The Next Crisis Lurks In Empty Piggy Banks

Written by Phil Hall
on June 07, 2010 No Comments
Categories : Blog View

BLOG VIEW[/u]: In an article that appears in the current edition of [i]Secondary Marketing Executive[/i],[/b] Alex J. Pollock, a resident fellow at the American Enterprise Institute in Washington, D.C., and a former president and CEO of the Federal Home Loan Bank of Chicago, referred to savings-and-loan associations by noting that contemporary consumers no longer understand the genesis of that financial services concept. ‘The original leaders of the 'movement,' as it then was – for they considered themselves a movement for personal and social improvement – were very clear about the order of things: first the savings, then the loan,’ Pollock wrote. ‘Our subsequent political development seems to have forgotten about the 'savings,' and put all the emphasis on the 'loan.' Even savings in the form of building up equity in the house by retiring the mortgage loan has turned into ways of extracting the equity instead.’ The lack of personal savings among would-be home buyers was the subject of a new survey released by the National Foundation for Credit Counseling (NFCC). Over 2,000 individuals were polled to see if they were able to meet the down-payment requirements for purchasing a home. The response was dismal: 49% stated that they were never able to save enough money for a down payment, which the NFCC puts at 20% of the property's value. The survey also found that 20% said that their mortgage loan would have to come with a much lower down payment, while 18% said they would have to borrow money for the down payment – think about it, borrowing money in order to borrow more money! Only 12% of the poll respondents felt that they'd have no trouble coming up with a 20% down payment. Depressing, isn't it? Well, here comes another rain cloud: A new study published in the Journal of Consumer Affairs found that only 27% of people between the ages of 23 and 28 could answer three basic questions about interest rates, inflation and risk diversification, and other basic financial concepts. This study determined that the under-30 crowd who are considered to be financially literate were more likely to have college-educated parents that discussed concepts of savings and investing with them. Dr. Annamaria Lusardi, who headed this research project, didn't blame parents for not teaching their kids well. Instead, she claimed that it is crucial to teach the concept of financial services in schools. ‘If we do not address financial illiteracy among young people through high school literacy classes, we will fail to equip young people with the tools they need to make financial decisions, and we may pay the cost down the road,’ she said. ‘Not everybody has an opportunity to learn from their parents or their friends. Young people at the start of their career, or who are in the process of buying their first home, need to be financially knowledgeable before they engage in financial contracts.’ The two surveys were conducted separately, but their combined results paint a sorry picture for the near future. When nearly half of the adult population believes that they will never be able to save money for a down payment, and nearly two-thirds of U.S. twentysomethings don't understand the basics of financial transactions, it appears that we are looking forward to a future borrower base that is going to provide our industry with more than its fair share of troubles. Former Fed Chairman Alan Greenspan was once quoted as saying, ‘Anything that we can do to raise personal savings is very much in the interest of this country.’ Do you have any ideas on how we can turn this crummy situation around? Drop me a line and share your thoughts – we need to have a conversation about this! – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b] [i] (Please address all comments regarding this opinion column to hallp@sme-online.com

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