Why the Economic Crisis is a Good Thing

Here is a recent op-ed article I just submitted talking about how we should use the current economic situation as a "wake up call" to promote better financial literacy education:

In case you’ve been living under a rock or in a cave, we are currently in the midst of a widespread financial crisis and looming recession. But before lapsing into a coma induced by a glimpse at your most recent 401(k) statement, realize that there may be a silver lining in this ever-darkening cloud, at least for those who choose to notice it.

The roiling financial markets might prove to be the “slap in the face” that consumers and educators need to realize the importance of teaching financial literacy in the school system. Shockingly, only three states currently require a semester-long course devoted to personal finance as a high school graduation requirement. The results from a 2008 survey conducted by the Jump$tart Coalition – a financial literacy advocacy group for students ¬– prove that more is needed. More than 6,500 high school seniors took the group’s 31-question survey and, in general, could only correctly answer 48.3 percent of the questions. That’s down from the 2006 survey when the mean score was 52.4 percent.

It’s human nature to be reactionary. We’re not clairvoyants – well, most of us aren’t – and cannot be expected to predict when disaster will strike. But in many cases, such as in the current financial crisis, the fissures that lead to mass failure aren’t impossible to read and are a long time in forming.

Now, fingers are flying, quick to place the blame for worldwide economic ruin as far from themselves as possible – Washington, Wall Street, real estate brokers, mortgage lenders, and the regulators who were charged with supervising them all. The argument over whether mortgage lenders or the home buyers are responsible for using the poor financial instruments that have played a major role in tens of thousands of foreclosures as well as the fall of some of the nation’s largest companies may never be settled.

The truth is, we are all responsible. Consumers must accept personal responsibility and cannot count on anyone else to take care of their financial health as well as themselves. Whether devious or not, real estate agents, mortgage lenders, car dealers, credit card companies and the like have a financial interest in making the deal, regardless of whether the deal is the right for the individual. There is certainly no direct financial alignment of interest between the two parties.

The mindset that we can live beyond our means is an underlying theme to the current crisis. Consumer acceptance of fiscal limits has become nearly non-existent. Why would you limit your spending power when it’s so easy to extend your credit? During the past decade, financial instruments have become exceedingly complex, but at the same time easier to access.

While most high school or college students are receiving their first credit card solicitations, a majority of them don’t even understand how finance charges will accrue. Only 48 percent of the Jump$tart survey participants were able to point out that a credit card holder who only pays the minimum amount on monthly card balances will pay more in annual finance charges than a card holder who pays the balance in full. Financially uninformed students soon become financially unaware adults.

According to recent survey results from www.FinancialLiteracyQuiz.com, only 40 percent of participants knew that their liability for credit card fraud is limited to $50. The Web site’s 50-question multiple-choice quiz covers such topics as credit and banking; real estate and mortgages; car buying; taxes and insurance; and saving for the future. Sadly, the average adult quiz taker scores just 53%, similar to the Jump$tart survey administered to students.

If we can’t teach students about the mechanisms that dictate credit financing, how can we expect them to decipher the terms of an adjustable rate mortgage or the understand the consequences of a financing plan that begins with the borrower owing 110 percent the value of the home?

While legislators and regulators are discussing how the financial markets can avoid further stress, parents, educators, business leaders and the general public should be addressing how the future generations can avoid the mistakes of their predecessors. Every state should have dedicated financial education classes as a required part of its K-12 curriculum. There is no excuse for lack of knowledge of this practical life skill in a subject that impacts our lives everyday. We require students to study trigonometry and physics, which a vast majority of them will never use outside of the classroom. So why not arm them with at least the basics of leading a financially secure life?

We do not need to waste time fretting over the current state of the financial markets. No amount of worry will soothe the system. Instead, we need to wake up and smell the opportunity that this crisis presents — an opportunity to demand that the future will be one of financial enlightenment rather than fiscal ignorance Regardless of the economic climate in the future, the best defense is a financially educated consumer.