Last Friday, Ben Bernanke held a press conference to update the world on the progress of recovery in the financial system and financial reform. Ending as usual by taking a few questions, an audience member asked what process of education or information sharing might help prevent future crises, saying:
“There is an unusual opportunity now, in terms of communications skills. The team in the Obama administration can talk to my kids, my parents, my relatives about individual financial responsibility.”
Beginning his response, Bernanke joked that he was reminded of teenage drivers who are caught speeding and then have to sit and watch films about car crashes. Turning serious, he then said words that may never have been spoken by a Fed chairman or any other central banker (drum roll, please):
“Communication is very important.”
And he continued, “Personally, I’ve tried some different venues to reach a broader public, to try to explain what happened in the crisis. I have been involved with public service announcements, too…We can think about appropriate communications venues and appropriate ways of communicating to make sure people are interested in seeing the output, so that people can see responsibility on both sides of the financial equation.
“It is more incumbent on us as supervisors, regulators, financial leaders, political leaders than it has ever been to try to work on both sides of the lender borrower relationship. So, we are talking about lender regulation and supervision and rules on transactions.
“But in free society if we want markets to work, we need to make sure borrowers, savers, and investors have the information they need to make choices.”
For those of us who have a role in how information about financial products and services is shared, and how financial results and investment performance are communicated, this is an important dimension of the discussion about recovery and reform.
The past versions of financial education, although well intentioned, have been limited in their effectiveness. I’d like to say I have data to support that statement, but instead, I think it is sufficient proof to look at the historic savings rate in the US and the recent trend in other developed countries, the degree of personal leverage that most people came to believe was acceptable in recent years, and the looming retirement funding crisis that was already dangerous to the economic stability of large swaths of the world’s population before the events of the past 12 months. More simply stated, when you can look at the question “what were they thinking?” about any major situation, it usually means that “they” were not. What were millions of people thinking? Certainly many were likely thinking, “Interest rates are low, so it is the right time to borrow a lot, and since rates are low, I can get bigger returns by taking more risk in investments, if I make any.” Or perhaps, looking at the mortgage they thought they could never afford, they echoed what every source of information seemed to be saying, “This time it’s different.”
Just regulating what financial institutions can do and how they do it will not make individuals better consumers of financial products, or better guardians of their own and their families’ welfare. Even a perfectly constructed consumer financial product in a perfectly transparent and liquid market can be misused by an investor who really does not understand what he or she is buying.
There are some who may argue that it is impractical to place more emphasis on financial education because it is too complicated and people aren’t interested. But that is like saying that individuals can’t be taught how to improve their own health; that only better regulation of doctors, hospitals and pharmaceutical companies can make people healthier. Or to mangle Mr. Bernanke’s metaphor, that is like saying drivers don’t need better training as long as cars are made safer.
Of course, whether it’s health, or driver safety, or the stability and growth of the financial markets, the well being of the individual, the provider, and society are all linked. There was a time in health education when some people thought that communicating information about chronic diseases and the link to diet or exercise was too challenging and wouldn’t work. But today, millions of people at least understand the connection, and many act on it. Communicating to consumers about the benefits of owning a computer was once seen as a ridiculous notion. Today, in the wake of big problems, the need for better financial education and more effective financial communication is very clear.
There have been many ongoing efforts to communicate to individuals about money, financial security, how to budget, save, use credit wisely, and possibly, invest. The space and time devoted to this subject grew dramatically after the end of fixed commissions on Wall Street a generation ago, coupled with the rapid demise of the defined benefit/guaranteed pension plan in America. Both created a generation of self-directed individual investors. But ultimately, that was a small slice of the total population, all of whom need to know the basics of personal financial management.
So back to Mr Bernanke’s epiphany, if that isn’t too strong a word, on behalf of all stewards of financial integrity. Communications is important—even if it is difficult, complicated and long overdue.
As he says, it has to address both sides of the equation. Comprehensive, non-marketing financial education might be a requirement for financial institutions in the future, as opposed to voluntary efforts today—some of which have been very extensive. As is the case now, maybe various sectors of the financial services community will support industry associations that do the education for the whole category. Again, though, with the emphasis in the future on education and building better judgment among individuals, not just marketing by another name.
Perhaps there will be tests of efficiency rather than government mandates on how much or how often institutions or issuers should have to carry out personal financial education. For example, why are high school students in many schools given little practical information on personal finance, but lots of time for safe driving and safe sex. Could we not have a national personal financial literacy standard, or local standards? I like the markets better than the regulators in many situations, but really, unless we choose a longer time horizon than we can currently afford, how will market efficiency help rebuild 401k portfolios that were drained by individuals to pay for current needs or desires rather than held for a solid retirement.
Putting the onus on the individual, in a shared system, is important. We need to find ways to introduce and encourage financial literacy as an expectation for those who incur debt or take risk in the market. Maybe, for example, individuals can be given an incentive with preferable interest rates or investment returns if he or she has passed personal financial education certification.
Or at least we need to all watch the personal finance equivalent of one driver’s education film I remember well from almost 40 years ago, “Mechanized Death.” We could call it “Leveraged Death.” Coming soon to a bank, broker or insurer near you.
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