The Fed likes financial literacy—how about intelligible financial regulation?

Bernanke promotes financial literacy but is one of many transgressors.


Financial literacy is a very good thing, Federal Reserve Chair Ben Bernanke assured an audience of business students and finance professionals at the University of Dayton, in Ohio, yesterday. Promoting a basic knowledge of finance and economics among people “of all ages and walks of life” is of the utmost importance, the Chairman said via prerecorded video. One of the lessons of the financial crisis, he added, is the need for people to know what they’re doing when they’re buying a house, a car, picking their investment portfolio or planning for retirement.

That’s hardly the stuff of headline news. Talking up financial literacy is about as boring and uncontroversial as saying that you like world peace. It’s also, I’m afraid, just as inconsequential. Forget that the Fed’s economic education website and classroom lesson tips are likely to sharpen the financial wits of only a fraction of Americans. Would financial literacy have kept most pre-recession homebuyers out of the subprime mortgage trap? I highly doubt it. After viewing some of the exotic home loans circulating at the height of the housing bubble, former Fed Chief Alan Greenspan allegedly told a public advocacy group that even with a doctorate in math one wouldn’t be able to make sense of them. (The citation comes from Inside Job, a documentary about the financial crisis about which I have some reservations but that is a fantastic source of quotes.)

The truth is that the world of finance in the U.S. has become incomprehensible even for the well-educated—and the trend hasn’t reversed with the financial crisis. To the contrary, efforts to regulate the unwieldy complex financial tools and structures that had fooled both small borrowers and regulators are producing thousands upon thousands of pages of equally unintelligible legislation and rules.

The cornerstone of President Obama’s financial overhaul, the Dodd-Frank reform act, passed in 2010, is a 2,300-page behemoth that even the country’s top pros had trouble wrapping their minds around. “Nobody can argue that the cost of citizen participation presented by the Dodd-Frank is anything other than prohibitive, even for people who do this full-time like me,” Jonathan Macey, a professor of corporate finance and securities law at Yale University, told the Economist.

New proposed federal mortgage disclosure rules introduced by the Consumer Financial Protection Bureau last year came with 1,099 pages of regulation required to implement them. Worse still, the new forms failed to include a comprehensive estimate of a mortgage’s total cost. “The new rules do not attempt to generate a single number that can be used for comparison purposes and instead focus on various components of the loan such as fees, penalties, interest rates and maturity separately,” Yale’s Macey wrote in a Wall Street Journal op-ed. “This makes it harder, not easier, for borrowers to compare mortgage options.”

The Fed hasn’t led by example either. Last year, the Government Accountability Office found that the redress process for borrowers wronged during foreclosure proceedings—actually co-designed by the central bank—was far above the grasp of average Americans. That might explain why so few people took advantage of it.

To think Americans can fend for themselves armed with basic financial literacy is like defeating a three-headed monster with a stick. While a stick is helpful, taming the monster might be more effective.

Erica Alini is a California-based reporter and a regular contributor to, where she covers the U.S. economy. Follow her on Twitter: @ealini.

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