Mortgages, Greece & Obama's Budget: The Global Financial Literacy Crisis

Once upon a time in America, Greek was routinely included in the curriculum of a liberal arts education. Today, we don't necessarily need to speak the language, but we do need to better understand what's happening.
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Seven days, three seemingly disconnected announcements, and one subtle theme: what we have here is a failure to communicate... or more to the point, a failure to educate. America and much of the world is in the midst of financial literacy crisis that goes well beyond one's ability to manage his or her own money. Consider what's going on at home and abroad.

First, the attorneys general of 49 states agreed on a $26 billion package with five major banks in order to settle lawsuits brought by those states alleging improper mortgage practices and rampant foreclosure fraud. Then the stock market went through the roof when the Greek government agreed to a series of truly severe austerity measures hailed as yet another final solution to the teetering solvency of that once-prosperous EU country. And finally, the Obama administration released its new $3.8 trillion budget proposal, which projected a massive deficit for the coming fiscal year, and significant deficits for each of the next six years.

What a web we weave.

You may not realize it, but these three events are part -- and an excellent illustration -- of the global financial literacy crisis, one of the overriding problems of the modern financial world. Let's start with a little context: The $26 billion settlement package of course received as many brickbats as it did kudos, but whatever you think about its specifics, you need to know that American residential real estate today is estimated to be about $700 billion underwater. I wonder if most people understand that the settlement is little more than a drop in a very large bucket.

In Greece, the new austerity measures include a 22 percent cut in the minimum wage and the elimination of 150,000 government jobs over the next 3 years. This, in a country decimated by 5 years of steep recession and an unemployment rate over 21 percent, represents a new kind of Greek tragedy. The night before Parliament passed the new legislation, there were violent demonstrations in half a dozen Greek cities, including a turnout of about 80,000 in Athens where the cocktails were provided by Molotov. That's quite a statement for a city with a population of some 650,000. Despite the proportion and emotion of the popular outpouring, the new austerity legislation passed by well over a two to one vote.

I wonder if those demonstrators in Greece understand why their elected officials did what they did, and what they had to do; and I wonder if Americans really grasp the significance and relevance of the near collapse of the Greek economy.

And then there came the new proposed U.S. budget, with its 60,000 line items jacketed in blue but awash with red ink, which projects a deficit of over $1.3 trillion for fiscal 2012, and a deficit every year for the next six, gradually shrinking to "only" $575 billion in 2018. I wonder if anybody, on the Hill or elsewhere, really understands anything about that budget.

Thus in short, the mortgage settlement addresses at best only about 4% of the overhang, the unrest in Greece is likely to accelerate with no guarantee that the new austerity plan will actually solve the problem anyway, and the Obama budget pleases no one, and was predictably declared on life support by many observers on both sides of the aisle.

So here's the real problem: the core principle of "democracy" -- a word invented by Greeks -- is that an informed electorate makes choices about who will lead, presumably choosing those who will represent its best interests. Unfortunately, we now live in a world where no electorate is actually well informed about what's actually going on financially. We all know that numbers don't lie, but that liars use numbers. But REALLY BIG NUMBERS numb the brains of most Americans. They numb the meaning of money. And they blur the motives of the people using them. Every number coming out of Washington has become too large to really understand. Does anyone truly comprehend the difference between $10 billion and $1 trillion? Gee, it's a whole lot of money either way. Either one would pay for a great quantity of baby formula, or many, many college scholarships. We're going to need some new denominations soon. What about a terabyte or a "light year" of dollars?

What is happening in Greece illustrates starkly how the people as a whole can lose sight of what is actually in their best interests, and how politicians -- whose first duty is, after all, to get elected -- either did not try or utterly failed to communicate the real state of fiscal affairs in that country for well over a decade. That lack of communication and lack of understanding is now coming home to roost in the form of violence in the streets, and the likely expulsion of Greece from the EU. In the U.S., the principal cause of economic weakness derives from the still gigantic and largely unaddressed crisis in mortgages, which was caused in significant part by complex financial products never fully understood by many borrowers. Efforts by governments, both state and federal, are well intended but ineffective, because no one really wants to deal with the entire problem principally because of its staggering magnitude. The new budget proposal, with all of its spending and deficits, doesn't really do much in terms of mortgage relief, but worse than that, it comes packaged with an advertised "$4 trillion in deficit reduction," when the deficit only INCREASES every year for the foreseeable future. The joys of baseline budgeting....

The United States is a large and still very rich country, but the informational and philosophical distance between the general public and their elected officials is growing -- and becoming frightening -- just as the distance between the rich and the poor seems to only get larger. There is no simple way to fix our considerable financial problems, and there is no simple way to communicate those problems. In other words, in the long run, American consumers need two things: more financial education -- a lot more; and a lot less apathy. Thankfully, the newly-minted Consumer Financial Protection Bureau has a strong mandate to promote financial literacy education to the general public. What the Bureau and everyone else needs to understand is that financial literacy involves more than learning how to balance a checkbook or understanding what APR means -- particularly in times when financial matters dominate the headlines. In addition to the microeconomics of personal financial management, the electorate needs to understand enough of the macro to figure out who's doing what to whom, to not become numbed by those big numbers, to get through the political spin that accompanies every announcement from Washington, and to learn the lessons provided by history and events in other parts of the world.

Once upon a time in America, Greek was routinely included in the curriculum of a liberal arts education. Today, we don't necessarily need to speak the language, but we do need to better understand what's happening in Greece. It has become our civic (another Greek word) duty.

This story originally appeared on Credit.com.

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