The American Dream has turned into The American Scream.
According to the Mortgage Bankers Association, a record 1 in 10 borrowers in the US were either delinquent or in foreclosure at the end of the third quarter of 2008. Given this data point was tallied before the massive wave of layoffs announced in October and November, things are likely to get worse before they get better. Against this grim backdrop, Washington is struggling with how best to help homeowners.Current proposals include government-engineered modifications for existing home loans and government-subsidized 30-year fixed-rate mortgages for new home purchases. Such programs, intended to jump-start our housing market, represent rational first steps given the magnitude of this crisis. Such steps, however, should not be our last. In many ways the housing bubble is merely a repeat of the internet stock bubble. More importantly, it is potentially the precursor to a college loan or an annuity crisis.
If we do not address the root issue that enabled home prices to rise to such ludicrous levels in the first place, history will repeat. We Americans continue to create asset bubbles and make serious mistakes with our personal finances because we are not financially literate. After two plus decades of unfettered consumerism, it is time to confront this harsh reality.
The statistics are shocking.
A recent survey conducted by Charles Schwab of 1,000 parents of 13 to 18 year-olds revealed that while 70% had taught their kids how to do laundry, only 43% taught them how to pay bills. The same survey also showed that while 97% of parents think it is important to teach their children to save and invest for retirement, only 14% have explained what a 401(k) is. Perhaps the reason for the disparity is that parents themselves aren't doing such a good job with their own finances. According to the American Savings Education Council in a February 2008 press release, less than 1 in 3 Americans routinely save the recommended 10% a year of their income. As a nation, we have lost our financial way. Founded on the principles of thrift, frugality, and hard work, our beloved country has morphed into a giant financial couch potato.
Who is to blame?
One culprit is our increasingly complex financial landscape. In years past, limited choice helped us save ourselves from ourselves. In the case of home ownership the twin forces of a 20% minimum down payment and 30-year fixed rate mortgage were self-policing mechanisms. However, in today's world of seemingly limitless financial choice we need to learn how to more effectively fish for our financial supper. Had more Americans understood how much home they could truly afford, what kind of mortgage was appropriate for their particular situation, and how to live within their means, housing prices would never have escalated to the bubble point. To date, many angry fingers have been pointed at predatory lenders, greedy mortgage brokers, and scurrilous investment bankers. Their role in our current economic malaise is irrefutable, and it must be addressed. Yet that is not enough.
As the debate swirls in Washington about how to "help the homeowners," we are reminded of this time-tested proverb: "Give a man a fish, and you have fed him for today. Teach a man to fish, and you have fed him for a lifetime."
A nationwide, mandatory financial literacy class in high school would be a nice start. To create lasting improvements, however, we must dream even bigger. We've changed the way Americans think about everything from smoking to wearing seat belts. Why not use a tiny sliver of the potential profits from government-subsidized 30-year fixed-rate mortgages (lending at 4.5%, borrowing at 2.7%...) to create a coast-to-coast financial literacy campaign ("Got Money $marts?"). Or perhaps we could offer Americans the choice of attending personal finance workshop after two late bills - sort of a traffic school for your wallet. And why stop there? We could offer a tax credit to Americans who take a government sponsored personal finance class.
The bottom line is this: Good personal finance does not have to be difficult. The guiding rule is to live within your means. Across the nation this basic principle should be emphasized in schools, colleges, houses of worship, and most importantly in our homes. As we work together to dig our country out of this financial mess let's identify creative ways to give ourselves, and our children, a gift that will last a lifetime - (financial) fishing lessons.