Maybe the Problem is Us

Earlier this week I stumbled across a surprisingly on-target quote about what got us into this economic mess from, of all people, Treasury Secretary Timothy Geithner.

The failures that led to this financial crisis were many. Banks and investors took on large risks, risks they did not understand. Washington allowed those risks to build up unchecked. And in communities across the country, Americans borrowed too much in part because they did not understand how to save prudently, how to borrow responsibly, and they did not understand fully that pension values and house prices, equity prices will not always rise.Geithner with Flags

It’s not a perfect explanation. I wouldn’t make the general statement that  banks and investors didn’t understand the risks they were taking. Some didn’t, but many understood quite well. And I think Washington was more than a passive observer of the whole mess.

But the blame laid at the feet of Wall Street and the government is mostly pro forma here. What Geithner is saying is that, as it turns out, a widespread lack of financial acumen amongst ordinary folks was at least as damaging as the foolishness amongst the bankers and bureaucrats. In the immortal words of Pogo "We have met the enemy and he is us."

Welcome to the club, Tim.

Politely ignoring the gap between an increasingly sophisticated economy and the capabilities and knowledge of the typical consumer will not make the problem go away.

Certainly, it is hard, particularly for government officials, to blame ordinary people, i.e. voters, for much of anything. For example, the irresistible bias in the media and elsewhere is to consider those that borrowed more mortgage than they can now pay back to be the victims and the faceless corporations who are getting stiffed as the villains.

I am not suggesting a reversal that black-white dichotomy. I prefer gray: both borrower and lender screwed up. But believing, as many people do, that consumers cannot possibly be held responsible for a bad mortgage because it is the lender’s, and only the lender’s, job to determine if a loan can be paid back, ought to be considered absurd. Instead, it is taken seriously.

When you get down to it, the problem is not just that many Americans do not understand personal finance as they should. It is the widespread attitude that it is unreasonable to expect Americans to understand personal finance as they should. You see this in, for example, the enthusiasm for opt-out schemes for 401(k) plans. Obviously, ordinary workers don’t understand the importance of saving. Rather than waste effort trying to explain it to them, just put them in the plan by default.

Well, it seems that the mandarins in the Obama administration have had something of a change of heart. Perhaps the ordinary folk can be educated after all. The Geithner quote is from a newly announced effort to introduce personal finance into high school curricula.

I am not especially optimistic about this program. If nothing else, I am deeply skeptical that the people who are developing the curriculum, and the teachers who will have to teach it, understand enough about personal finance themselves.

But it is a start. They say the first step is acknowledging you have a problem. It is also necessary that you believe that there is something you can do about it.

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