Bottom-up Financial Reform

The financial reform bill recently signed by President Obama will attempt to attack numerous regulatory gaps and enforce new consumer protections to prevent the next global economic crisis.

But consider this thought from historian Niall Ferguson in his book "The Ascent of Money" (which, by the way, was written before the worst of the financial crisis hit):

"Politicians, central bankers and businessmen regularly lament the extent of public ignorance about money, and with good reason. A society that expects most individuals to take responsibility for the management of their own expenditure and income after tax, that expects most adults to own their own homes and that leaves it to the individual to determine how much to save for retirement and whether or not to take out health insurance, is surely storing up trouble for the future by leaving its citizens so ill-equipped to make wise financial decisions."

The financial institutions who duped unassuming home buyers into taking on mortgages they couldn't afford and the regulators who failed to identify the risks of doing so are certainly to share the blame for the recent economic turmoil. But a major missing piece in the recent regulatory reform bill, and in the general conversation about righting the economy, is an effort to improve basic financial and economics education - something that should be part of every primary high school and college curriculum. For most Americans, this education once came in the home, with parents teaching children about saving money, living within one's means, earning before spending.

But the expansion of credit over the last two generations has complicated this message: Spend, so long as you can pay the interest. Living beyond one's means is now possible - indeed a miracle of credit - but has created a sort of financial overconfidence in society.

In the principal-agent failure that took place in the recent crisis, the "principals" (bankers, etc.) with access and financial sophistication far above that of the average person were able to manipulate finance to make enormous profits, all the while knowingly risking stability of the financial system that enabled such tactics.

The new reforms notwithstanding, it is difficult to assume these mistakes won't happen again when the "agents" in society, ranging from local police pensions funds to average Joes, continue to be ignorant of the rapidly evolving world of finance.

A Solution for Public Education?

I'm not one to profess any expertise on public education, but here's a new program in my hometown, Pittsburgh Pa. (the Steel City), that may prove effective in improving student performance in inner city public schools.

The Pittsburgh Promise is a college fund that provides college tuition incentives for city school kids who stay in school and commit to going to college in the Pittsburgh area and possibly staying there to work. The program received a sizable endowment recently, and could give hope that if the private and non-profit sectors play a role, they can improve student performance by incentivizing it. I would hope, though, that the benefactors maintain a hands-off approach on changing curriculum or dictating how a public school system must manage itself.

The current of state of public finance on all levels is a mess, with a massive federal deficit and many states looking at fiscal issues of their own. Thus, the solution to public education's problems in inner cities cannot be found in increased funding. Creating new incentives for students to pursue college (and get a big tuition bonus) is a pretty good way to motivate.