Recently, John Carey at Dealbreaker raised a subject that I also raised a few years ago and that, at the time, engendered some spittle-spewing outrage on some consumer financial advocacy blogs and message boards: the financial illiteracy of most Americans. In a February 2005 post about the fears of some lenders that they would be overwhelmed with inquiries from consumers because of the (then) new requirement that credit reporting agencies furnish consumers with an annual free credit report, I said that I doubted those fears were justified.
If contacts with banks increase, it will be due to a trend of financial literacy generally, not due to the existence of this new right. I've seen no evidence that financial literacy of the average consumer is increasing. While there may be some increased contacts from the financially literate consumer, the numbers of those are in a distinct minority in this country.
Notwithstanding accusations at that time of "arrogance" (which accusations tie in nicely with recent sneers of "elitism" by a critic of this blog), I think that I was on the money. Banks weren't overwhelmed by inquiries about their credit reports.
If I was arrogant, Carey is the Platonic ideal of arrogance of which my feeble efforts are a mere pale reflection.
There's no question that the United States is a nation of financial illiterates, and that this contributed to the decisions of millions of Americans to run up credit-card debts, buy houses they couldn't afford, purchase college educations they can't pay for.
Moreover, Carey doesn't believe that more education would have made people more financially literate or that more financial literacy would have made a difference in any event.
Educated people tend to overrate the value of education (just as intelligent people overrate intelligence). Reality, however, is less enthusiastic about education. Despite decades of civics class, the broad public remains shockingly ignorant of even the most basic political facts. There's little to suggest that widespread financial education can make a meaningful difference in overcoming financial illiteracy in all but a select few. Many people are illiterate because they are, for all practical purposes, uneducable.
What's more, it's questionable that even a financially literate people could have avoided the mistakes that led, say, to the mortgage mess. Some of the most financially literate people on earth lost billions on Wall Street betting wrong on mortgages and derivatives. If a Wharton education can't prevent these kind of colossal errors what are the odds that a semester of high school finance would?
Greed often trumps rational behavior, as can sloth, lust and other basic human "sins." Carey rightly points out the fact that Wall Street Wizards took way too much risk in connection with residential mortgage loans and securities backed by those loans. He doesn't advance a reason, but it wouldn't be unreasonable to suggest that money played a role, would it? I hope this is not an "elitist" viewpoint, but I think that most of those involved in creating the current credit "crisis" appear to have let their need for immediate gratification overwhelm their common sense or at least a sense of caution that you would assume should have been possessed by any reasonable human being. Some participants in the debacle were innocent dupes, and some were criminals, and I suppose we'll only know the relative proportions of these subclasses when we get a chance to look back once this crisis has resolved itself. At the moment, however, I have a hard time believing that the majority of the people on any side of this mess were either innocent or evil. Instead, I think that they were imprudent, often grossly so.
One of Carey's commenters, who appears to be well-spoken and thoughtful, posits that the painful consequences of this meltdown must be brought home to all participants.
[T]he more risk the more people pay attention. When your entire future rests on your successful management of your investments, you pay more attention and you take fewer risks. This is human nature and applies to driving (seatbelts, roadsigns, curbs, painted lines, highway dividers, etc all increase the risk tolerance of road users), health (safer sex practices vis a vis treatment options for STDs, dietary choices vs blood pressure meds, total risk taking vs avg life expectance (sic)), and finance. The more risk in the system, the more cautiously people behave - Moral Hazard is very real and demonstrable, despite the protestations of leftists everywhere.
While I might agree with that view as a general proposition, I think that it has to be tempered. It may be important to let people who act rashly suffer the natural consequences of their behavior, in the expectation that they (or others who observe those consequences) will learn lessons about prudent risk management. However, many citizens will insist that such a purely free market view be qualified by a sense of basic human compassion (whether or not religiously or spiritually inspired) and by the desire to make certain that the sufferings of the "guilty" do not spread to the "innocent" (whether that means "bailing out" Bear Stearns, opening up Fed borrowings to investment banks, or passing some type of legislation to keep the crisis from hurting businesses and consumers who did not participate in the crisis). Those who believe in the law of moral hazard and in the efficacy of the markets to best work through this painful process without the gentle ministrations of Congress will fight to minimize legislation or other outside intervention, and will vehemently oppose attempts by those who are attempting to use the crisis to promote their social engineering schemes. These are some of the basic issues all of us who are interested in the matter are wrestling with and debating as we watch the cynics in D.C. and elsewhere play to their constituencies, push personal agendas, and protect their bureaucratic turf.
More financial education and more financial literacy appear to be worthy goals, even if people like Carey remain skeptical that they will be achieved. However, I think that the entire topic of financial literacy and education has to be qualified with the observation that many people, educated and uneducated, intelligent and unintelligent, appear to suffer, some consistently and some sporadically, from "willful blindness." No matter how much people know or how well they are able to reason, no matter how much a particular action might appear to be illogical to an objective observer, human beings are masters of self delusion, ignoring the risks, turning their rational minds to the "off" position, and doing the damnedest things. We've seen it before, and we'll see it again.