A Blog by Jonathan Low


Jul 18, 2013

Americans Now Know More About Their Often Pathetic Personal Finances

Well, that was fun.

As if Americans needed a reminder of just how parlous the state of their household finances might be,  a recent report by the new Financial Industry Regulatory Authority disposes of any illusions the public might have.

FIRA, as it is known in Washington-speak, is the agency created in the wake of the financial crisis to identify ways in which financial institutions may be preying on unsuspecting citizens. Given its mission, and the degree to which such tactics have contributed to banking industry profits, the agency has had a rough time getting started. Until the compromise reached on Presidential appointments, the industry had tried repeatedly through Congress to defund the agency and refused to approve its first leader.

The release of this report explains why financial services companies and their legislative allies feared the establishment of this institution. The data reveal that most Americans have few or no financial reserves, that younger people are worse off than older ones due to the still extant impact of the financial crisis as well as accumulated student loans, and that the majority can correctly answer only half the questions posed about rudimentary personal finance matters. Optimists would say there is no where to go but up and tremendous room for improvement. Pessimists would be looking at rebalancing their portfolios towards foreign investments.

The primary issue appears to be that Americans still have too much debt - mortgages, car loans, credit cards - even five years after the financial crisis. Furthermore, they are largely ignorant of economic fundamentals and susceptible to offers that are counter to their short and long term financial interests.

Economic literacy and a system of laws designed to protect consumers makes common sense in an economy in which said consumer purchases drive 40 to 70 percent of GDP. If households have the wherewithal to earn, invest and spend, the overall economy and the businesses that rely on it will prosper. The only question is why that logic is not more consciously reflected in current public policy. JL

Denny Gulino reports via Deutsche Boerse Group:

The only good news on the personal finances of Americans is that now everyone can find out more about how badly many of them are handling their personal finances.
In a survey in every state and the District of Columbia that covered 25,509 people, the foundation supported by the Financial Industry Regulatory Authority, working with the Treasury Department and other government entities, found:
-Fewer than half, 41%, of Americans spend less than they make.
-Over a quarter, 26%, have unpaid medical bills and those under 34 years old are more likely to have them than those who are older.
-More than half, 56%, have no rainy-day savings enough to cover surprise financial distress.
-Over a third, 34%, pay only the minimum amount on their credit cards.
-Younger Americans are more likely to show signs of financial stress.
-Of five basic questions about personal finance, the national average was 2.88 correct answers.
The head of the new Dodd-Frank Consumer Financial Protection Bureau reacted to the report with alarm. "We have built the greatest system of economic liberty in the history of mankind," said Richard Cordray, "but it will only endure if we take the necessary steps to strengthen that system from the bottom up, starting with the individual."
Cordray, incidentally, can only stay in his job until the end of the year unless Republicans stop blocking his appointment in their effort to cripple or kill the consumer agency.
Assistant Treasury Secretary for Financial Institutions Cyrus Amir-Mokri found a bright side, apparently cautious about a report that does not totally jibe with a message of recovery. "More Americans now report that they can cover their monthly expenses as compared with 2009" when the first survey was taken and the numbers were worse, he said.
Yet he conceded the report showed, "Too many Americans feel they have too much debt, too few Americans are setting money aside for their children's education and too many Americans have not planned for retirement at all."
FINRA Foundation President Richard Ketchum said, "This survey reveals that many Americans continue to struggle to make ends meet, plan ahead and make sound financial decisions."
Titled the State-by-State Financial Capability Survey, the questions were asked between July and October. It showed that 89% of Americans surveyed agree that financial education be offered in American schools, as is required in many other developed countries. Only 19% reported they ever encountered any course in financial education.
Said Cordray, "We must arm our fellow citizens with the wherewithal to stand on their own two feet and make sustainable economic choices." Outside of school, he said, financial information "is likely to be skewed by the financial self interest of other parties. So people need trusted and impartial resources."
While the basic survey numbers have improved somewhat since 2009, they reflect a massive disregard or ignorance of financial axioms on top of negative trends in the economy underway since 2000 - when even before the financial crisis median household income flatlined and more recently headed lower.
While American manufacturing productivity has continued to improve, it stopped carrying inflation adjusted hourly compensation with it beginning in 1970. Now the gap between the growth of pay and productivity in the U.S. is the largest among 19 developed economies measured by the Bureau of Labor Statistics.
"Our democratic system rests on the effective operation of a free-market economy," Cordray said. "This arrangement demands strong and effective consumers." The best kind of consumer protection, he said, "is self protection, being able to avoid problems in the first place and to know what you can do about it when you do experience a problem."
By state, citizens of California, Massachusetts and New Jersey who were surveyed are the most financially capable, the survey suggested. Mississippi stood out as the least financially capable state, placing in the bottom five in four out of five measures. Arkansas ranked in the bottom five in three out of five measures, and Kentucky ranked in the bottom five in two out of five measures.
For New York, the numbers were better than average, with 43% saying they spent less than they make, versus the national average of 41%. And only 22% said they had unpaid medical bills versus the national average of 26%.
In other findings, 30% said they borrowed from an institution that was not a bank, including auto title lenders, payday, tax refund advances, pawn shops or rent-to-own stores.
Younger people, between 18 and 34, are the most likely to borrow outside of banks.
The survey found most Americans do no compare offers or collection information from more than one company when shopping for credit cards.
Those reporting their mortgage was for an amount greater than the value of the property was 14%. Those most likely to have underwater mortgages were 18 to 34.
Those who reported they had no rainy day fund put aside at all were 56% of the total. Compared to the previous survey, those with rainy day savings were 40% of the total in 2012, versus 35% in 2009.
"Lessons must be learned and changes must be made," the CFPB's Cordray said. "Americans simply are not well equipped to fight through the complexity to make sound and sensible decision." Every day, he said, the agency hears from people "often expressing anguished regret that they did not know more about the risks involved at the time they made key financial decisions."


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