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Opinion: It’s time to fix America’s financial literacy problem

Financial literacy could have helped many during the Great Recession, but the lessons learned are more relevant than ever today.
<a href="" target="_self">Helaine Zhao</a>

Helaine Zhao

June 21, 2023

One of the greatest challenges our society faces today is a lack of financial literacy and education, which results from inadequate awareness of and action on being financially healthy.

According to Forbes, only “four in seven Americans can be categorized as ‘financially literate’, and only 24 percent of millennials understand basic financial concepts.”

However, despite the pressing urgency of this issue, this is not a recent or new problem, but rather a long-standing situation that has plagued the United States for several decades already. One significant reflection of this problem was in the 2008 financial crisis, the most serious U.S. economic crisis since the Great Depression.

Resulting from excessive risk-taking, increased predatory mortgage lending, and unregulated markets, the Great Recession resulted in the loss of over 8 million jobs, over 8 million home foreclosures, and a 4.3% decline in GDP. 

However, a 2011 report by the Financial Crisis Inquiry Commission suggested that this was an “avoidable” disaster due to its man-made causes. Additionally, a lot of this damage could have been avoided or at least moderated if our country had greater financial literacy.  

A more financially literate public could have better avoided the lure of dangerous mortgage lending. Without government regulation and oversight, a major cause of the 2008 financial crisis was the spread of risky mortgage loans. With a period of prosperity, many people assumed the economy would keep growing, making them vulnerable to traditionally risky behavior, like taking on excessive debt.

The housing market boom also resulted in an excess of mortgage loans to borrowers with insufficient credit, known as subprime mortgages. Coupled with risky behavior on Wall Street as lenders found new but risky methods of making more money off the housing market, when interest rates began rising in the mid-2000s, defaults on subprime mortgages also shot up, thus beginning the 2008 economic crisis. 

If the public was more financially literate and aware, more people could have recognized the predatory lending tactics and the danger of subprime mortgages. These products were often marketed without adequate information and were targeted at lower-income families who originally would have been unable to afford a home.

It has long been a trend for low-income households to experience financial illiteracy at higher rates, as they do not have wide access to accurate financial information. This results in youth from low-income households falling victim later as adults to scams, high-interest rate loans, and increasing debt, as shown in the 2008 crisis.

Financially informed consumers could have also served an important monitoring role in the market during the period of risky practices leading up to the crisis, which could have helped to improve transparency and honesty in financial institutions. 

Fnancial literacy could have diminished the severity of the crisis while it was occurring. According to a 2009 policy paper by the International Network on Financial Education, a lack of financial literacy during a crisis can lead to a greater drop in confidence in financial institutions like banks, resulting in the public limiting their investments in financial markets, which ultimately further delays economic recovery. Adequate financial literacy allows for a better understanding of economic policies and interventions and will contribute to the financial system’s overall efficiency.

In addition, Leora F. Klapper, Lead Economist in the Development Research Group at the World Bank, and others report in the National Bureau of Economic Research that individuals who are more financially literate are more likely to report having higher availability of unspent income. This relationship was also perceived in 2009, showing how financial literacy usually better equips individuals to deal with macroeconomic shocks. 

In order to better prepare our youth for future financial challenges, like an economic crisis, and equip them with the necessary knowledge and skills to build a better future, financial literacy is critical and the lack of financial education must be addressed. 

Many states are already taking steps to confront this challenge, including a recent bill in California that would require high school students to take a semester of a personal finance class to graduate. Assemblymember Kevin McCarty has introduced Assembly Bill 984, which, if passed, demands that schools offer a financial literacy course by the 2025-26 school year and calls for it to be a requirement for graduation in 2029 or later.

Although the 2008 financial crisis has passed over a decade ago, the financial illiteracy crisis is still ongoing and needs to be addressed. In a world where the economy is constantly changing and money is an absolute necessity, greater awareness of the development of financial literacy from a young age is essential and demands immediate attention.