In the last two years, consumers were the beneficiaries of more financial reform legislation than America has seen in generations. Over the recalcitrant foot-dragging of the financial industry, which (enabled by government inattention and consumer irresponsibility) arrogantly caused this nation’s biggest economic crisis since 1929, Congress finally passed basic reforms that empower consumers to take better control over their financial lives.
Consider the legislations that have passed in the last two years:
- The CARD Act limits credit card companies’ ability to unilaterally raise fees and interest rates, and requires them to explain credit card terms to consumers in plain English.
- The Dodd-Frank Wall Street Reform increases oversight and requires more transparency from the financial industry.
- The creation of the Consumer Financial Protection Bureau, designed to ensure that financial products are safe for consumers, is also the result of the Dodd-Frank bill. It was inspired and shaped by Elizabeth Warren, arguably the most famous consumer advocate in the country and now a Special Presidential Advisor charged with setting up the new agency (she’s also the odds on favorite to run it).
- The HITECH Act empowers federal regulators to go after companies that fail to keep our health and identity information safe.
Not bad. We can all relax now, secure in the knowledge that these new rules will protect us from a dangerous and often predatory financial world. Right? Of course not. Let’s say that while these new rules indeed represent a huge step forward for consumers, they are all works in progress. The big banks are still too big. They still have the power to be banks, insurance companies and Wall Street investment houses at the same time–creating dangerous conflicts of interest that likely will cause another big recession in the not-too-distant future. Nevertheless, the reforms of the last two years represent a huge step forward for consumers.
But still it’s not enough. Legislation alone will never be enough.
Why? Because it doesn’t matter how simple and easy-to-read new credit card contracts and mortgage documents will be if consumers don’t actually read them. We can pass all the bills and promulgate all the rules we want. But consumers who don’t take responsibility for their own financial well-being will always be targeted by peddlers of risky financial products.
The ultimate guardian of the consumer is the consumer– and these days far too many Americans simply aren’t up to the task. Financial literacy in this country is abysmal, which isn’t surprising given that we generally don’t teach this stuff to kids in school. According to one study I came across conducted by the government’s Financial Literacy and Education Commission (FLEC), most teachers aren’t teaching this stuff because they don’t feel that they themselves are up to the task. That, of course, means that the responsibility falls on the parents, who aren’t exactly experts in the subject either. According to Charles Schwab’s most recent Family and Money Survey, while 70% of parents have taught their teens how to do laundry, just 29% have taught them how credit card interest rates and fees work. And only 14% have taught their kids what a 401k plan is.
I’m not big on predictions, but if you’re looking for one from me, here it is:
In 2011 Americans will still be pounded by banks and other financial companies who are predictably intent on exploiting our lack of sophistication in the areas of credit, identity and all things personal finance. And while we’re at it, 2012, 2013 and 2014 will also be similarly disastrous for the financially illiterate. The new rules and the CFPB will help, but as long as we fail to prioritize financial literacy as a nation, the cat and mouse game between banks and regulators will continue to ebb and flow, as it has for generations.
This isn’t the first time America has seen an influx of financial regulations as a result of a period of financial distress. The stock market crash of 1929 and the Great Depression that ensued thereafter gave birth to the Glass-Steagall Act of 1933, the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. I won’t go into the purpose of each of these (we’ve linked to each of the law’s Wiki entries if you’re interested) but suffice it to say, they were designed to protect people–and our economy in general–from profiteers who placed more value on short term personal gain than the overall strength and stability of our economy as a whole.
These profiteers will always be out there and they will always be looking for a way to make a killing, regardless of who gets hurt. And there will always be regulators trying to keep them in check. Sometimes the regulators will have the upper hand, and sometimes the profiteers will. Right now it appears that the momentum is with the regulators, which is certainly nice, but it won’t last. It is my fervent hope that they take advantage of this opening, not just by trying to close some loopholes, but by crafting an actual policy to help Americans understand where the hell all their money is going. It may take the better part of a generation to effect this change but we might as well start now because things aren’t getting any better.
We’ll be looking for real leadership on this from Elizabeth Warren and the rest of the Jedis over at the CFPB as the government’s other financial literacy initiatives seem sorely lacking in our estimation. I’ve been perusing FLEC’s National Strategy for 2011, and let’s just say that it’s underwhelming. It’s really a collection of goals, without an actual strategy for making them happen.
Here’s an idea we’ve been tossing around at Credit.com. Include financial literacy questions in the math component of the SAT. We’ll be writing more about this particular plan in the coming weeks but I guarantee, if you make a kid figure out the amortization schedule of a $250.00 debt, assuming minimum payments on a 24.99% APR credit card, then you’ve got yourself one savvy credit card shopper… who might be able to teach mom and dad a thing or two.
Originally posted at Credit.com.