FINANCIAL LITERACY IS NOT ENOUGH
BY JULIANNE MALVEAUX
Once upon a time, people had passbooks for their savings accounts and fixed
rates for their mortgages. Banks were open from ten in the morning until 3
in the afternoon, and many knew their neighborhood banker. People paid for
most things – with the exception of their cars and their homes – on a cash
basis. I’m not sure when, exactly, banking and finance got more complicated,
but in testimony before the Senate Banking committee, Treasury Secretary Paul
O’Neill contrasted that much simpler time to the financial world of today
when “Mortgage financing comes in a variety of packages, credit card use is
universal, and savings investment vehicles range from CDs to mutual funds.”
The Treasury secretary doesn’t have it all right. Credit card use may be
universal for some, but others have such bad credit that they can’t get a
card, even a secured one. Indeed, those who are poorest, and who could
benefit from some of the bargains on the Internet, can’t get access to them
because they neither have the credit cards nor the computer access to take
advantage of them. Still, as Rev. Jesse Jackson asks Congress to make Enron
pensioners whole, O’Neill and Federal Reserve Board Chairman Alan Greenspan
testified that too many Americans are “financially illiterate”.
Senate Banking Committee Chairman Paul Sarbanes (D-Md.) convened hearings
on financial literacy because he says our nation needs to develop “a national
strategy to promote financial literacy and education.” In addition to
Greenspan and O’Neil, the committee heard from Securities and Exchange
Commission Chairman Harvey Pitt, and a set of consumer advocates. A common
theme among those testifying was the need for more financial education so
that consumers are better equipped to resist credit’s siren call, or the
temptation of predatory lending. With consumer bankruptcies at a high of
1.45 million, and more than $1.65 trillion (another high) in consumer credit
outstanding, the need for financial literacy has never been more pronounced.
Yet, according to the Consumer Bankers Association, most large banks
sponsor financial literacy programs, with efforts aimed at homeownership,
credit counseling, small business development, and public school programs.
Many work with nonprofit and community organizations to get the message of
financial literacy out there. Yet there is a glaring gap between those who
are equipped to “work” the banking system, and those who are victimized by
it. Part of the gap certainly has to do with education, but the Enron
situation reminds us that the poor pay more, and that double standards
proliferate in the financial service industries.
With Enron, corporate officers could sell stock during a time period
where employees could not. The company was aware that stock values were
falling, and they even contemplated alerting their employees before freezing
access to the pension fund. Ultimately, they decided not to alert their
employees because they could not be assured of altering all of them, and
because they felt they’d be sued if some got information and others did not.
Now, they’ll be sued because they hoodwinked their employees and allowed
senior corporate officers to cash in their stock, while others did not have
the opportunity. The contrast was pointed in testimony that two women made
before the Senate Governmental Affairs Committee this week. On one hand
Cindy Olsen, executive vice president of human resources at Enron, cashed in
stock options to earn $3 million when the Enron stock was near its peak. In
contrast, Deborah Perrotta, and administrative assistant whose welfare should
have been Cindy Olsen’s concern, lost her job, $40,000 in retirement funds,
and most of her severance pay.
Access to information perhaps shaped the two women’s decisions. Perrotta
was encouraged to hold ‘em, getting memo after memo from former Chairman Ken
Lay about the strength of Enron stock. Olsen, on the other hand, knew when
to fold ‘em, cashing out at the stock’s peak. Increased financial literacy
might have pushed Deborah Perrotta to hold a more balanced portfolio. At the
same time, Perrotta and Olsen were playing by different sets of rules, facing
different constraints.
The same is true with financial literacy. No one would discourage increased
financial literacy, but those who live at the periphery of the economy have a
different set of rules than those who are in the economic mainstream. At the
periphery there are more than 10 million “unbanked” Americans, who have no
bank accounts at all. Some can’t get bank accounts because somewhere along
the way they bounced a check or something. They aren’t getting the mailings
that promote financial literacy, they are getting letters from predatory
lending companies that will help them fix their porch for 30 percent interest
and fees.
The Senate Banking Committee needs to consider the fact that banking is a
public good, and that entire populations are pushed to the periphery when
they can’t develop banking relationships. Promoting financial literacy is
wonderful, but mandating low-cost access to banking for the low-income is one
way to insure financial literacy. Alan Greenspan suggested that high
schools, colleges, and employers get involved in the financial literacy
business. That’s a good thing, but it would be even better if special
attention were directed at those at the bottom, those who have no access to
banking or credit.