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.


34 thoughts on “You should need a license to take out a mortgage

  1. Let’s hope this post generates a lot of critical thinking and discussion, not only on consumer borrowing and lending, but also on the larger issue of GOVERNMENT manipulation* of private commerce. Remember: the US real estate debt bubble, whose burst devastated global finance, was the politically-motivated work of the Clintons administration, Sen. Dodd and Rep. Frank, exacerbated by surreptitious debt-marketing by their Wall Street friends.

    Apparently the well-intentioned Pope** fails to grasp the history of the consequences — unintended and otherwise — of using force (government) to take from one and give to another. This is NOT charity. The beneficiaries are the Soviet “Nomenklatura”, plutocrats (e.g., congress members and their cronies), and third-world tyrants.

    * Manipulation FOR quid pro quo (money or power), “picking winners”, a particular view of “social justice”, and other forms of UNequal opportunity is NOT regulation AGAINST “combination in restraint of trade” and other unlawful inequity.

    ** The Pope was quoted recently as advocating “the legitimate redistribution of economic benefits by the state”. The US Constitution is (used to be??) our standard of legitimacy; it limits government power to protecting rights of individual citizens. Result? Prosperity and caring for the needy.

  2. More on the post and the Pope.

    Since respondents in the survey must get 3 of 3 to avoid “failed”, financial ignorance/illiteracy may not be so bad. But it is not surprising: while every student should be introduced to compound interest, inflation and mutual funds, most are not — certainly not in the wretched politically-controlled* US public schools.

    Aziz’s call for adult public (consumer) financial education is right on target, to reduce “bad decisions that endanger their own financial health and the wider economy”. But the suggestion to require a license — from any level of government — to borrow would increase political control and only make matters worse.

    How about returning to “the market” — willing and informed sellers (lenders) and buyers (borrowers)? As I recall, we (US) used to have that with local Savings and Loan lenders and borrowers negotiating risk-determined down payment, rate, term, etc.

    Sellers seek to maximize profit, buyers to minimize cost. If government — always seeking more control/power — plays any part beyond refereeing, it results in inefficiency, injustice and corruption.

    Let’s cut the Pope a little slack. In what language did he speak — Latin, Spanish, English? Who may have translated into English? Who wrote the story and picked the quotes? The Pope is concerned with GLOBAL humanity, and is a product of Argentina/Latin-America, where Jeffersonian (Judeo-Christian based) democracy is a rare and fragile thing.

    Still, because of his ivory tower isolation and/or distorted reporting, the Pope’s seems to blame capitalism for obstructing justice, “ethical mobilization”, “cooperation between the private sector and civil society”, and “dignified labor for all”; and for perpetuating poverty and hunger and “the economy of exclusion”. Someone should inform him that his disiderata are the exact opposite of the goals of the redistributionist “Progressives” now in power in the US, whose religion is nihilism/revolution, whose messiah is Saul Alinski*, and whose leading disciple is Barack Obama.

    * Obama taught and preached from their bible, Alinski’s “Rules for Radicals”, originally titled “Rules for Revolution”. Among its doctrines is that Liberals are to be scorned for their reluctance to disavow their moral (Judeo-Christian) scruples in subservience to revolution.

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