Capitalism for All?

For all the failures of bankers and policymakers to tame the unbridled innovations of capitalism in recent years, many of us have also lost our own way financially--and it's costing us hugely. American consumers are losing hundreds of billions of dollars in unnecessary banking and checking fees, inflated interest rates, and missed opportunities. Reclaiming those dollars and putting them to work for workers is one of the most powerful and widely overlooked opportunities we have to restart economic mobility in the U.S.

For a half-century, we've benefited from the democratization of the financial services industry--and all of the new ways of saving, spending, borrowing, and investing that it created. Up until just 60 years ago, most Americans either kept their money under a mattress or had just a checking or savings account at their local bank. Capitalism was simple, in other words. But during the second half of the 20th century, financial services were broadly expanded for all. In the 1950s, for instance, credit cards didn't exist, 14 percent of us had access to the stock market, and 59 percent had a checking account. Today, by contrast, there are 640 million credit cards in circulation--nearly three for every adult--and we owe nearly $1 trillion. Similarly, over 60 percent of us are directly invested in the stock market and over 90 percent have a checking account.

Democratization of products brought with it new hopes for millions of Americans to own homes for the first time, send their kids to previously unaffordable colleges, and buy shiny new things on credit that they had always wanted but couldn't afford.

But it also sowed the destruction of economic mobility at the very same time it promised to improve our lives. That's because while we were getting access to ever-more products, we weren't getting actionable knowledge about how to use them the way the nation's wealthiest do. Fewer than one in five households have access to the financial guidance needed to use these new products effectively--a statistic that has remained essentially unchanged since the 1950s.

What's happened over the past 60 years, then, is somewhat akin to lending someone a car without first giving them a driving lesson. They'll get down the road and feel the wind in their hair, but eventually most people will get into an accident.

And that's exactly what's happened in this country. The worst accident, of course, was the mortgage crisis over the last two years, through which over 5 million mostly middle-income households have lost homes that they likely never would have bought in the first place if they had been able to talk to an independent financial advisor that they could trust, almost taking down the entire U.S. economy.

But the mortgage crisis is only the tip of a massive iceberg that's cracked the hull of most Americans' finances. The statistics are jaw-dropping. Last year, for instance, while Congress was busy debating financial reforms, U.S. consumers spent about $38 billion in overdraft fees. But the more shocking figure is that in a recent survey, 70 percent of people were found to be overdrawing from banks where they have savings accounts in addition to checking accounts. In a matter of minutes, they could have linked their accounts and avoided most of those fees.

The lack of knowledge about checking accounts is stunning, given their widespread use. But it doesn't stop there. One- to two-thirds of fixed-rate-mortgage borrowers pay more than a full point above the going rate and may qualify for a better rate, according to their risk profiles. Getting a more appropriate, lower rate would save these homeowners an estimated $60 billion a year. Over 20 percent of Americans keep more than two months of their income in checking accounts and have no other investments, causing them to miss out on billions of dollars in interest every year. Most investors are undiversified and lose money as a result. And so on.

The bottom line is that few people, regardless of income or educational level, know how to use financial products effectively--because there's no one to help us figure them out.

That burns consumers, badly. We lose hundreds of billions of dollars every year in unnecessary fees, inflated interest rates, and missed opportunities. This stifles economic mobility and breeds personal financial crises, such as bankruptcies and foreclosures, that collectively damage the national economy. It also erodes our middle class over time, because without understanding how to use financial products effectively, workers cannot convert their wages into economic mobility.

So, what do we do about this?

As a financial policy wonk trained in economics, I'd love to boast that I've devised the magic blend of new laws that the country's been waiting for. But as an expert, I've learned that consumer finance policy is a lot like whack-a-mole--after years of wrangling, one outrageous fee is banned while a dozen blossom in its place. Just like most of us, policymakers are not money experts either. Our $13 trillion debt is evidence of that. Even more importantly, it can take years for Washington to pass legislation; banks, on the other hand, can add new fees and products in a matter of weeks. Policy is always, by default, behind the innovation curve.

I also wish I could say that we can educate ourselves out of this problem, as we've successfully done with so many other critical problems facing this country. But that would be like saying we can improve the health of people in this country by requiring everyone to be a doctor. Today, effectively managing one's money is a full-time task that requires access to advanced math skills and information. And with nearly half of U.S. adults reading at or below an eighth-grade level and almost all of us juggling more work than we can handle, this would be a fool's errand.

The answer is that we instead need to put capitalism back to work for us by democratizing independent financial guidance and inserting a new, nimble intermediary between consumers and financial institutions--just as we have mechanics between us and our cars, and doctors between us and medicine. Imagine, for instance, that you had someone proactively looking at your money, guarding against unnecessary fees, warning you of bad deals, and stewarding you to use your hard work to climb up the economic ladder. The wealthy have had access to these services in the form of private bankers since the beginning of time. It's high time that the rest of America also reap the benefits of that expertise.

That's what we're trying to provide at the organization I now run, HelloWallet. But I'm sure there are dozens of other ways we can work together to take back capitalism. I'm starting this blog to help spark that dialogue, to shed light on the difficulties we all have using financial products, and to suggest meaningful solutions that we can put in place now--no matter what Washington or the banks do.

Ultimately, my goal is to help put capitalism back to work for ALL Americans.