YOU DON'T hear many good things about Enron Corp. these days. But if there's one positive aspect, says AARP's president, it's that the Enron debacle has highlighted the need for Americans to understand the investment process.
Numerous studies and surveys in recent years have revealed that Americans' financial knowledge is inadequate for a world where they must fund their own retirement and face a growing choice of mortgages, credit cards and investments.
The consequences of not knowing financial basics are costly, according to statistics compiled by the Senate Committee on Banking, Housing and Urban Affairs:
As many as half of those who borrow from subprime lenders could actually qualify for cheaper conventional loans. Instead, they end up paying at least $3 billion more a year in interest than necessary.
An estimated 10 million American adults have no relationship with a bank or other mainstream financial institution. As a result, millions of consumers end up using expensive check-cashers that charge an average of 9.36 percent to cash a personal check.
The median amount of family debt from 1995 to 1998 grew 42 percent to $33,300.
Debt has engulfed young adults, too. Undergraduates carried an average credit-card balance of $2,748 in 2000, a 46 percent jump in two years. Nine percent owed more than $7,000.
Nearly half of 18- to 34-year-olds admit to living beyond their means. And bankruptcies of 18- to 25-year-olds have nearly doubled from 1991 to 1999, when 118,000 young adults filed.
It's these sorts of statistics that prompted the Senate banking committee last week to hold hearings on how to develop a national strategy to promote financial literacy. Though right now there are good financial education programs offered by schools, consumer groups and federal and state agencies, many Americans are falling through the cracks, said the committee's chairman, Democratic Sen. Paul S. Sarbanes of Maryland.
"How do we establish this Financial Literacy 101?" Sarbanes asked. "Where should that happen? Who should do it?"
Many suggested teaching financial education in school.
Sen. Charles E. Schumer, a New York Democrat, said he would urge high schools to make financial education a required course, whereas Treasury Secretary Paul H. O'Neill said financial concepts should be woven into lessons, but not taught as a separate course.
Federal Reserve Chairman Alan Greenspan suggested a need for a better grasp of basic arithmetic.
"If you don't understand how to multiply and divide, you will not understand finance. Period. It's crucially important that at a very early age, that people understand numbers," he said.
Even some well-educated people are embarrassed to admit that they don't understand financial literature now available to help consumers, Greenspan said.
"The reason they don't is that they aren't used to dealing with numbers," he said. "I learned fractions very young because I had to calculate baseball averages. I had incentive to do it. By the time I got to fractions in school, I was a whiz, provided it had something to do with ... something under point-four."
The earlier financial lessons start, the better, many agreed. By the time some students reach middle school and high school, they have already incurred debt, said H. Patrick Swygert, president of Howard University.
"It ought to start as a function of primary education," he said. "Very young people in the second and third grade can be exposed to a foreign language and successfully so. We are clever enough to come up with ways to expose them to financial literacy as well as another language."
But Esther Canja, president of AARP, advised that financial education must also target older Americans, particularly women, who must make major financial decisions about retirement and who are increasingly relying on investment income.
Experts varied on the role they saw the federal government playing in financial literacy.
Stephen Brobeck, executive director of Consumer Federation of America, suggested a study of financial education needs and whether a federal Office of Financial Education should be created to conduct research and review the effectiveness of new and existing education programs. The office, he suggested, could be operated by the Department of the Treasury, or Education.
Others said the government should encourage or help coordinate education efforts by private and public sector groups. And some said there is just so much government can or should do.
To the suggestion that those younger than 21 must have some financial knowledge before they could get a credit card, O'Neill responded:
"It's a complex issue because the same time we are saying, well, maybe young people shouldn't have access without some special provisions until they are 21, 18-year-olds are serving in Afghanistan," he said. "At the federal level, we have to be very careful about how much we interfere with the rights of individuals to make their own decisions."
Of course, during the two days of hearings, Enron's name popped up. The Houston energy trader, now under bankruptcy court protection, is being investigated for questionable accounting practices that left workers and other investors in the dark about the company's financial condition.
Financial literacy can't solve all problems, and there's a need for strong legal protections and vigorous enforcement, Sarbanes said. "You can be financially literate, but if not given the proper information, you can't do very much," he said.
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