Companies and colleges say that if we all understand our finances, financial crises won’t happen. This is simply untrue
April is National Financial Capability Month. You know what that means. We will be subject to many a tedious lecture, telling us how the financial crisis would not have happened if only those darn, irresponsible Americans knew how to handle their funds. And, of course, we’ll believe it.
Almost all of us are sure that if someone, somehow, can convince us to improve our financial knowledge, all will be right in the world of our wallets. Goodbye balloon mortgage payments, hello responsible financial decision making. Of course, we’re always talking about the other guy. But I digress.
So take a few classes, and learn to manage your money. Federal Reserve chairman Ben Bernanke says it is the right thing to do: “Among the lessons of the recent financial crisis is the need for virtually everyone – both young and old – to acquire a basic knowledge of finance and economics.”
Sounds great. But it’s not true.
As I discovered when I researched my recent book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, financial literacy or capability or whatever you want to call it is a bunch of hooey. It promotes the false equivalence that the victims of the financial shenanigans of the past several years are as responsible for the financial crisis as the financial services sector, the ultimate creator of all those financial products of mass destruction.
Think about it this way: did you take on a collateralized debt obligation? Did your neighbor? (Readers in Manhattan and Fairfield County, Connecticut, you shouldn’t answer this question.)
So you get outfits like Bank of America, which debuted a financial literacy series created with the Khan Academy, a provider of educational content. As the press release announcing the effort puts it: “Bank of America and Khan Academy recognize that no matter where you are starting from, the best way to improve long-term financial success is by changing habits slowly, step by step.”
This is the same Bank of America where a few years ago an executive named Ric Struthers blamed the housing crisis not on the organizations like Countrywide Financial, which it bought in 2008 despite the fact that it was at the epicenter of such mortgage practices as liar loans and deceptive marketing to consumers, but on the people who fell victim to the housing crisis. He said:
It all starts with financial literacy. If we had done that many years in the past, especially in the mortgage industry, we wouldn’t be having some of the problems we are having today. People would be paying a little more attention to the loans they signed up for.
This sentiment is far from uncommon. “Financial illiteracy is a major contributor to the economic struggle that many Americans face and plays a large role in the nation’s growing economic crisis,” reads one paper from an outfit called the National Financial Educators Council, which offers programs in – well, you guessed it. “Financial education is the key to reviving the American dream for millions of Americans.”
No mention at Bank of America or the National Financial Educators Council of one particularly noxious financial habit: median income in the United States fell by more than 12% between 2000 and 2012, according to the Center for Budget and Policy Priorities. If there is a class in how to fix this one, sign me up.
Colleges are also getting in on the financial literacy movement because, after all, one needs to do something about all that student debt, all $1tn of it.
Let’s take a look at Penn State, a school the United States Department of Education College Affordability and Transparency Center deems to be one of the most expensive public four-year colleges in the country. How do you solve a problem like that?
Why, you set up a new office devoted to financial literacy, that’s what, where students can learn how to “make better decisions about budgeting, borrowing and loan repayment”. After all, as yet another press release put it: “As tuition costs increase and job opportunities become more selective, it is vital that college students have skills for personal financial planning.”
When I emailed Penn State to ask about how financial literacy could compensate for such things as the fact that college tuition nationwide has more than doubled since 1980, this is the response I got from Daad Rizk, the head of the program:
Financial literacy helps students to treat education as an investment in their future. The real problem is not the rising cost of education, it is in the lack of financial planning and lack of financial literacy skills of making sound financial decisions.
Here is one thing I would suggest any financial literacy program at Penn State should emphasize: state funding provided 62% of the school’s budget in 1970, vs 14% in 2012. This might go a long way toward explaining the explosion in both tuition and student loans at the school.
Oh, and another thing none of these outfits thinks it worth mentioning … financial literacy, even at the most basic level, doesn’t work.
Survey after survey shows that high-school students who take mandated seminars in financial literacy know no more about basic financial concepts than students who didn’t study the concept at all. As a recent study on the topic put it, these classes have “no impact on credit management outcomes, including: credit scores, credit card delinquencies, or the probability of declaring bankruptcy or experiencing foreclosure.”
So why continue to push financial literacy? As journalist Jill Schlesinger recently put it: “Many of these big companies promote their public education projects, while at the same time continuing to sell murky, complicated products.”
Maybe there ought to be a law. Oh, right. Every time we try to do that, try to legislate something like plain vanilla mortgages, or restore the right of borrowers to jettison student debt in bankruptcy court, the financial services sector comes out against it.