A major transformation in banking is revolutionizing America's approach to financial literacy.
Some financial institutions, to their credit, such as Citigroup, have expended hundreds of millions of dollars each over the last generation in promoting traditional approaches to financial literacy.
No one can doubt that an educated public starting as early as kindergarten is helpful to preventing abuses in credit cards, student loans and subprime mortgages. However, we were struck by a comment that former Federal Reserve Board Chairman Alan Greenspan made to us at a meeting in his office in July 2004.
We presented him with 150 different adjustable-rate mortgages that had recently been offered by Countrywide. He said that his staff had reviewed all of them, and that he had read many of them. His conclusion: "Even if you had a PhD in math, you wouldn't be able to understand some of these."
Of course, Mr. Greenspan exaggerated his point, but he concurred that these instruments had become very complicated to understand. Unfortunately, at that time he believed that the free market would correct the problems and rise to the highest level of responsibility.
In some of his recent speeches, President Obama has raised the larger issue relating to financial literacy: a change in values. We concur. However, a change in values is most likely to occur if financial institutions promote a new form of literacy that is based on a combination of full transparency by bankers and consumer restraint.
A major problem that occurred in California, relating to the foreclosure crisis, was precipitated not by the desire of those who live from paycheck to paycheck to own a home, but by their desire to live beyond their means and "roll the dice" for the future.
Many could have easily afforded a traditional 1,500-square-foot home in an older neighborhood and received a fixed-rate mortgage. Instead, they opted for (or were seduced into) an option ARM that permitted them to purchase a 2,800-square-foot home with a swimming pool that they could afford only if home prices continued to escalate, their jobs remained secure and interest rates were low.
Similar problems have occurred relating to credit card debt. For more than a decade, banks have avoided clearly stating the implications of not fully paying the monthly bill, and in their fine print they barely disclose the consequences of a failure to pay even noncredit card debt in a timely fashion. Comparable abuses have occurred with student loans.
Our call to action, consistent with the president's call for greater transparency and a change of values, would be as follows:
- Financial institutions and foundations, matched by economic stimulus and/or Tarp money, should fund financial literacy programs that start at kindergarten. They would focus on living within your means, securing material goods on credit only when they were a necessity and making certain that your future is not gambled away with financial consequences you do not fully understand.
- Every form of credit, not just financial institution credit, should be subject to full transparency. Nothing of consequence should be left to fine print, and all key language details should be laid out clearly on one page.
- Any financial transaction involving 1% or more of annual income should be subject to rescission within 30 days, and the creditor should be required to offer a multilingual 1-800 number that could independently advise you as to the consequences of your undertaking. This number should be operated under the supervision of the government and funded by all those who offer credit.
- The government should offer all creditors an FDIC-like seal of approval if they adhere to regulatory standards that are agreed to by the government, creditors and Main Street interests.
- Government regulators should oversee the marketing of financial products to ensure safety and soundness of both Main Street and financial institutions.
Until a radical transformation occurs in both Americans' credit habits and financial institution transparency and responsibility, financial literacy programs will generally continue to be important but always well behind the dubious schemes of the unscrupulous to lure most of America into a web of unsustainable debt.Today there are many financial institutions that share our concern but fear that loss of market share would result from restraint and full transparency. It is therefore up to Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke, and perhaps the SEC, to take the lead in carrying out the Obama principles.