or high frequency traders.

We all know to be wary of politicians making lavish campaign promises. Let's add to that a degree of caution when it comes to their pronouncements about money matters.

Some, like Healey, clearly don't know what they are talking about. Others, like the Republican critics of the stimulus package (some of whom still can't admit that they might have been wrong and that inflation isn't lurking in a corner somewhere) are simply politically motivated. There's the risk of oversimplification, as politicians of all stripes reach out to their bases.

By all means, listen to what they say, but don't be that guy that turns into a gold bug overnight because Ron Paul and Glenn Beck told him to. That's just scary.

Source: Dear politicos: quit oversimplifying money matters