Is a Lack of Financial Education the Reason for Poor Financial Management Decisions in America?

Americans study all of the essential things in school, algebra, science, history, languages and the arts. However, many people wonder why there may be a lack of financial management classes to learn basic financial planning strategies. Many students don’t know the first thing about retirement, savings, credit cards, debt or even basic budgeting strategies. Although some might say this is something that should be taught by parents, today’s parents are the byproduct of the credit card generation; therefore many parents only learned the cause and effect of their financial matters by trial and error.

It is not only the parents that are financially challenged. Even teachers lack the training because of an education system that lacks the teaching of fundamental skills needed to achieve fiscal responsibility. Some of those more savvy in the diligence of their finances may seek the services of a financial management advisor, however given today’s economic turbulence, the very root of the problem has become apparent in our society’s apparent financial illiteracy.

According to a recent survey, over 60% of all high school students failed certain questions about basic household financial management and were not given the proper role models for financial independence. Across the gamut, the media has highlighted examples of adults who have mismanaged their money, losing homes or severely damaging their credit by defaulting on their loan and credit card payments, as well as college students who default on student loans and many other examples. Even big businesses on Wall Street have gone bankrupt and the entire financial system of banking seems to be crumbling right before our very eyes. We expect our youth to learn about proper financial planning and financial management amid a society that has accepted financial failure as the norm?

Today’s Financial Buzz attributes many of these economic problems not entirely to the fault of any one entity, enterprise, or government but instead to the theory that the need for financial management practices should be taught early on to our youth. By teaching everyone how to become financially literate, we could create a society of fiscal responsibility. Instead, it is becoming rare to see a young person who doesn’t abuse credit by either racking up high debt, paying late or even bouncing their checking accounts time and time again by relying on unsafe measures, such as online banking. Some do learn these best practices in college through economics or financial courses, but those students are becoming far and few between.

Some critics say that in order to add any more mandatory courses to the education system would require dropping some other important classes. Other say that the public school system is not supposed to be a lesson in life training manual and that those types of learning exercises should be enforced by parents. However, there are two sides to every coin and with many parents now in deep financial troubles themselves, they may not be the best role models for kids to follow. Foreclosures have reached an all-time high while stocks and securities have reached an all-time low, indicating a big problem with the entire system of financial management and not just a few sprinkled examples here and there.

Strengthen Our Financial System With Effective Regulations

When discussing regulations affecting financial services organizations, or for that matter, regulations affecting any type of industry, people tend to be in one of two major groups – those who believe that having fewer regulations is always better, and those who believe that more regulations are needed to protect the public. In my view, both groups are wrong. Let’s discuss why.

The Need for Regulation

The economic downturn that began in 2008 has created severe hardships for millions of Americans who have lost jobs and not been able to find new ones. Many of these same Americans have lost their houses due to foreclosure, or have watched as the value of their primary assets, their houses, plummeted well below the total of the mortgages that they still owe on them. In addition, the US Government was forced to bailout many large financial services organizations due to the concern that their failure would send shock waves through the worldwide financial system and cause global markets to collapse. These bailouts added at least a trillion more dollars to our burgeoning national debt that is already too large to be handled reasonably. This downturn, which has been so devastating to so many, was caused by a lack of effective regulation over our financial system.

There is a reason why financial services organizations have traditionally been regulated more closely than companies in other industries. The impact of a financial services organization failing, or following unsound operating practices, is far-reaching. Much more far-reaching than normal product or service companies. Not only do financial services organizations carry huge levels of risk, in comparison to their capital levels, that risk is also intertwined with risk in other financial services organizations. The collapse of even one financial services organization can potentially cause the collapse of others, which in turn can potentially bring down global economies.

Our Current Regulatory Environment

The regulatory environment within which financial services organizations operate has been gradually weakened over a long period of time, at least 40 or 50 years. At this point, most of the major tenets of the regulations that were enacted shortly after the Great Depression have been swept away. In their place, we have enacted newer regulations that focus more on “how” business is conducted, rather than “what” business is conducted. These newer regulations require detailed documentation of operating policies and procedures, along with required testing to ensure compliance with the policies and procedures. In addition, examinations from various regulatory entities have gotten more frequent and more detailed oriented. During our recent economic downturn, it goes without saying that most, if not all, financial services organizations that were bailed out by the taxpayers had detailed documented policies and procedures in place, and were in solid compliance with recent examinations, when they collapsed.

The regulations that are currently in place are onerous and costly to implement and maintain, but more importantly, they just are not effective.

The Regulations That Are Needed

Once that major regulatory constraints have been released, it is extremely difficult to put them back into place, and enacting new regulatory constraints would be equally as difficult. However, if new regulations were going to be created, they should require the following:

Separation of commercial and investment banking. This requirement was originally a part of the Glass-Stegall act, which is no longer in effect. However, we were supposed to learn this valuable lesson in the 1930’s.

Capital requirements on derivatives. There should be adequate capital maintained against the total amount of risk in derivative portfolios, without allowing netting of counter-party risk.

Risk diversification guidelines at the total institution level. Each institution should be required to have stated guidelines that diversify its total risk by product and product type, collateral type, geography, and major customers, including joint ventures and interlocking directorships.

New regulations are needed to strengthen our financial system. Our current regulations are not effective, and new ones will be difficult to enact. However, new potential regulations should focus on “what” business is allowed, and not “how” business is conducted. That should lead to a regulatory environment that is more effective and efficient.

Is the Financial Crisis Really Over?

What is the risk of another financial crisis? The dust has begun to settle. The turbulent events of the past two and a half years seem to be over and the world is looking forward to a period of renewed stability and growth. Across most of the world there are plans afoot for the reform of the banking system to “fix” it so that the dreadful events that we were witness to so recently will not happen again.

2010 – The start of the second decade of the twenty first century is seen as a symbol of hope and a brighter future.

How realistic are these hopes? Is it possible to really repair the banking and financial system? Can we avoid any future pain such as we have seen (and alas are continuing to see)?

This is all good stuff, but realistically speaking the prospects for a quick “fix” are not at all good. In fact one need look no further than to the responses of governments and financial regulators to these recent events to see that the seeds of the next financial crisis have already been sown. And this crisis may not be so far in the future either.

Consider the facts. The overall response of governments and regulators alike to the recent financial crisis has sent a totally wrong message out to the banks. This misguided response has vastly increased the possibility that the same events will repeat themselves in the not too distant future.

To make matters worse, when the next crisis occurs countries may just not be able to take the strain. The events of recent days in Iceland regarding the reimbursement of the British and Dutch governments in the “Icesave Bank” saga and the ongoing financial problems in Greece are portents that the next crisis could be much, much worse.

The single distinguishing feature of the 2007-9 crisis was the huge amounts of financial assistance that was literarily thrown at the banks. Governments across the globe went almost berserk to avoid a systemic collapse of their individual country’s banking systems.

By taking this course of action governments simply reinforced the existent cavalier attitude of the banks. The banks who benefitted the most from the support of the state were in all probability the ones who presented the most serious risks to the financial system; the banks who should most probably been allow to go to the wall.

Because governments and regulatory authorities provided such massive assistance to banks and securities firms these governments have in effect created a sort of automatic disaster insurance fund. Bank executives now know that their banks will not be allowed to go under. This is going to lead the banking industry generally to their bad pre-crisis habits; habits of taking dangerous and unjustified risks once again, in the certain knowledge that that they will not be allowed to fail. “Too-big-to-fail” was (and is) the cry and governments have been all too eager to dance to this tune.

A factor which is so conveniently ignored is that for many banks across the globe the pain is not yet over. These banks are going to continue to experience losses for some time to come. These losses could still be extensive, as foreclosures continue to mount amidst a stagnating property market and continuing high levels of unemployment.

If governments could say with any absolute conviction that they would never, ever bail out another bank again, there would be some hope of averting a future crisis. However governments are fickle, driven by the winds of political opportunism.

When the crisis returns, as it surely must, we will see a replay of what we saw before. Indeed certain recent developments at some of the banking culprits from the last round are a clear indication that some banks are back to their bad old ways with massive profits and obscene bonus payments becoming the norm once again.

Clearly any attempts by various governments to “fix” the system have been a non-starter. To be brutally blunt – it has failed! And the same unfortunately applies too, to “fixes” that are planned. If they haven’t been started on yet the chances of them ever happening are less and less likely with each day that passes.

Unless governments and regulators seriously look at the failed systems and repair them properly in a manner that avoids the current implied guarantees of support “no matter what”, we are doomed to relive the events of 2007-9 again and again and again.

Financial and Moral Deficits

Our nation’s record-breaking budget deficits are in the news lately. President Obama’s recently uncloaked budget bombshell for fiscal year 2014 includes massive and unprecedented new spending increases-largely as a consequence of the pathetically misnamed Affordable Care Act-at a time when the United States of America is still struggling to recover from the worst recession in eighty years. Under President Obama’s corrupt and irresponsible administration over the past five years, which has swollen the federal bureaucracy to double its original size and scope, our nation has been digging itself into a far deeper hole of debt, and at a far more rapid pace, than at any previous point in its 240-year history. Even the dramatic rise in the national debt from $2.1 trillion to more than $10 trillion that marked the George W. Bush administration due largely to its own massive spending and federal bureaucratic growth is quickly being eclipsed by President Obama’s boundless spending extravaganza. Whereas our country gained some $8 trillion in additional debt burden during eight years of President Bush, we have accumulated nearly $7 trillion more on top of that during just five years of President Obama. As a result, our national debt figure now stands at $17.3 trillion and counting. Unfortunately, President Obama and his loyal cronies on both sides of the aisle have abandoned all pretense of concern for rescuing our country from this inconceivable debt nightmare, with the concept of a balanced budget appearing less likely and more laughable with each passing day. If President Obama’s proposed budgetary scheme were to pass Congressional muster, gigantic spending hikes would push our national debt well above the $20 trillion mark before the final three years of his administration are up.

It is shocking to think that just thirty-three years ago when President Ronald Reagan took office, our entire national debt was “only” around $900 billion. It’s even more disturbing to realize that the federal budget deficit projected for this coming fiscal year alone eclipses our nation’s total debt figure for the year 2000. Clearly, our dishonest and corrupt reigning establishment politicians in Washington have lost all sense of fiscal discipline and responsibility for the financial health of our country as they unscrupulously sacrifice control of our national financial system to the insatiable appetites of major corporate interests, thereby loading a colossal and unsustainable burden of debt onto the shoulders of future generations of average hardworking Americans and guaranteeing that American prosperity will soon be a thing of the past.

But while we must be concerned about these gargantuan runaway financial deficits and their long-term impact on our economy, we tend to forget that our country is simultaneously experiencing a more serious kind of deficit-that is, a moral deficit. These two kinds of deficits, moral and fiscal, are closely related. Our nation’s financial and economic decline over time has directly resulted from and closely paralleled its moral decline. The profound and clearly evident moral deficit in our nation’s leadership and in its citizens must first be acknowledged and duly addressed if we are to have any hope of effectively halting and reversing the national debt-not to mention getting our economy on a sound footing.

Morality involves a sense of responsibility towards God and our neighbor. Religion helps to foster and inculcate this sense of responsibility. Our Founding Fathers and early national leaders were religious and moral men, and under their wise and competent administration, our country’s debt incurred by the War of Independence was paid off in a timely fashion and the national debt kept very low thereafter. The Founders and their immediate successors exhibited a healthy fear of even the smallest outstanding debt. Benjamin Franklin encapsulated this early fiscal conservatism in his famous line, “It is better to go to bed supperless than to wake up in debt.” President Andrew Jackson paid off the national debt down to zero in 1835. Unfortunately, in more recent times, the religious and moral character of our nation’s leaders has tended to decline, with a decreased sense of responsibility to the people they govern, and the result has been a corresponding increase in the national debt. During the last century, America’s outstanding debt rose from less than $1 billion in 1900 to more than $2 trillion in 2000. From the 1980s onward, the debt began to rise at a noticeably faster pace. In the last fourteen years it has grown exponentially, dwarfing the entire national debt of America’s previous 200 years combined, reflecting an increasing loss of any sense of responsibility on the part of our most recent national leaders.

What is debt? Debt is something that we owe someone else. When we get a loan or a credit card, a bank gives us a certain sum of money to borrow. Along with the right to borrow money comes the responsibility to use this money honestly and to repay it as soon as possible. When a creditor lends us money, he gives us the right to use it and expects us to pay it back in a timely fashion. Thus a financial debt is a moral responsibility towards our neighbor, because the money we are borrowing belongs to him. When we repay our debts, we are acting honestly and responsibly in accordance with the moral law.

In the world of finance, we have a responsibility to only borrow a sum of money that we reasonably expect to be able to repay and to avoid deliberately accumulating unsustainable debt. Sometimes, through no fault of our own, we may become indebted to someone and be unable to repay what we owe. In this case, it is an act of mercy and a moral thing for our creditor to voluntarily practice debt forgiveness. When he does this, he is saying that the money he lent us is now ours to keep, and we need not worry about paying it back. In the Bible, Jesus urges creditors to practice this form of forgiveness, and not to demand repayment when this is impossible.

Similarly, in the realm of morality, we are given the right to make free choices, and along with this freedom comes the responsibility to act in accord with the moral law. When we abuse our freedom by committing sin, we incur a moral debt towards God and towards our neighbor. We can pay off such a debt by repenting of our sin and making reparation for it by prayer, fasting, and works of charity. Nonetheless, it is a fact of fallen human nature that most of us are walking around with some level of debt to God due to our sins. However, God is merciful and has made an arrangement known as Purgatory to take care of any remaining moral debt we may owe Him at the time of our death. Jesus himself connected the moral debts we owe to God with the moral debts owed to us by our neighbor in the Our Father, which in St. Mark’s gospel reads, “Forgive us our debts as we forgive our debtors.”

Now, in the financial world, there is (or ought to be) a difference between an honest, responsible person who accidentally falls into a situation of unsustainable debt through no fault of his own, and a dishonest, irresponsible person who runs up many debts and wishes to continue running them up with no intention of ever repaying them. In the first case, mercy (financial assistance) is appropriate; in the second case, there can be only justice (collection agencies). In the moral life, there is a similar distinction between a person who sins and then repents and makes restitution for his sin, and a person who sins freely and wishes to continue sinning with no intention of ever repenting. In the first case, God is merciful and bestows a heavenly reward; in the second, He is just and metes out the punishment of Hell. Just as it is the fiscally irresponsible person’s own fault that he loses his credit card and whatever he purchased with it and must pay what he owes with extra penalties and interest, it is the morally irresponsible person’s own fault that he ends up in Hell for all eternity.

Beneath the economic and financial collapse of 2008 that led to the current recession lay a crisis of personal moral responsibility. It’s easy and partly correct to blame irresponsible lending policies of the banks or unwise housing policies of the federal government for this disaster, but the fact is that all of us Americans contributed to this national financial crisis by our immoral individual personal decisions which helped drive the preceding artificial boom. We chose to borrow irresponsibly, to spend more and save less, to live beyond our means, to take on more and more debt, to buy that nice house and new car and all kinds of gadgets we wanted but really couldn’t afford. In other words, we chose to live dishonestly because we were selfish, greedy, materialistic and corrupt. And these immoral personal decisions of ours contributed to the ballooning growth of our national debt during the Bush administration. As Pope Benedict XVI eloquently demonstrated in his great social encyclical Caritas in Veritate (Charity in Truth), you cannot build a sustainable economy on immorality and selfishness. Fidelity to the moral law on the part of everyone involved, i.e., personal moral responsibility, is a prerequisite for a sound economic and financial system.

The word “deficit” comes from the Latin word deficere, which means “emptiness.” Benedict XVI pointed out in Caritas in Veritate that financial deficits and moral deficits go hand in hand. When individuals in a society succumb to a loss of personal moral responsibility, one of the natural consequences is a loss of fiscal responsibility that negatively impacts the whole society. Our skyrocketing fourteen-figure national debt with its twelve zeroes is merely a symbol and a symptom of the yawning moral emptiness of our nation’s leaders and citizens in recent years. Without a general and profound moral reform of American society beginning with each individual American, no financial reform project will succeed or bear lasting fruit. Only through a timely return and re-commitment to personal moral responsibility-aided by devout religious faith and the wisdom and example of the Founders-on the part of America’s citizens and leaders alike can our nation yet hope to pull away from the giant black hole of financial self-destruction toward which it is now hurtling at breakneck speed.

The Recent Financial Meltdown – Financial Crisis Devastates American Economy Further

The financial sector of the United States is collapsing – and it has been for years now. Defaulted home loans number in the millions and the Fed can no longer make positives out of the reckless behaviors demonstrated by greedy investment banking institutions. Here are some quick facts concerning the recent financial meltdown on Wall St.

o The Fed granted Bear Stearns a $29 Billion dollar bail-out;
o The US government has taken over both home mortgage monsters, Fannie May and Freddie Mac – at a total economic impact to taxpayers totaling over $200 Billion;
o The traditional standard of finance, Lehman Brothers, recently filed for bankruptcy;
o Insurance mogul, AIG received an $85 Billion loan from the Fed – before being taken over by the US government;
o The Bank of America acquired full ownership of Merrill Lynch – previously the world’s leading brokerage company;
o Morgan Stanley stands to be purchased from a similarly-savvy commercial banking institution;
o Goldman Sachs has been beat nearly to death by the failing stock market;
o Washington Mutual, the largest savings bank on the planet, is bordering on a complete collapse;
o and guess who’s going to pay for all of it?

YOU ARE!

You are not yet diluted enough to believe that the government is going to take the losses, are you? Maybe our elected officials will all jump in and voluntarily take some serious pay-cuts. Or better yet, maybe the CEOs of these companies will all give up a measly $20 or $30 million of their wages to help stabilize the economy. Yeah right.

The fact is, as usual, that we the taxpayers will be made to suffer in unseen and uncountable ways as we continue to attempt to remain positive and faithful to our all-compassionate leaders and employers.

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