The Baltimore Sun recently published an op-ed piece by Maryland Comptroller Peter Franchot, supporting proposed legislation in the Maryland General Assembly to require all high school students to complete a stand-alone course on financial literacy before graduation. Franchot argues that educating our children in the basics of financial literacy will help avert future economic downturns. As is typical of many people in the government, he blames the recent economic crisis on bad choices made by consumers. Mr. Franchot writes:
"Thus, in far too many instances, we entered into financial commitments that we couldn't afford, with terms and conditions that we didn't truly understand, in order to buy things that we really didn't need. If more Marylanders had the benefit of sound financial literacy education, fewer of our friends and family members would be facing the loss of homes and life savings today."
I think teaching financial literacy to high school students is a good idea. But, the problems with the financial system go far deeper than a new high school course will fix.
First there is the problem with "stand alone" courses. To understand personal finance, students need to understand more about math, especially arithmetic, than they currently do. Many consumers made bad decisions on loans because they did not understand the basic math behind interest and payment calculations. My own belief is that personal finance education should be woven into current math courses. It would make math more interesting, and therefore relevant. Too many students, and adults view math as a "stand-alone" subject with no connection to their daily lives. If consumers learned just how many dollars their lack of mathematical knowledge costs them in the marketplace, they would see that math is an important subject.
Second there is widespread corporate-government collusion to deceive consumers and then blame them for falling victim to the deception.
I gave a talk on the U. S. mortgage crisis at an international conference on science in society at Cambridge University in the United Kingdom this past summer. In academic jargon the paper I presented was titled: "Quantitative Reasoning Applied to Modern Advertising." The term "quantitative reasoning" just means applying arithmetic to real-world problems. It is a way of thinking that is second nature to scientists, but unknown to most people outside of science.
I argued that if consumers learned some of these quantitative reasoning methods, they could greatly improve their day-to-day financial decision-making. I concluded that the best way to effect economic change is through the market. I said that people selling mortgages act according to their financial interests. In response, consumers need to educate themselves to make choices that are in their best financial interests.
After my presentation, an Australian economist, in a private conversation, disagreed with my conclusion. He said that home pricing, and mortgages are too complex for the average person to understand. It is incumbent on the government to regulate the market. He said that Australian government did not allow the kind of toxic mortgage products that brought down financial institutions in the US and UK, and wiped out millions of homebuyers. As a result, Australia did not have a mortgage crisis.
I admitted that my American bias influenced my conclusion. I told him that in the United States, government and corporate corruption is so institutionalized, that meaningful regulations to safeguard the financial well being of average Americans would never be implemented. From my viewpoint, education is the only realistic way American consumers have to protect themselves.
But, my viewpoint is not meant to excuse corrupt behavior. If you leave your house unlocked and are robbed, you made a bad choice. But, a crime was still committed. If you agreed to a mortgage that you didn't understand, you made a bad choice. But, the lender should have made sure that you understood the mortgage. Instead, lenders created mortgages designed not to be understood.
That is why I get so angry when I see government officials like Mr. Franchot blaming uneducated consumers for the financial crisis. Education is needed, but it will only go so far in fixing our financial problems. It will not replace trust. All parties to a contract must act in good faith for our financial system to work.
Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy