Financial illiteracy …

Posted in Uncategorized by groffellison on September 29, 2008

We’re a bit perplexed by these somewhat simpleton and obtuse distinctions between “Wall Street” and “Main Street.”  There really isn’t any: both are just as responsible for the current financial mess.  We don’t buy the argument, which attempts to play pseudo-class warfare through clever buzz words.  But, we shouldn’t talk, huh?  We tried to coin “Main Street vs. Martin Luther King Blvd.” in a snappish twist on the campaign culture wars ignited by the GOP political hack-dom.  We’ll take one on the chin for that.  But – at least we got your attention …

Which we guess is the point.  When you put complex policy crisis into simple terms, essentially “dumbing” down complex issues, people listen.  It’s like the term “bailout.” Mike Allen in Politico writes today:

Don’t think “bailout.” Think “economic stability.” Or “financial rescue.” Or “buy-in.”

And definitely don’t think $700 billion. Think, well, who knows? But less. Much less. Promise!

In fact, maybe it’ll even be a profit-maker. Really!

Suddenly worried, administration and congressional leaders are racing to rename and re-price the mortgage bailout even as they scramble to sell the unpopular measure to voters and rank-and-file lawmakers.

There’s a bit of conundrum we policy experts and political junkies find ourselves in.  On one hand, we want to “keep it real” or “break it down” in such a way that everybody, even that blue collar cat in the factory or the single mom catching the bus, gets it right away.  Hence, a habit to simplify the issue – some call it trivializing.  But, on the other, we don’t want to miss the details, and we abhor public stupidity and society’s tendency to bask in its own idiocy.

Both arguments are cogent.  We dig that.  At some point, you have to find the balance.  But, in the meantime, is the American public actually grasping what’s going on at the moment?

To make the point, we single out Columbia University economist’s Charles Calomiris’ point in the Politico Arena earlier:

The preferred stock approach would have protected taxpayers from bearing much risk, provided the capital and liquidity necessary to end the panic and avoid a severe credit crunch, and avoided the need for complex interventions into the financial sector — such as limits on pay, stock warrants to taxpayers, ex post assessments on financial firms to pay for losses. Instead, we will do all these, and will buy assets with no reliable mechanism for price discovery, at ill-defined prices “above fire sale” values. That approach invites errors and abuse in execution, and by moving the process of asset liquidation from New York to Washington, we will add to the job loss in New York’s financial sector at a time when New York is already in trouble. There will also be substantial confusion about stock valuation coming from the uncertainty of ex post assessments and ill-defined warrants mandate (in amounts and at exercise prices to be determined by Secretary Paulson). No wonder stock futures are down.

Translated: “no wonder” people don’t get it.  Garbled academic transmissions hyped by the fluidity of their expert vernacular on a simple conclusion: banking institutions got greedy offering loans to average consumers who took their gluttony for “things” to a whole new level which drove unrealistic expectations and commitments.  This is what happened, on the real, multiplied tens of millions of time: so many wanted so bad to “flip” and “McMansion” their house or were foolish enough to actually buy the cheaply built by overpriced model house in the ‘burbs, we collectively drove up prices, costs of living and property taxes (so we could have what Mr. and Mrs. Jones had on the latest installment of MTV’s “Cribs”).   But, since common folks don’t understand Econ 101, or fail to read between the lines of their mortgage, we all eventually suffer once it reaches a boiling point.  Which provides a rather strong argument for mandatory financial literacy in the classroom, Pre-K to high school.


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  1. One BlackDemocrat said, on September 30, 2008 at 5:49 pm

    We’re a bit perplexed by these somewhat simpleton and obtuse distinctions between “Wall Street” and “Main Street.” There really isn’t any: both are just as responsible for the current financial mess.

    The responsibility of this crisis is not equal. The people who knowingly placed the Goldfish into the tank of Piranhas have a greater responsibility to protect the Goldfish. In a civil society, where social behaviors are not always rational, but largely predictable, we must inject protections (regulations) that are real barriers to harm to all parties. Economic Darwinism is dumb.
    Financial literacy is not the real problem. We need fair regulations that protect people who lack real power in financial transactions. Literate or not. Think about it – you’re a “literate” guy – what leverage or power do you have when you buy a cell phone? Except for choosing a company and a plan, you really can’t influence one term or clause of the contract that you sign. Do you really feel like an equal participant when you play in that game? If you’re like most, you signed a 1-2-3 year commitment without reading a word of the contract. You simply hope that somewhere along the way, a legal framework exists that will not punish you for signing that contract of adhesion. The reality is in most cases where big business meets little guy – the deck is completely stacked against the little guy. His “literacy” cannot match the speed or power at which the big business can play the game. And furthermore, having undue (financial) influence over the rulemakers, the referees, the umpires, the commisioners, etc makes it laughable to suggest that a level playing field exists. The notion that both sides are equally responsible is ludicous.

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