Why Financial Literacy is a Mirage
Financial literacy is today's Very Worthy Cause. If only regular people understood more about money, they wouldn't have created the real estate asset bubble, or gorged on credit cards, or--close to my heart in this blog--blown their nest egg in their 401(k)s.
It's curious how much reverence towards financial literacy always seems to stage a bull market in the aftermath of financial disasters. However, it rarely results in much. The tech stock bubble, for example, led to the Financial Literacy and Education Improvement Act of 2003 and its feeble Financial Literacy Education Commission. The FLEC, according to this year's GAO progress report, was reduced by apathy and lack of funding to relying on a single volunteer Virginia Tech grad student to evaluate the effectiveness of the U.S. government's financial literacy programs. That barely rises to the level of lip service.
What makes financial literacy such an attractive goal today? One benefit is that it deflects attention from reforming financial services. The crash was all the fault of those illiterate consumers, goes the argument. But if we turn them into amateur financial wizards, why then, who needs a Consumer Financial Protection Agency? Same with retirement planning. I've often used this blog to suggest that policy makers rethink the nation's over-reliance on 401(k)s. The typical response, most recently endorsed by trade pub Financial Planning, is that there's nothing wrong with the plans; 401(k)s would be fine if workers were just taught better how to use them.
All that may be true, if only the premise weren't absurd. How exactly are we supposed to take a nation of workers and turn them in their spare time into a nation of amateur financial athletes? One apparently serious questioner at a Ben Bernanke press conference last month suggested that Bernanke and Obama should just create a series of financial literacy videos--on, for example, "here's how a credit card works"--and send it to every household in America. (The suggestion occurs about minute seven in the clip.) It's a little bit tougher than that.
- For one thing, whatever materials the forces of financial literacy might create would be dwarfed by advertising campaigns urging you to act like a complete illiterate. What chance does "Here's How a Credit Card Works" mailed by Ben Bernanke have against "What's in Your Wallet" commercials airing endlessly on football games? That these ad campaigns are created by the same companies speaking prayerfully of financial literacy is one of the smarmy ironies of the post-crash era.
- For another, proper financial behavior, particularly investing behavior, is terribly hard to teach. Endless economic research shows that humans are wired for short-term thinking and tend to make the same mistakes over and over again-even when they know better.
The fact is, financial services companies understand better than anyone how Sisyphean it is to teach financial literacy. For two decades they've sent trainers, armed with white boards and colorful brochures, to talk employees into signing up for 401(k)s. Employees still stayed away to an alarming degree. That didn't change until the law allowed companies to enroll employees automatically in their 401(k)s. The fact is, when it comes to protecting consumers from their own mistakes, paternalism works better than pedagogy. Financial literacy is an amiable smokescreen-a way to blame consumers and head off reform that will really make a difference.
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Why financial literacy is a mirage? Just read the comments section.
First, people that do educate themselves on the complexities of things financial want to believe that they have a good handle on what, as the author states, is more specter than substance.
Second, proof requires that a certain amount of people actually do increase their knowledge. Guess what is most likely to happen? It would become even more complex and convoluted in order to sucker the same amount of people. Just using more smoke and more mirrors.
Just think about what casinos do about people that learn to count cards.
I respectfully disagree.
Financially Literate people would realize complexity in the economics leads to corruption.
Simplicity is a virtue with money systems.
See Michael Martin's Profile
Great post, but Americans spend more time looking through their Zagat Guide or "shaking" their iPhones to get a new restaurant on Urbanspoon than they do studying the markets or market history. On some level they are complicit in the results they get in their portfolios.
A few suggestions:
- Throw out the Registered Rep Series 7 exam and teach financial advisors how to manage risk.
http://martinkronicle.com/2009/03/26/wall-st-plan/. There's nothing on the test about making money or minimizing losses.
- Diversification is only a starting point. Educate the public to time the market using simple moving averages.
- Stop with the Buffett and Bogle racket, and illustrate what would happen in you "missed the 10 WORST days in the market."
- Delineate the dangers of investing in "weapons of mass destruction" (mutual funds) - and the fallacies of quarterly rebalancing and dollar cost averaging.
We still need to educate people as much as possible on the basics of money, economies and business. This should be as basics as Reading Writing Arithmetic and science.
Most poeple don't even realize there are alternate fairer money systems, like Greenback, or a FED that is part of the Treasury so Taxpayers don't pay 2% to use the money the treasury creates.
I urge everyone to look up every finical term you don't understand.
The net is the miracle that makes that possible and easy for nearly everyone.
Anyone who can understand a TV show can understand the economic system the Banksters and money.
It's hard to know what level of 'financial literacy' is necessary for the consumer.
Ivy league business school graduates in charge of investing hundreds of billions have pretty much bankrupted the world investing in derivatives that even THEY now admit they didn't really understand. (google 'Li Cupola equation' sometime).
If they aren't financially literate enough for their supremely well paid functions just what constitutes financial literacy ?
Indeed the entire world economy for a while was pretty much running on the idea that residential housing can be a permanent growth investment, something GRADE SCHOOL ARITHMETIC can show is unsustainable.
Using HELOCS the American public put themselves trillions of dollars in debt on the basis of a COMPLETE LIE and scam on an enormous scale ( read here on Huffpost of 'epidemic' mortage fraud.)
What constitutes financial literacy when our entire financial press pretty much missed the biggest looming economic financial disaster since Black Tuesday?
You made my day: just think of the next 30 years as roughly the equivalent for financial services of what happened the past 30 years for big tobacco.
Aaahh! Such a chilly taste of freedom!
So what should we do? Tie the hands of anyone who can't take a test and get a Banking License?
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