How to Live with a Financially Illiterate Population 7 comments
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John Carney is right: a very large number of Americans is always going to be financially illiterate, and there’s nothing we can do about it. Indeed, if we try too hard to do something about improving financial literacy, there’s a good chance we’ll only end up creating a new cohort of overconfident financial illiterates who think they understand things when they don’t.
This is why we need a Consumer Financial Protection Agency: to make sure that people buying financial products don’t end up buying something that’s going to end up exploding in their face. As Elizabeth Warren so frequently says, we do it for toasters, we should be able to do it for mortgages and toasters and annuities. There’s a decent case to be made that we can and should give a decent financial education to people starting up small businesses. But there’s not much empirical evidence that it works for people more generally.
(Via Konczal)
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> jack
In the revised introduction to "The Ascent of Money", Niall Ferguson lists as one of the 3 major insights he gained while writing the book, "equality and its absence".
A few people are financially literate. Everybody else is less so. Ferguson writes, "But finance also exaggerates the differences between us, enriching the lucky and smart, impoverishing the unlucky and not-so-smart. ...The rewards for 'getting it' have never been so immense. And the penalties for financial ignorance have never been so stiff."
If we can agree that what distinguishes developed countries from less developed is the presence of a flourishing middle class, then the widening income gap between the financially savvy and the rest of the population can be seen as a devolutionary force. The middle class is becoming poorer because the benefits of the economy flow disproportionately to the financially savvy and lucky at the top of the food chain.
People who know how to make things and build things are getting poorer. People who know how to finance things are getting richer. This trend leads to a rich financial aristocracy ruling a population of impoverished peasants. I am not speaking for Ferguson when I say that this state of affairs is the ultimate outcome of 'the ascent of money'.
I don't think this is a desirable outcome. It is economic prowess and innovation that creates wealth. Financial prowess and innovation merely redistributes ownership of that wealth. Conservatives and libertarians who bemoan government welfare state redistributionism are beguiled into celebrating financial welfare state redistributionism as "market outcomes". They are deceived. These are not "market" outcomes.
Since the 1982 Latin debt default big finance has been a client of the corporate welfare state. A recently publicized Fed missive from that era shows that 7 of the 8 largest US banks were rendered insolvent by their exposure to that bad bet. In Canada 4 of the big 5 banks were similarly affected by their exposure to the Latin default.
Western banks malinvested Arab petrobillions into Latin American resource plays, creating overcapacity. When all that new production came onstream commoditiy prices collapsed and the Latin governments had insufficient revenues to service their development loans, so they defaulted. Latin American resource development was the first of our recent debt bubbles to burst. The bust rendered insolvent all the overexposed banks. And each time since 1982 we have bailed them out.
So big finance is not big and profitable due to "markets". It only still exists due to "bailouts". Capitalism would have meant the bankruptcy and dissolution of those banks. Smaller players would have picked up their assets at bankruptcy sale prices. Smaller players would have become bigger, and probably lent into the next bubble, and they in turn would be bankrupted and their assets picked off by a new set of players.
Each cycle of malinvestment and bankruptcy redistributes wealth from the formerly wealthy to the newly wealthy. Everybody makes mistakes, and fails. As the Chinese say, "From shirtsleeves to shirtsleeves in 3 generations."
Nobody can become "too big to fail" if they are made to pay for their malinvestments in the normal capitalist way. But since 1982 big finance has been in the process of capturing its regulators. Laws are made to protect them from their mistakes. Laws are modified to let them 'earn' their way out of insolvency, like borrowing at 0% from the Fed and 'investing' in Treasuries paying 3.5%. This is a pure transfer of money from the taxpayers who ultimately fund Treasury interest to the failed banks who collect the interest payments.
Finance has become way too important a component of modern developed world economies. Insofar as it funds productive investment by intermediating between passive savers and active innovators, finance is the engine that drives wealth creation. But when finance ceases funding economic activity and only finances wealth redistributions by betting on various financial instruments, the business cycle has reached the "speculative" stage that is supposed to end in collapse of the malinvestments and a redistribution of financial and economic power to solvent players from insolvent. We have not let that happen.
Those at the top of the corporate ladder are, for the most part, our best and brightest. And I believe that it is right and good for the system that they receive more wealth and income than those of us lower down in the chain.
But there has to be a limit to the disparities of wealth and income produced by this arrangement.
The 'corporation' is a creature of statute. We should not be afraid to fine-tune statute to minimize this unequitable, unjust and infinitely growing disparity between the lucky and smart on one hand and the unlucky and not-so-smart on the other.
In the meantime, show the ones who want to learn how to do it, and the ones who do not want to learn - let them go. You can NOT help someone who does not want to be helped or teach someone who does not want to learn.