By Clarence Hightower
The Anti-Poverty Soldier
ST. PAUL (March 6, 2015) — A few years ago the North American Securities Administrators Association declared that, “The need for financial education in the United States has never been greater. The precipitous drop in savings rages and the rise of personal debt indicates a looming crisis that will be averted only through the combined efforts of public and private sectors, educators, and in the end, individuals making informed choices about their own financial futures. These problems will not be solved by education alone, but we are certain that they cannot be solved without education.”
This statement underscored a genuine calamity in the making, not just in the United States, but around the globe. Much of the analysis and angst regarding the financial crisis of 2007-2008 and the resulting recession, focused on a worldwide financial establishment that in the eyes of many had completely “run amok.” In fact, a number of experts cited new and expanded banking practices, which had a decidedly detrimental effect on the global economy.
Since 2007 for example, Americans have become more familiar with terms such as deregulation, subprime and adjustable rate loans, credit default swaps, the housing bubble, collateralized debt obligations, mortgage backed securities, hedge funds, predatory lending, over-leveraging, and the shadow banking system. Notwithstanding the role financial institutions had played in the crisis, the lack of financial literacy among Americans has also contributed to an economic emergency unparalleled the in the last 80 years.
One of America’s leading financial analysts, Todd Harrison warned that financial literacy is an enormous public need that has long been overlooked noting that, “Our financed-based economy, financial engineering and government intervention have comingled to create the most critical juncture in market history. The decisions we make today, both personally and with regard to policy, will have profound implications for future generations.”
The tangible void in financial literacy plagues Americans across all social, cultural and economic strata; however it disproportionately besets low-income communities. One of the most common results related the absence of financial literacy skills is the number of households that are either unbanked or underbanked. Unbanked is a term that denotes households that maintain no banking relationship at all, while underbanked households maintain a bank account, but primarily utilize alternative financial institutions such as payday loans and check cashing stores to pay bills and cash checks.
A 2009 report from the Federal Deposit Insurance Commission notes that in the United States, nine million households are unbanked and 21 million more are underbanked. Together, these figures account for approximately 26 percent of all American households. Although Minnesota and the Twin Cities Metro fare better than the national average in each category, there are far too many of our fellow citizens who classified as unbanked or underbanked. Statewide, the FDIC reported that Minnesota had 56,000 unbanked households and more than 236,000 underbanked households.
Another critical issue arises in the effort to assist low-income citizens in the transition to self-sufficiency. Financial literacy becomes paramount, particularly from those moving from unemployment and public assistance to full or even part-time employment. As Help Minnesota Save notes, “Financial literacy is a stepping stone up and out of poverty. While having a job is a necessary component of financial security, a job alone is not enough. Many low-income families get stuck on a path of debt, bad credit, and access only to second-tier financial resources, rather than an asset-building path that provides sustainable well-being.”
Moreover, financial literacy is an essential tool to possess in all households in our communities, regardless of our current socioeconomic status. We should all develop a savings plan, set financial goals, find ways to reduce debt, carefully manage credit, and strategically acquire and build assets. And every bit as important, we must impart this knowledge to our children.
Clarence Hightower is Executive Director of Community Action Partnership of Ramsey & Washington Counties.