Financial literacy is necessary to reduce the likelihood that our country will repeat the mistakes that have brought our economy to its knees. Basic consumer education is sorely lacking in our public schools and should be a graduation requirement - not an elective.
Sadly, even the smartest consumers and brightest economists were unprepared for the alphabet soup of creative and complex mortgage products such as YSPs (yield spread premiums), CDOs (collateralized debt obligations) and NINAs (no income no asset loans). Despite this inability by even the experts to comprehend and forecast the consequences of these sophisticated mortgage terms, our current housing crisis - even the entire economic meltdown - has been largely blamed on consumers who, after all, "knew what they were signing."
Some homeowners did abuse the system, exaggerating their incomes, for example, to buy more house than they could responsibly afford. This, however, is a minimal cause of the crisis we are in. Most mortgage fraud was perpetrated by industry insiders such as appraisers, mortgage brokers, title companies, attorneys, and the like.
It is ludicrous to suggest that 10 million stupid, deceived or dishonest homeowners have caused so much economic turmoil. (Thus, I take exception to Jay Hancock's recent reference in The Baltimore Sun to "dumb consumers" and his suggestion that a federal consumer protection agency is unnecessary - in an otherwise fine column addressing the importance of early financial literacy education.) Not only were dishonest consumers a small piece of the puzzle, even the educated and savvy fell victim to the predators' deceptions.
We have begun to take steps in the right direction. As director of research and policy at the Community Law Center in Baltimore, I have developed, and am delivering, a "mortgage literacy" message to a variety of audiences, including homeowners attending foreclosure prevention workshops throughout the state. In July 2008, Maryland established a task force to assess and improve financial literacy education in public schools.
But we must do more. In addition to educating consumers, we need robust regulation of the financial industry to assure that laws are complied with. The industry suggests that regulations must be minimal and need only "level the playing field" among the various financial service providers. Never do the banks or others in industry suggest that the playing field be level between them and the consumer.
