« Jackson Hole: Not Just a Nice Place to Vacation | Main | Research on Financial Education and Youth »
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?
Posted by Cindy at September 2, 2009 7:58 PM
Trackback Pings
TrackBack URL for this entry:
http://www.chicagofedblogs.org/cgi-bin/mt/mt-t.cgi/64
Comments
I should begin by stating that I'm a confirmed layman when speaking to economics or even personal finance. But it seems to me that the lesson to learned doesn't require much of either: don't bet more than you can afford to lose.
Had we combined adherence to that rule with knowledge that investment -- even at its surest -- is nothing more than a good bet, we wouldn't be in this position. And my 30-year mortgage would look more like the common sense it was than the economic prescience I pretend it was when trying to keep up with my financially literate colleagues.
Posted by: Patrick at September 2, 2009 10:10 PM
Cindy
I do agree with most of your post. However, early education concerning savings and proper use of credit would go a long towards an individual coping with a bad financial trough. The over extension of consumer credit is but one part of the current crisis, but had consumers done a better job of maintaining an adequate savings cushion while using proper levels credit borrowing, perhaps this crisis would lead to a much quicker recovery.
Posted by: Ed at September 4, 2009 3:37 PM
Cindy
I do agree with most of your post. However, early education concerning savings and proper use of credit would go a long towards an individual coping with a bad financial trough. The over extension of consumer credit is but one part of the current crisis, but had consumers done a better job of maintaining an adequate savings cushion while using proper levels credit borrowing, perhaps this crisis would lead to a much quicker recovery.
Posted by: Ed at September 4, 2009 3:37 PM
I completely agree with you. I would also add, that financial literacy won't get us out either.
Posted by: Mike Fladlien at September 6, 2009 12:24 AM
Thanks for your comments and I just wanted to address Ed's comment in particular, because it was really good.
I do think that better, more informed personal financial decisions would enable people to weather an economic storm easier and with less disruption to their families' lives. And I would not want to confuse that with the point that I was trying to make that this crisis would not have been avoided if we had more financially literate population (but I think Ed is right, the average family might have coped better with the fallout if they were more prepared financially).
Thanks again all --
Posted by: Cindy at September 8, 2009 8:38 PM
While I agree that education alone would not have avoided the crisis, I do think that financial education would have helped. But only to the extent that financial education includes some basic economics to familiarize people with some macroeconomics. This is important because it helps folks see a larger picture and can put a different spin on their decisions.
You can't get rid of the "animal spirits" as Keynes called them, but you can temper them with sound judgement, based on clearer understanding.
Posted by: Tim at September 12, 2009 11:19 AM
Just a follow-up to my comments from yesterday, there is an interesting article in yesterday's (Saturday, 9/12/09) issue of The Wall Street Journal titled "New Rules for Personal Finance." (It's free at this time.) Here's the link:
http://online.wsj.com/article/SB125268390913603465.html
I think it makes a very good case that an understanding of personal finance MIXED WITH some understanding of larger economic concepts has benefits. But to go back to your original point,
personal financial literacy would not have prevented the crisis - but I suspect it might have had a mitigating effect.
Posted by: Tim at September 13, 2009 12:20 PM
Cindy:
You say that this " is not tied to personal finance but to decision making abilities" You can not make proper decsions if you do not have enough knowledge to make those decisions, there will be different consequences tied to you decisions if only you had known better. It is true that this alone would not have prevented the current crisis, but I do believe that our financial world is consistently becoming more complicated and that education will always impact what kind of decision we make whether they are financial in nature or not.
Posted by: brenda at September 29, 2009 5:21 PM
Thank's for sharing this
This is really interesting
Posted by: End of the World at October 28, 2009 11:23 AM
Appreciate it for this post, I am a big fan of this site would like to proceed updated. Cheers ! Independent Financial Advisor :-)
Posted by: Independent Financial Advisor at November 7, 2011 1:17 PM
I have not checked in here for some time as I thought it was getting boring, but the last several posts are good quality so I guess I¡¦ll add you back to my everyday bloglist. You deserve it my friend :)
Posted by: Usmle 1 at February 25, 2012 6:03 PM
Just discovered this blog thru Google, what a pleasant shock!
Posted by: what is the army knowledge online phone number at February 26, 2012 9:53 AM
Took me time to read all the feedback, but I really enjoyed the article. It proved to be very useful to me and I am certain to all the commenters here! It is all the time nice when you cannot solely be told, but in addition engaged! I am positive you had joy writing this article. Anyway, in my language, there aren't much good source like this.
Posted by: Sharee Lindstedt at March 29, 2012 3:18 AM
Of course, what a magnificent blog and illuminating posts, I will bookmark your site.Best Regards!
Posted by: Patrick Chappo at June 1, 2012 4:07 AM
Nice! Just wanted to respond. I thoroughly loved your post. Keep up the great work on marginalthoughts.chicagofedblogs.org .
Posted by: Clenbuterol at June 18, 2012 11:34 AM
I almost never drop comments, however i did some searching and wound up here Marginal Thoughts: Personal financial literacy would not have prevented this crisis.... And I do have 2 questions for you if it's allright. Could it be just me or does it seem like a few of the responses look like they are written by brain dead individuals? :-P And, if you are writing on additional places, I would like to follow anything fresh you have to post. Would you list of all of all your community sites like your linkedin profile, Facebook page or twitter feed?
Posted by: wyroby z drutu at July 30, 2012 3:44 AM
As soon as I detected this site I went on reddit to share some of the love with them.
Posted by: barproducten at August 27, 2012 9:31 AM
Post a comment
Commenting Policy:
All comments and links posted to FRBC blogs are reviewed. The Federal Reserve reserves the right to protect against spam, off-topic and profane comments and links; any such comments or links will be deleted and the domain address of the poster blocked.