Fie upon financial instruments!

Posted on August 16, 2011


As a Gen X – Gen Y cusp, I have perhaps enough distance from the Gen Y ethos to see it clearly and am enough a part of it to see what is coming. I have a bit of a premonition. Given that Gen Y is growing up amidst mortgage failure and fraud, bank defaults and bailouts, and their own student loan debt comprising 7% of the US GDP, I have a feeling that Gen Y will lose interest and faith in financial instruments entirely. Perhaps we will choose not to have mortgages, car loans, stocks and bonds, credit cards, 401Ks, or even interest bearing bank accounts.

"In Islamic finance you cannot make money out of thin air," said Amr al-Faisal, a board member of Dar al-Mal al-Islami, a holding company that owns several Islamic banks and financial institutions. "Our dealings have to be tied to actual economic activity, like an asset or a service. You cannot make money off of money. You have to have a building that was actually purchased, a service actually rendered, or a good that was actually sold."

This would not be the first time that there is a cultural avoidance of financial instruments. For generations, there was a Christian prohibition against earning interest on loans. There continues a Muslim prohibition against collecting interest, which is manifested in modern day interest-free Islamic banks based on profit sharing.

So, if we are raising a generation of people who choose not to use financial instruments, what will the world look like when we are in charge?  Here are some thoughts:

1.) Banks. A bank will not be a means of earning interest, but simply a vault to hold your valuables. In this case, banks will likely need to change their business model so that they are not making money by loaning their principal at a greater rate of interest than they return to their account holders. Instead, they will need to charge a fee for the service they provide, namely holding money such that it may be insured by the FDIC.

The need for new banking business models could be the impetus for banks to upgrade their services in terms of instantaneous reconciling of money transfer. I am referring to the fact that if you pay for your groceries with a check, debit card, or credit card and then drive to your bank, your bank will not be aware of this transaction. Say what? How long does it take bits to travel across the Internet?

2.) FICO, Experian, Equifax, and TransUnion.  These companies will have to look elsewhere for their revenue. If people have little to no credit histories, they will have little to no creditors interested in these agencies rating every single person as a credit risk. Creditors will have to develop a new means to determine someone’s credit worthiness that does not rely on previous history. Likely, peer to peer lending services like Prosper and LendingClub will be the leaders in this new means of handling risk.

3.) NYSE, mutual funds, money-market accounts. These will change significantly as future generations change what is meant by valuation. They will only give their money to companies whose products they support in a manner articulated by Umair Haque.

4.) Finance and business majors. While it has been the case that math whizzes chose to go into finance, if this industry were in decline, they would likely choose other avenues and so these programs will collapse in colleges and universities.

5.) Retirement accounts. I have put more money in both my 401K and my Roth IRA than it is worth today. In other words, if I had put this money under

I am all for going out in a blaze of glory before reaching retirement age.

my mattress, I would be doing better now than I am doing by following current retirement best practices. If I decide to drop out of the use of financial instruments, I could simply put this money in FDIC insured bank accounts and make sure I don’t exceed the $250,000 limit without opening a new account. My employer could direct deposit their 2% match right there. However, I have loads of self-control. For others, who would break into this account far before they intend to retire, perhaps banks could offer a product that locks you away from your money until a certain age or hardship could be proven. Certainly, being cut off from your money would make many people uncomfortable, but it could  prevent some from reaching retirement age in a very unhappy state.

While some are listing 8 reasons America’s youth don’t fight back, I am looking for the Gen Y equivalent of Timothy Leary’s “turn on, tune in, drop out“. Perhaps, if we want to damn the man, we should abandon his business models.