United State’s Newest Epidemic - Insufficient Financial Literacy
Opinion -
Congress, regulators, and the financial services industry are pointing fingers at each other in an attempt to pass the blame regarding who is at fault for our current credit crisis. In reality, everyone probably shares a piece of the blame; however, to leave a lack of sound financial literacy out of the equation would be arrogant, to say the least. The fuel that started the billion-dollar write-downs our major financial institutions are currently acknowledging is simply consumers in mortgages they cannot afford. Sure, there were a certain number of borrowers who did not have the adequate terms of their loan disclosed to them at closing, but ignoring this relatively small number of these predatory lending situations, we are left with an overwhelming number of borrowers who agreed to terms of a mortgage that they knew and the banks knew, were unaffordable.
Our entire credit crisis, which has reverberated to nearly all sectors of our economy has originated from a source so easy to identify, so easy to avoid, and so easy to understand – a home mortgage. Congress has so graciously designated April as Financial Literacy Month again this year, and just this week, the House Financial Services Committee held a hearing on the issue. For a couple of hours, Representatives from around the country patted each other on the back for creating a month devoted to financial literacy, which they call a “timely” event considering the state of our economy. I am glad Congress is at least starting to look at the matter of financial literacy, but considering their actions “timely,” would only be appropriate if they enacted legislation to put financial literacy in our school system years ago.
Our current administration still advocates for and pleas for, the survival of the famous No Child Left Behind Act. This legislation was created with good intentions, but in the process of testing children in various subjects, without enough focus on financial literacy, we have left an entire nation behind. The concept of an Adjustable Rate Mortgages (ARMs) is not complex, and likely, a subject, if explained to children, could be understood at a young age. However, we find our nation struggling financially due largely in part to adults who simply could not understand that with an ARM mortgage their loan rates would reset, which in turn would raise their monthly payments – embarrassing, considering its effects on economies worldwide.
Our nations saving rate is still staggering close to 0%, which means as a whole, our nation spends more money than they make. What is most troubling about this is our employers are quickly moving away from the traditional pension retirement system that many of our grandparents enjoyed. Employees now have to take their retirement into their own hands by actively enrolling in their companies 401(k) or other tax-sheltered plan. Participants are now asked to pick their own investments based off what the employer plans offer. In essence, we are asking the same people, who struggle to understand the terms of their mortgage, to choose complex investments in order to secure a financially healthy retirement – this is unrealistic.
Although these ARM mortgages are the primary reason for our debatable recession, there is no question the severity of our credit crisis advanced due in large part to an increase supply of lending products. Eventually, we were probably going to be burned anyways – credit cards, student loans, car loans, payday loans, home equity loans, store credits, and tax refund loans have fueled a consumption lifestyle our society has become accustomed to, regardless of its affordability.
Credit is far too easy to obtain, and consumers without adequate financial literacy are like kids in a candy store. It is not their fault either, kids learn what we teach them and unfortunately, this does not include an in-depth looks at compound interest, mortgages, mutual funds, and adequate savings. Why is it that we fail to teach our nation’s youth something that is essential not only to the well-being of the student, but also to our economy as a whole? It is our hope that a major financial literacy push will someday be achieved, but in the meantime, we will continue to see more write-downs, foreclosures, bankruptcies, and ruined lives – it is clear, the United State’s newest epidemic is insufficient financial literacy. $
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Comments
Good article. Don’t forget that it’s not just children who need to be educated about financial literacy - most of our government officials apparently need a little refresher too. It’s tough to cut taxes and raise spending and maintain any sort of fiscal sanity…
thanks for the link!
Steve
Completely agree that kids need to be taught about finance. Since they don’t get that education at school, it is up to parents to teach them, at least the basics of savings and loans. My kids are 6 and 8 and we’ve already started discussing the basics.