Tess Vigeland: It’s one of the first rules of personal finance — keep it simple. That goes for everything from insurance to investing.
Commentator Chris Farrell wishes the same rule applied to financial regulation.
Chris Farrell: What do dogs, frisbees, bank regulation and managing your money at home have in common? A lot, it turns out.
Let me explain: It starts with a speech on regulation given right to economists at last week’s meeting for central bankers at Jackson Hole. The title? “The Dog and the Frisbee.”
As they pointed out, the underlying physics of catching a frisbee is pretty complex. It takes Ph.D.-type calculations to figure out. But the act of catching a frisbee is easy; even dogs can do it well. The secret to the dog’s success and ours? Keep it simple. Without thinking about it, we move at a speed that keeps the angle of our gaze to the frisbee, roughly constant.
Now that’s kinda cool, but what does that have to do with bank regulation? Well, a financial crisis is an incredibly complex event and preventing one is really hard. The basic impulse among legislators and regulators is this: Solving a complex financial problem requires regulatory complexity. With each crisis, we add more regulators and more rules.
Problem is, applying increasingly complex rules in an increasingly complex financial environment doesn’t work. Remember the lesson of the frisbee and the dog. Keep it simple. A handful of well thought out and simple rules is a far better approach. With financial regulation, less is more.
The same less is more strategy holds for managing our own money. The risks and rewards of simple investments and simple strategies are easy to grasp. The expenses associated with plain vanilla products are low.
Put it this way: Many of the complex financial products and high-priced, cutting edge, money-making tactics manufactured by the financial services industry over the past three decades have turned out to be bad for your financial health. Keep it simple, and you’ll have more time to play frisbee.
Tess Vigeland: Chris Farrell is the economics correspondent for Marketplace.