September 24, 2009
Financial Crisis Provides a Teachable Moment without a Lesson Plan
By Cindy Ivanac-Lillig
Economic textbook authors have been feverishly working on appendices to explain the current financial crisis. The challenge when describing the crisis is where to begin -- and frankly where to end. Was the cause:
• The housing boom?
• Misaligned compensation incentives?
• The repeal of Glass-Steagel Act?
• Our political and social momentum pushing greater home ownership?
• A global economic boom that led to massive amounts of money in search of “healthy” returns?
• The Fed holding rates at historic lows through the early part of this decade?
• Regulations not keeping pace with financial product innovation?
• The increase in sub-prime borrowers?
And if we say some or all of these events caused the crisis, does it become impossible and unruly to teach?
Well, I guess my answer is yes and no. It is complicated and that is an important part of the lesson. I have facilitated about a half-dozen sessions where educators discuss the financial crisis and how best to present it to high school students. What I try and do is make the different pieces they come up with make sense. I suppose the most important thing I want people to walk away with is that it is not one thing that caused this crisis. It is many things, and that’s probably why there will be other financial crises in the future. It is a combination of small events that lead to unforeseeable wide-spread consequences. This does not make it less important to study, but more important. It is the ultimate teachable moment – it underscores the value of studying the interconnectedness of our political, economic, and social systems.
Over the course of the last year, I have come across other blogs and opinions that I have found helpful and I wanted to share them with you. One of Marginal Thoughts’ regular commentators, Mike Fladien, has a blog that highlighted this article I found simple and yet insightful: “The Financial Crisis as Explained to My Fourteen-Year-Old Daughter.”
If your questions run more in the vein of regulations, I recommend a fairly easy-to-read entry by the Curious Capitalist where you can definitely get a flavor for both sides of the argument. If you have more specific questions about AIG, Bear Stearns, and Lehman’s involvement in the crisis, there is a good Freakonomics blog with FAQs on these subjects. Some other quick reads on the crisis more generally include this New York Times entry or this one from Askville(Amazon). And finally, if you have some time, you can watch renowned economics textbook author David Colander present his “Student’s Guide to the Financial Crisis” here, which I think is the best of the bunch (but the longest time commitment).
None of these recommendations is perfect, nor without its own controversial statements, but hopefully they will offer enough information so that we can all avoid summarizing the crisis in simplistic terms. After reading this, hopefully you will all bristle when you overhear someone saying the cause of this crisis can be boiled down to unworthy borrowers being granted mortgages.
Good luck to all of you, and please share resources that you have found helpful in learning/teaching about the crisis by commenting below. I look forward to hearing from you.
September 14, 2009
Research on Financial Education and Youth
The Chicago Fed hosted a conference last Friday, Financial Literacy, Financial Education and the Federal Reserve. The agenda was diverse and ranged from a review of Fed-based programming to external groups discussing the proper role of the Fed in the realm of financial education. You can read more here.
However, the best take-away may have been a paper that was sitting on the publications table outside the seminar room. It is a paper by Laura Choi of the San Francisco Fed that discusses the correlation between students with banks accounts and higher levels of financial knowledge. The reason I decided to post the paper on the blog was not only to promote her central thesis but also to highlight what was uncovered as part of her background study -- the significant correlation of children who played the Stock Market Game and their increased financial knowledge. This latter correlation seemed the most impressive in her research. Please take a few minutes and read her paper here.
Overall, I think what you can safely conclude from Choi’s paper is that experiential learning may very well have significantly more impact than an entire semester-long class in personal finance. This is a pretty powerful conclusion.
What should the education community do with this knowledge?
September 2, 2009
Personal financial literacy would not have prevented this crisis...
By Cindy Ivanac-Lillig
I read an article this morning in which the head of the American Institute of CPA’s Financial Literacy Program sounded a familiar theme. He calls the current economy “the case study for having personal financial education,” and adds that current conditions illustrate why we should have had personal finance education in grade school and high school.
Although popular, this argument always rings a bit hollow to me, and I fear it could lead to poor decision-making in education policy. When I look at this recession, I see financial markets that were too interconnected and complicated, new financial products that were opaque, a mortgage market where most expected that their house would always gain in value, two decades of changing regulatory structures, misaligned incentives, etc. I don’t clearly see how people being more knowledgeable about managing their money would have helped avoid the recession. After all, major economists and financial tycoons didn’t notice some of the main fault lines that contributed to this economic earthquake, and they are certainly well trained.
I do think there were plenty of folks who took mortgages that they didn’t understand or couldn’t afford. More importantly, however, I think there were many more who took these mortgages with the expectation that their house would gain in value fairly aggressively, and they would then refinance. And frankly, based on recent history, this would have been the financially savvy decision.
People always laugh when I say that the irony of the personal financial education narrative that has developed from this crisis is that consumers should not have taken these exotic mortgages. In reality, the folks who are wealthy and trained in finance today would probably still seek out these exotic products and probably never sign onto a fixed-rate 30-year mortgage.
Much of the repair work that will come out of this crisis doesn’t have to do with the consumers but rather with financial infrastructure -- with maybe the one exception of consumer expectations. This is a tough nut to crack and not tied to the mechanics of personal finance but to decision-making abilities. Consumers need to feel confident that they can logically and rationally evaluate situations long-term.
I hope this crisis prompts educators to see the need to push for more economics and finance in curriculums, both of which force students to look at long-term returns/productivity, fundamentals of business cycles, how businesses make money, and the government’s role in our economic system. All of these things would go a lot further in training students to be better able to make difficult decisions as adults. It is difficult to evaluate risk to your own situation if you are not trained to think about how the world works around you. I don’t want the lesson of this crisis to be that students need to better understand credit as opposed to better understanding business cycles and economic systems. This will give them the confidence to evaluate what will surely be a more complex set of financial choices in the future.
What do you think?