Copyright 2002 eMediaMillWorks, Inc.
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Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
February 5, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2533 words
COMMITTEE:
SENATE BANKING HOUSING AND URBAN AFFAIRS
HEADLINE: FINANCIAL ILLITERACY
TESTIMONY-BY: ALAN GREENSPAN, CHAIRMAN
AFFILIATION: BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM
BODY: Prepared Statement of the Honorable Alan
Greenspan Chairman, Board of Governors Federal Reserve System
February
5, 2002
Hearing on "The State of Financial Literacy and Education in
America." First Hearing in a Series.
I am pleased to be here this
morning to discuss the importance of improving financial literacy and learning
for consumers.
Given the importance of accurate and timely information
in the financial services industry, it is not surprising that this sector has
benefited enormously from the innovative application of new technologies that
have facilitated the development of a wide range of new financial providers and
products. For consumers of household and business credit, computer and
telecommunications technologies have lowered the cost and broadened the scope of
financial services. As a consequence, we have seen a proliferation of
specialized lenders and new financial products that are tailored to meet very
specific market needs. At the same time, the development of credit-scoring tools
and the securitization of loan pools holds the potential for opening doors to
national credit markets for both consumers and businesses. In addition to
technological advancement, deregulation has created important structural changes
in the financial services industry and contributed significantly to creating a
marketplace that is increasingly competitive and highly innovative as a result
of the entry or expansion of new players. Throughout our banking history, we
have seen significant adjustments made to existing policies to enable markets to
respond to the demand for services. These structural changes have heightened
competition, resulting in market efficiencies that continue to help drive down
costs and foster the emergence of increasingly diverse and highly specialized
organizations. Through these entities, which range from banks and brokerage
firms that offer their services exclusively through electronically based
delivery mechanisms to locally based public- private partnerships that provide
counseling and financing arrangements to facilitate access to mortgage credit
for low- and moderate-income families, consumers have increased access to a
variety of credit and savings instruments. Corporations, for example, often
allow employees to self-direct their investments in pension and other benefit
plans, whereas employers dictated such decisions twenty years ago, and the
advent of on-line brokerage firms has enabled individual investors to directly
conduct stock transactions.
For an increasingly complex financial system
to function effectively, widespread dissemination of timely financial and other
relevant information among educated market participants is essential if they are
to make the type of informed judgments that promote their own well-being and
foster the most efficient allocation of capital.
However beneficial,
constant change, of course, can be unsettling, and one challenge we face is
overcoming such anxieties. But just as the rapid adoption of new information
technologies has expanded the scope and utility of our financial products, so
has it increased our means for addressing some of the challenges these changes
pose. For example, just as universities provide remote learning options to allow
students to pursue continuing education via the Internet, consumers can utilize
software to create customized budgets to develop long- term savings strategies
for retirement or their children's college education. In both scenarios,
technological advances represent the opportunity for achieving efficiencies and
exercising preferences, but only when the end users possess the knowledge of how
to access pertinent information and how to capitalize on those choices.
As in the workplace, fostering education that will enable individuals to
overcome their reluctance or inability to take full advantage of technological
advances and product innovation in the financial sector can be a means of
increasing economic opportunity. As market forces continue to expand the range
of providers of financial services, consumers will have more choice and
flexibility in how they manage their financial matters. They will also need to
accumulate the appropriate knowledge about how to use new technologies and how
to make financial decisions in an informed manner.
Indeed, surveys
repeatedly demonstrate a strong link between education and the use of new
financial technologies. For example, data from the Federal Reserve's Survey of
Consumer Finances (SCF) suggest that a higher level of education significantly
increases the chances that a household will use an electronic banking product.
In particular, in 1998, the typical user of an electronic source of information
for savings or borrowing decisions had a college degree--a level of education
currently achieved by only about one-third of U.S. households.
These
most recent data from the SCF exhibit a mixed picture of the financial status of
households, providing evidence that we need to reach out to those who have not
been able to participate fully. For example, while the median real net worth for
all families increased 17-1/2 percent between 1995 and 1998, this trend did not
hold where the head of the household had a high- school level of education or
less, family earnings were less than $25,000 annually, or the ethnicity of the
respondent was non- white or Hispanic. That families with low-to-moderate
incomes and minorities did not appear to fully benefit from the highly favorable
economic developments of the mid-1990s is, of course, troubling, and the data
from the 2001 survey that will be available later this year will warrant a
detailed look. Through 1998 we found that families with incomes below $25,000
did increase their direct or indirect holdings of stock, and more reported that
they had a transactions account. However, they were less likely to hold
nonfinancial assets--particularly homes, which constitute the bulk of the value
of assets for those below the top quintile according to income. At the same
time, one encouraging finding from the survey is that the homeownership rate
among minorities rose from 44 percent to 47 percent between 1995 and 1998, and
according to the Census surveys, the rate edged above 48 percent as of the
fourth quarter of 2001. This trend may be a sign of improved access to credit
for minorities.
Other findings of the SCF through 1998 include the rise
in families' median level of debt burden, financial stress (defined as debt
payments that represent more than 40 percent of income), and incidence of late
debt repayment. The findings showed increases in each of these categories across
all income and age groups, with the highest levels of financial stress among
households headed by people 65 and older and earning less than $25,000 annually.
The recent evident rise in subprime loan delinquencies is of some concern in
this regard.
In considering means to improve the financial status of
families, education can play a critical role by equipping consumers with the
knowledge required to make wise decisions when choosing among the myriad of
financial products and providers. This is especially the case for populations
that have traditionally been underserved by our financial system. In particular,
financial literacy education may help to prevent vulnerable consumers from
becoming entangled in financially devastating credit arrangements. In the quest
to stem the occurrence of abusive, and at times illegal, lending practices,
regulators, consumer advocates, and policymakers all agree that consumer
education is essential to combating
predatory lending. An
informed borrower is simply less vulnerable to fraud and abuse. Financial
literacy can empower consumers to be better shoppers, allowing them to obtain
goods and services at lower cost. This effectively increases their household
budgets, providing more opportunity to consume and save or invest. In addition,
comprehensive education can help provide individuals with the financial
knowledge necessary to create household budgets, initiate savings plans, manage
debt, and make strategic investment decisions for their retirement or their
children's education. Having these basic financial planning skills can help
families to meet their near-term obligations and to maximize their longer-term
financial well-being.
While data to measure the efficacy of financial
education are not plentiful, the limited research is encouraging. For example, a
recent study by Freddie Mac, one of the nation's largest purchasers of home
mortgages, finds that homebuyers who obtain structured homeownership education
have reduced rates of loan delinquency. Similarly, an evaluation conducted by
the National Endowment for Financial Education on its high-school-based programs
found that participation in financial-planning programs improved students'
knowledge, behavior, and confidence with respect to personal finance, with
nearly half of participants beginning to save more as a result of the program.
Another Freddie Mac study of the relationship between financial behavior and
financial outcomes revealed that comprehension of the general principles of
sound financial behavior, such as budgeting and saving, is actually more
beneficial in producing successful financial results over time than specific and
detailed information on financial transactions.
These findings
underscore the importance of beginning the learning process as early as
possible. Indeed, in many respects, improving basic financial education at the
elementary and secondary school level is essential to providing a foundation for
financial literacy that can help prevent younger people from making poor
financial decisions that can take years to overcome. In particular, it has been
my experience that competency in mathematics--both in numerical manipulation and
in understanding its conceptual foundations--enhances a person's ability to
handle the more ambiguous and qualitative relationships that dominate our
day-to-day financial decisionmaking. For example, through an understanding of
compounding interest, one can appreciate the cumulative benefit of routine
saving. Similarly, learning how to conduct research in a library or on the
Internet helps one find information to evaluate decisions. Focusing on improving
fundamental mathematic and problem-solving skills can develop knowledgeable
consumers who can take full advantage of the sophisticated financial services
offered in an ever-changing marketplace.
As I noted earlier, we have
seen the marketplace respond to an increased demand for conceptual job skills by
increasing the range of educational options available to individuals. We are
also beginning to see similar efforts to provide consumers with information and
training that will improve their knowledge about financial matters throughout
their lives. For example, the U.S. military, in response to surveys that
revealed that nearly one- third of enlisted service members reported
moderate-to-severe difficulty in paying bills, has mandated that all incoming
enlisted personnel receive financial education.
Some school systems have
introduced financial-management classes as part of their high-school curricula
and many employers are taking up the challenge as well. At the Federal Reserve
Board, for example, interest in financial education prompted an employee
committee to host a seminar on financial-planning strategies, and our Consumer
and Community Affairs staff recently hosted several well-attended educational
programs for Federal Reserve employees, providing information on qualifying for
a mortgage and managing debt. In fact, in conjunction with National Consumers'
Week, today an additional employee seminar on budgeting is underway
Despite the existence and proliferation of numerous training programs
offered by a wide variety of public, private, and nonprofit organizations,
evaluation of the efficacy of such programs has just recently begun. A study
commissioned and published by the Fannie Mae Foundation recommended that
financial education programs equip consumers of all ages and across all
socioeconomic groups with the ability to know when they need information, where
they can find it, and how to apply it.
The Federal Reserve also has a
keen interest in measuring the effectiveness of financial literacy programs. For
example, we hosted a forum highlighting best practices in credit education
focusing on effective tools and techniques and identifying programmatic
challenges and issues. More recently, we have included studies that evaluate the
impact of such training initiatives in our call for papers for the Community
Affairs Research Conference scheduled for the spring of 2003. Additionally, our
Community Affairs and Public Information Offices have embarked on a national
initiative to highlight the importance of financial literacy and heighten the
visibility of economic education programs. Quantitative study of the quality and
long-term success of education and training will be of particular interest to
the Federal Reserve System, as we develop and distribute a wide variety of
financial and economic literacy products.
Both individually and through
long-standing partnerships with a variety of local, regional, and national
organizations, each of the twelve Federal Reserve Banks and the Board provide
extensive information on these topics to a wide range of audiences, including
school-age children, low- and moderate-income families, and minority and
immigrant populations. The scope of these activities ranges from the sponsorship
of competitions on economic principles for high-school students and workshops on
homeownership and wealth-building strategies to the development of
computer-based tools for understanding mortgage borrowing and creating household
budgets and savings plans. The economic educators of the Federal Reserve System
launched an interactive web site offering students, educators, and the general
public an introduction to the workings of the Fed and the nation's banking
system. The goal is to offer consumers a clearer picture of, for example, how
the Federal Reserve's decisions influence the economy and consequently affect
their monetary choices.
In closing, let me simply reiterate that the
pace of technological change and competitive pressures can only increase. These
changes are affecting both financial and nonfinancial institutions around the
world. We cannot know the precise directions in which technological change will
take us, but as in recent years, the role of banks and other providers of
financial services will surely be significantly affected by the same basic
forces that guide the real economy. Building bridges between community
organizations, our educational institutions, and private business will be an
essential aspect of our efforts to increase familiarity with new technological
and financial tools that are fundamental to improving individual economic
well-being. And the success of such efforts will have a significant bearing on
how well prepared we are to meet the challenges of an increasingly
knowledge-based economy.
LOAD-DATE: February 6,
2002