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Will More Regulation Help Consumers Overcome Their Ignorance?

(2011-06-12 16:10:53)









分类: 财经

Will More Regulation Help Consumers Overcome Their Ignorance?


The Wall Street Journal recently busted several money managers — including CNBC host Jim Cramer — for misleading advertising: The managers compared their investment returns, including dividends, to the benchmark S&P 500 Index without dividends.

That's like suggesting I beat you in Monopoly because my net worth (my properties plus my cash) is higher than your net worth — but we don't include your cash in the equation. It's a ploy that even my eight-year-old wouldn't fall for. Of course, many people just read the headline; in Cramer's case, "My portfolio is CRUSHING the S&P 500." (When you do a fair calculation, the Journal points out, that "crushing" advantage is worth 0.9 percent. And that's before you pay several hundred dollars for Cramer's newsletter.)

Add this latest con to the gazillion other tricks people play to separate suckers from their money, and you've got a solid argument for requiring financial literacy courses in every year of school (or at minimum, annual Monopoly tournaments).

"We shouldn't underestimate how difficult it is for some people to make financial decisions," says economist Annamaria Lusardi of the George Washington School of Business, author of a new paper on financial literacy.

The paper analyzes the results of a survey conducted in 2009. Lusardi found that just 10 percent of 1,500 survey respondents could ace a quiz on the basics of economics and finance in everyday life, including investment returns, mortgages and inflation. (You can test yourself on my blog).






Moreover, 10 percent didn't know the interest rate on their mortgages, and 20 percent didn't know the interest rate on their car loans. Of the 46 percent that carry a balance from month to month on their credit cards, 12 percent didn't know the interest rate on the highest-rate card.

When I suggested to Lusardi that this kind of information is both obvious and easy to find, and that people should know better, she disagreed. "Some financial contracts are designed such that people don't know the variable on which they should have chosen that contract," she says. "If I ask what interest rate you're paying on your mortgage and you don't know, that's probably not how you chose your mortgage."

Americans also failed to plan ahead: just 42 percent of survey respondents have tried to figure out what they need to save for retirement, and just 41 percent of people with financially dependent children have set aside money for college.

Those who do save don't necessarily understand the mechanics of investing. Among people with retirement savings, nearly one in five did not know how much of their portfolios were invested in stocks or stock mutual funds. Only a third of the college savers used a tax-advantaged savings account like a 529 plan or Coverdell account.





I spoke this week with a reader and retired insurance executive, Rick Mayhew, about financial literacy. Mayhew, 58, teaches a financial planning class for adults at Washington University in St. Louis. "Most of my students, even though they have been to college, didn't get a lot of the basic information along the way that we cover in my class," he said.

Magical thinking also looms large. "It is amazing how many people want to talk about investments rather than budgeting," Mayhew notes. "It's not the fun or sexy part of planning. People think they are going to hit a wonderful investment that's going to help them live a great life, when they will do better by managing their controllables: making sure they get the best value on purchases and keep a little money in reserve."

Lusardi's is a timely report, given the debate over the Consumer Financial Protection Bureau, a new agency created by the Dodd-Frank financial regulation bill. The CFPB's goal is to provide more transparency to consumers so they can compare financial products in an apples-to-apples fashion.

The CFPB must have a director in place by July 21 to receive its regulatory authority, but Republican senators have vowed to block the nomination of a director unless major changes are made to the agency. Consumer advocates charge that the GOP is trying to weaken the agency's powers at the behest of the financial-services lobby.






In this week's New Yorker magazine, James Surowiecki suggests that the CFPB would even benefit banks by promoting fairer competition and more efficient markets. Harvard Law Professor Elizabeth Warren, who established the bureau as a special adviser to the president, made similar arguments in my interview with her in March 2010.

Lusardi agrees with the efficient-market theory: "The banks need to get a grip. They are not going to benefit by going against regulation. It's going to come back to them [in the next crisis] and the cost will be much heavier than the cost of regulation."

The state of personal finance today is like a world without drivers' licenses, Lusardi says. "Imagine people get in the car and drive and it's up to them to learn so they don't have an accident," she says.

Drivers' licenses and speed limits are there to ensure everyone's safety. But when it comes to the financial arena, it's like we've put people on busy roads without asking what they know and without giving anyone directions, Lusardi says.

"In finance, when we have an accident, taxpayers may be asked to pay for it," she says. "It's not sustainable to have an economy of individual responsibility where people are not equipped to make decisions and we are always afraid of the next crisis. We bailed out the financial industry. I'm surprised consumers are not more vocal, demanding good, safe financial products and the ability to make decisions that don't require sophisticated research. Where is the tea party for this?"









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