Even now, as the dust from the financial crisis settles, there's surprisingly little agreement on what just happened. As the banks, mortgage brokers, financial-products innovators, and regulators argue over who deserves more blame, it's obvious that a vast number of American consumers were simply out of their league. They spent more than they earned, willingly signed up for trip-wired housing loans, and piled on debilitating levels of credit-card debt.
If you're reading this, you're probably fluent in the language of money. But as the Federal Deposit Insurance Corporation announced late last year, more than 25% of U.S. households are unbanked (with no accounts at all) or underbanked (making use of alternative financial services such as check-cashing services and payday lenders). Even before the crisis hit, 70% of Americans were living from paycheck to paycheck. Those among us who were never taught the fundamentals of money are living at a huge disadvantage in this increasingly complex age. But there's a way to change that: Make financial literacy the next civil right. If this handicap were to fade, a very real drag on the entire economy would be lifted. As a side benefit, predatory lenders would have to find a new line of work.
In order to fix this problem, we need to quantify and track it, which is why Operation HOPE, the financial literacy nonprofit I founded, teamed with Gallup to begin to meet this need. The Gallup-HOPE Financial Literacy Index, first announced on Apr. 7, will build on the Gallup Student Poll of over 70,000 participants in grades 5 through 12 in 18 different states to yield hard data on how many American youths have held a job or a savings account. It will tell us how many have a general understanding of what it takes to run a business and how many hold a positive view of free enterprise and envision themselves taking part in it.
A comprehensive plan to raise financial IQs began taking shape in early 2008 under President George W. Bush, prior to the financial crisis. President Barack Obama reinforced it by creating the President's Advisory Council on Financial Capability, and the Education Dept. will be promoting a financial component in the curriculum for all public school students from kindergarten on up (although there are limits on its influence). In addition, a bill now before Congress would require the recipient of every guaranteed student loan to take a course in financial literacy, and every college that gets federal funds would have to offer one.
The challenge of boosting financial literacy has to be addressed in the marketplace and at the local level, too. Operation HOPE has negotiated a landmark five-year commitment from the Financial Services Roundtable—boasting a membership of 41 banks and a host of asset management companies and insurers, among others—to promote fairer financial products and efforts to raise literacy.
Some of the ideas coming out of this effort promise to be genuinely transformative. Here's just one: a fixed-rate mortgage with a built-in "life-event" clause that gives the holder the right to a one-month grace period in return for every 18 months of on-time payments. That would mean that a lost job wouldn't have to spell disaster in a single-income household.
If you're born in the U.S. you get a Social Security number. When we're ready to take the idea of financial literacy as everyone's right seriously, perhaps we'll also start assigning an electronic debit card at birth that's tied to an account covered by the FDIC or the National Credit Union Administration. This idea certainly won't go over well with the owners of check-cashing businesses, but it would, over time, take the unbanked portion of the population and put it on the financial map. And that's a great place for all of us to be.