It will be interesting to see how people reflect on this economic crisis in years to come. Will it be remembered for the trillions of dollars the government will likely throw at the problem before it’s over? Will it be remembered for the failures of financial industry giants like Bear Stearns and Lehman Brothers? Will it be remembered as the era in which millions of people lost their homes due to the predatory practices of some unscrupulous lenders? Will it be the defining issue for a president past or future?
As a financial journalist, I’ve heard many of my colleagues speculate on how this will play out, and how it will be remembered. Quite frankly, it’s what I’m not hearing that is making me nervous. If we are not looking back on this period in our history as the moment we tackled the financial-illiteracy crisis in this country once and for all, we will no doubt face more hard times down the road.
The Heart of the Matter
At its heart, this financial crisis is a story of financial illiteracy: People signed up for mortgages they did not understand. They did not understand how their debt levels would change and how quickly that would happen.
A survey commissioned by Bankrate.com found that a quarter of the respondents didn’t even know what kind of mortgage they had. The Consumer Federation of America found that more than 40 percent of participants in a survey it commissioned did not know that maxing out a credit card lowered their credit score.
Even worse, a survey conducted in part by Roper Public Affairs and Media found that 57 percent of this country’s late-paying mortgage borrowers don’t know their lenders may offer alternatives to help them avoid foreclosure.
Borrowers weren’t the only ones in the dark. Washington did not understand the complex financial instruments Wall Street created to capitalize on our mortgage debt—right under Uncle Sam’s unwatchful and unregulating eye. And many of the financiers who created the securities did not understand the tangled, leveraged web that they were weaving.
As we watch lawmakers and financiers around the globe struggle to throw money at the credit markets so that companies that rely on them to borrow money can to do things like pay their employees, turn on their lights, and honor their loans, etc., it’s easy to point fingers and wonder how things got off course.
Keep in mind that while the system took advantage through things like predatory loans and “Wild West” trading tactics, it was our individual choices about spending and debt that really got this ball rolling…Our individual choices to remain blissfully ignorant about our personal finances as long as we could have the things we wanted to have.