You should need a license to take out a mortgage

In The Atlantic, Moisés Naím points to a recent study that poses three simple questions on personal finance:

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.

2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer. [The Atlantic]

These questions were asked to people around the world, and the correct answers are A, C, and B. Did you get them all right? If you did — congratulations, you understand the basics of how interest ratesinflation, and portfolio diversification work. Most people surveyed around the world didn’t.

In Russia, 96 percent of those surveyed failed to answer the three questions correctly. In the U.S., 70 percent failed. The highest performing countries were Germany where 47 percent failed and Switzerland, where 50 percent did. But this isn’t rocket science. The questions reflected basic financial concepts that are essential for saving for the future, using credit cards, taking on a student loan, purchasing a home, investing, and building up a pension.

Worse than this, Americans also showed overconfidence in their abilities. Asked to rank their financial knowledge on a scale of 1 (very low) to 7 (very high), 70 percent of Americans surveyed ranked themselves at level 4 or higher. Yet only 30 percent answered the questions correctly.

These surveys provide some pretty scary food for thought, because uninformed, overconfident people are more prone to make bad decisions that endanger their own financial health and the wider economy. As this paper from the World Bank shows, individuals who are financially literate have better financial situations.

Read More At TheWeek.com

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Who should the SEC punish next for the Madoff scandal? Itself.


J.P. Morgan Chase is nearing a settlement with federal regulators over the bank’s ties to convicted fraudster Bernie Madoff, reports The New York Times. The deal would involve penalties of up to $2 billion dollars and a rare criminal action. The government intends to use the money to compensate Madoff’s victims.

For two decades before his arrest, Madoff had banked with J.P. Morgan — and apparently laundered up to $76 billion through the bank. Employees at the bank had raised concerns about Madoff’s business. In 2006, a J.P. Morgan employee wrote after studying some of Mr. Madoff’s trading records that “I do have a few concerns and questions,” and expressed worry that Madoff would not disclose exactly which trades he had made. Madoff’s company turned out to be an elaborate ponzi scheme that stole an estimated $18 billion from clients; it collapsed in 2008.

Is it fair to blame J.P. Morgan for the activities of Madoff? Do banks have a responsibility to know if their clients are involved in criminal activities? I think so — banks should have strong checks and balances to prevent fraud and money laundering, because if they don’t then criminals like Madoff can get away with it for years and years. According to Robert Lenzner of Forbes, “J.P. Morgan never reported to the Treasury or the Federal Reserve a huge cache of checks going back and forth for seven years between Madoff’s Investment Account 703 and Bank Customer Number One, belonging to real estate developer Norman Levy, who died in 2005.”

By agreeing to pay the fine and the government’s rebuke, J.P. Morgan is admitting a failure of oversight. But it’s not as if J.P. Morgan is the only one to blame. Others on Wall Street had expressed concern about Madoff’s business much earlier.

Read More At TheWeek.com

Why the Volcker Rule won’t solve the problem of Too Big To Fail

The Volcker Rule was originally proposed to end the problem of banks needing taxpayer bailouts. Paul Volcker, the former chairman of the Federal Reserve, proposed that commercial banks using customer deposits to trade — a practice known as proprietary trading — played a key role in the financial crisis that began in 2007.

Five former Secretaries of the Treasury — W. Michael Blumenthal, Nicholas Brady, Paul O’Neill, George Shultz, and John Snow — endorsed the Volcker Rule in an open letter to the Wall Street Journal, writing that banks “should not engage in essentially speculative activity unrelated to essential bank services.”

The Volcker Rule was signed into law as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act in July of 2010, but its implementation has been delayed until yesterday when it finally received approval from the five (!) regulatory agencies that will enforce it — the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

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Why America’s new love affair with saving is not great economic news

This data from Gallup shows that the 2008 recession transformed America’s relationship with money. In 2006, before the recession, 55 percent of Americans saw themselves are savers, and 45 percent saw themselves as spenders. By 2010, 62 percent saw themselves as savers, and only 35 percent saw themselves as spenders, a pattern which holds up today:

This tallies with data showing that the total level of money Americans are sitting on has soared since the recession. This is not great news.

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Why so many Americans are missing out on the stock market boom

The stock market has been on a major tear for the last four years, with both the Dow Jones Industrial Average and S&P 500 climbing to all-time highs:

But the gains aren’t trickling down to the majority of Americans.

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Hey, Pope Francis: Markets are the solution, not the problem


Pope Francis continues to make waves as the new head of the Catholic Church, offering a blistering critique this week of free markets and capitalism in his first apostolic exhortation:

[S]ome people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. [vatican.va]

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What The Federal Reserve Could Learn From Strike Debt

take-note-yellen

One year ago, a campaign group affiliated with Occupy Wall Street called Strike Debt announced a campaign called the Rolling Jubilee, which sought to buy up distressed debt for pennies-on-the-dollar — for the purpose of abolishing it.

Historically, a debt jubilee was a feature of ancient Jewish law, under which all debts were written off every seven years. So why is Strike Debt trying to do something similar?

Strike Debt describes the program as a “bailout of the people, by the people.” The group targeted people struggling to service necessary debt, such as those without medical insurance who ended up needing expensive medical care.

So far, the Rolling Jubilee campaign has bought up and written off almost $14 million in debt.

Read More At TheWeek.com