On this blog, we talk sometimes about whether disclosure to consumers as opposed to outright prohibtions or restrictions on business conduct (or doing nothing at all) is the appropriate way, under the circumstances, to protect consumers in the marketplace. In any case, and particularly when disclosure or nothing at all is the choice, consumer protection will only work when consumers have at least some knowledge of how the marketplace works. This concept is often referred to as "financial literacy."
So, you may want to read a speech given today by Consumer Financial Protection Bureau director Richard Cordray (pictured above), in which he stresses that the U.S. educational system must do a better job teaching kids financial literacy. Here are some excerpts:
The economist John Maynard Keynes was once asked what interest is. He replied simply and directly: “If I let you have a halfpenny and you kept it for a very long time, you would have to give me back that halfpenny and another too. That’s interest.” Of course, that is not Keynes’s most insightful comment on economics, but it may be his earliest: He was four-and-a-half years old at the time. … Today’s results from the Programme for International Student Assessment show that much works need to be done and can be done when it comes to financial literacy for young people. Young Americans struggle to solve financial problems, have trouble with financial decisions, and lack understanding of larger financial concepts. The United States ranked in the middle among the 18 education systems that participated in the tests. Youth in Shanghai, Australia, and New Zealand did better than we did in demonstrating strong financial education skills. What this means is that we have an opportunity to learn from others. The goal here should be a collaborative one, not a competitive one. What are they doing differently? How can we replicate their successes? … Last year, we published a report that assembled and synthesized all the best thinking we could find on ways to promote youth financial capability. We concluded that every state must include financial instruction in our schools – where the benefits of compound interest are understood in math class; where economic costs and risks are taught in social studies class; and where essays in English class include topics involving money. Young people should learn about money − what it is, how it has evolved, how we use it, how we keep it safe.
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I sorta regret writing this for the umpteen time, that the
Truth In Lending Act of 1968 (TILA) uses the mathematically-UNTRUE, Nominal, simple-method of expressing an Annual Percentage Rate, which I acronym SIAPR). In 1974 I wrote to Robert Willard Johnson, author of a graduate financial text book, that I believed the Compound method was the correct method, CAPR. I have in my hand his letter in which he stated that I was right … and he was instrumental in the select the method when they choose, and the Nominal (SIAPR) method was chosen because of the “cost of computing.” What he meant was, at the time, interest rates were low and periods long, as one month, quarterly or semi-annual and ubiquitous calculators did not have compounding (CAPR). Now rates are astronomically high and periods are short (as 14 days on a payday loans and 7 days on bank overdrafts). In my state, Louisiana, on a payday loan for $100 for 14 days the periodic percentage is 20% plus a $10 fee. That fee is really interest. So on that loan the compound, CAPR is 93,368.65%, calculated (using Excel symbols: add +, subtract -, multiply *, divide /, compound ^, 100 to divide or multiply to change from or to a whole number). ((((20+10)/100)+1)^(365/14)-1)*100. On June 12 Richard Cordray was in New Orleans for a public hearing. In a Public Comments, I stated that current method was false. I guess it didn’t stick.