Is Financial Literacy Education the Solution to Credit Crises?

Article excerpt

"Some of the country's economic woes might have been prevented if students were taught financial literacy, supporters of a bill that would do just that told a Senate committee" (Koranda 2009)

"...our education system is not providing the essential skills necessary for Canadians to understand money management. As a result, Canadian households have been buried under a mountain of household debt and have forgotten the importance of saving and asset building, lessons that boomers should have learned at their parents' knees. We are not talking about learning the specifics of investment products or understanding what a short is. It's much simpler than that. There are a few concepts central to good money management - which we seem to have lost in schools and households that are the foundation of financial prosperity. " (Hamza & Bates 2009)

"You don't have to look very far for relevancy to see the bad decisions consumers made with these subprime loans. Financial literacy is very important in our society. The education system needs to find some way to provide that to our youth." (Loew 2009 quoting United States Rep. Gene Whisnant, RSunriver)

Financial literacy framed as the solution to contemporary economic problems

The financial meltdown of late 2008 was a prominent news story, and fodder for discussion among many. In response to the global financial crisis, the media has touted financial literacy education as a solution to our economic problems. Through such education, consumers are presumed to become "responsible" and "empowered" market players, motivated and competent to make financial decisions (Willis 2008).

In the United States, the National Financial Literacy Act of 2009 was passed in Congress to allow banking institutions to receive credit for offering community-based financial literacy programs. In Canada, the federal government's 2009 budget includes a new financial literacy task force with representation from the business, education, academic and volunteer sectors.1 This

appears to be a tacit acknowledgement that part of the blame for today's financial mess falls on regular Canadians who took on more debt than they should have. "We are graduating people who can design and build complex buildings and bridges, but cannot effectively manage their personal finances," said [Minister] Flaherty. (Burke, 2009)

In this article, I identify and examine some of the assumptions underpinning the arguments commonly presented in favour of financial literacy education. For each assumption, I look to the literature for empirical data to support or refute its veracity. While this is not intended to be an exhaustive literature review, it provides some insights into the financial literacy debate through cross-disciplinary research. Given the amount of weight placed on financial literacy education in our current political environment, interrogating this concept and whether or not it is a viable "solution" to our economic woes is imperative. An incorrect "diagnosis" for the financial crisis naturally leads to the wrong remedy for solution or prevention of future crises. As I will illustrate, many "common sense" assumptions and assertions publicly voiced about financial literacy education remain in question.

Unpacking assumptions behind financial literacy education

Assumption 1: More financially literate citizens would have prevented the economic crisis.

The OECD attributes the financial crisis to global macro policies affecting liquidity (low interest rates, fixed exchange rates, and liquidity reservoirs) and a "very poor regulatory framework" especially in the area of mortgages and off-balance-sheet activity (Blundell-Wignall, Atkinson & Lee, 2008: 2). Together, these resulted in macroeconomic weakness, economic imbalances, over-leverage and credit risks which ultimately resulted in the crisis. In plain language, lenders became greedy, and nothing was in place to stop them from aggressively selling credit vehicles to individuals and corporations who were credit risks. …