Remarks at Conference on Successful Strategies for Financial Literacy and Education
Federal Reserve Bank of Chicago
Good morning. I'm Charlie Evans, president and CEO of the Federal Reserve Bank of Chicago, and it's my pleasure to welcome you to today's conference. I appreciate the opportunity to be here today to discuss the importance of financial education, a topic that is particularly relevant in light of the subprime crisis and the struggles that many families are facing to stay in their homes.
This morning I would like to offer some observations on the importance of financial education, which is of particular concern to those of us at the Federal Reserve. I will also discuss the origins of Fed engagement in financial education and some similarities that I see between the economic and political climate that prompted the Fed to ramp up its financial education efforts in the 1970s and where we are today. I will close with some thoughts about the particular strengths that the Fed brings to the financial education arena.
The Importance of Financial Education
Recent research shows that American consumers have relatively low rates of financial literacy. For example, two-thirds of older Americans do not have a clear understanding of financial concepts like compound interest and inflation.1 Financial illiteracy is particularly acute among specific demographic groups, including those with low education, women, African-Americans, and Hispanics.
It is perhaps useful to consider why we think it is important for individuals to be financially literate. To my mind there are (at least) two key reasons. First, if individuals are financially literate, then they will be able to make better financial decisions for themselves and for their families when it comes to budgeting and buying, financing a home, or planning for retirement, for example. Second, when individuals have a better understanding of financial and economic concepts, it is easier for them to appreciate the role of the Federal Reserve and the benefits of the Fed's independence when it comes to monetary policy. When you don't understand what inflation is or the risk that it presents to your financial well-being, then it is difficult to appreciate the importance of a Federal Reserve that can take politically unpopular steps to combat inflation.
Since the 1970s the Federal Reserve has been actively involved in a variety of financial education programs. Of course, it is desirable to know how helpful this instruction is, so we can assess whether programs are cost-effective and perhaps even worthy of being replicated broadly. However, evaluating financial education programs is far from a straightforward task—simply looking at the outcomes of program participants can be misleading, because individuals choose whether or not to participate. For example, enrollees in credit counseling programs might make better mortgage contract choices. But the fact that they choose to enroll reveals their interest in making good decisions about their personal finances. Thus, those particular individuals might have made good choices even without attending a program.
The gold standard for dealing with such problems is randomized assignment, which ensures that individuals selected for programs do not differ systematically from the target population. There are important examples of this type of work within the Federal Reserve, for example assessments of home ownership education and counseling at the Philadelphia Fed and other research that will be highlighted in the second panel. But randomized assignment evaluations are usually quite costly. They require very careful design, the ability to replicate that design, the political fortitude to exclude populations from treatment, and extensive follow-up. Moreover, most financial literacy programs—for instance, 2 hour credit counseling—offer small treatments that are likely to produce small effects. Detecting such effects requires studying large populations, raising the cost of evaluations even further. So, for some financial literacy programs, such rigorous assessment may simply be impractical. One thing I hope we will get from this conference is a better sense of how we should approach the evaluation of such programs.
Origins of the Fed's Engagement in Financial Education
I date the beginning of the Fed's engagement in economic and financial education to the mid-1970s.
So, what did the economic landscape of the mid-1970s look like? The economy had just gone through a severe recession, during which output, income, and employment fell sharply and the unemployment rate rose to 9 percent. At the same time, inflation had been around 3 to 4 percent earlier in the decade, and then soared to more than 10 percent in 1975. The oil export embargo by Arab states and President Nixon's wage and price controls combined to create long lines at the gas pump and restrictions on gas purchases. The oil price shock exacerbated a buildup of inflation and inflation expectations, which was further worsened by rapidly rising prices of agricultural products and other commodities.
During this period, there were several Congressional attempts to curtail the Federal Reserve's independence. Sound familiar?
It was in this environment that the Federal Reserve grew increasingly concerned that the American public was uninformed about the Federal Reserve's statutory responsibilities, especially its monetary policy role. By 1976, a consensus had developed within the Federal Reserve System that an expanded public information program was needed to reach a broader segment of the American public and to dispel misconceptions about the Federal Reserve. This led the Fed to create a more professionally organized public information program at the Board and within the 12 Regional Reserve Banks. The recommended programs were designed to move the Fed from a "passive" information stance to a more active posture by expanding the dissemination of information to as wide an audience as possible.
The education efforts focused initially on improving public understanding of the Federal Reserve's purposes and functions and informing consumers of their rights and lenders of their responsibilities. Documents from the Fed at that time list several diverse groups who would benefit from the Fed's public information and education efforts, including: bankers, members of Congress, representatives of electronic and print media, consumer advocates, educators, students, representatives of organized labor, and the general public.2 Then as now, the audience was broad and diverse.
An expansion of public information programs, including economic education programs, began in earnest in the 1980s. During this period, Reserve Banks across the country undertook a burgeoning array of initiatives and activities to facilitate public understanding of the Federal Reserve and developed greater coordination and information exchange throughout the System.
Economic education also became a specialty within public information programs, supporting the development of publications, curricular materials, programs and Reserve Bank staff activities targeting K-12 educators and students.
Over the past decade, the Fed's education initiatives have broadened to include an additional focus on financial education and literacy. These initiatives concentrate on practical issues, such as: financial skill-building, economics education, bank account ownership, financial planning, wealth accumulation, consumer protection, and foreclosures—issues that affect many people at different stages of their lives.
As I'm sure you've noticed, there are some similarities between today and the environment of the mid-1970s. While we are tentatively emerging from a severe recession, unemployment remains high; thankfully, inflation and inflation expectations are under control However, there is a similar lack of understanding of the role of the Federal Reserve, threats to its independence and various proposals that would change its functions.
In some respects, confusion over the Fed's role is quite understandable, given the unconventional steps we have taken over the past two years to ensure liquidity flows in the wake of the financial crisis and the non-traditional monetary policy environment that we are in. At the same time, we have an important responsibility to explain our policy actions to a broad and diverse public. Today, as in the past, the better the public understands the work of the Fed, the easier it will be for us to achieve our mission.
What You Will to Get Out of this Conference
Today's conference provides a timely and important opportunity to discuss what the regional Reserve Banks and the Board of Governors are doing to ensure that the public understands the role of the Fed. The conference also offers an occasion for a discussion of what the Federal Reserve System is doing to provide opportunities for consumers to become better prepared to make complicated financial decisions. During the course of the conference, you will have the opportunity to share strategies for designing successful programs and partnerships in financial education, to learn how regional Feds make the most of scarce resources, to hear about research on the effectiveness of various financial education efforts, as well as some of the challenges involved in measuring the impact of financial education programs generally. In addition, you will have the chance to learn from partners and potential partners about strengths and areas for improvement in the Fed's financial education efforts.
Our Comparative Advantages
Let me conclude my remarks by briefly highlighting why I think that the Federal Reserve has a critical and ongoing role to play in the field of financial education. First, as I've mentioned, the Fed has two very important reasons for working to increase financial literacy: wanting consumers to have the information and knowledge necessary to make good financial decisions and wanting the public to have a better appreciation of the role of the Fed.
In addition, the structure of the Federal Reserve—with the 12 regional Federal Reserve Banks and the Board of Governors—allows us to work effectively on both the regional and national levels. The regional Feds are ideally positioned to develop financial education programs that take into account the needs of their regions. For example, they can respond to variations in state education standards and to regional economic conditions. In addition, they are adept at identifying strong partners in their communities.
At the same time, by working together with one another and with the Board of Governors, the regional Feds and the Federal Reserve System can impact financial education at a national level. The Federal Reserve System provides an important independent and unbiased source of financial and economic information, as well as a wide variety of opportunities for individuals to build their financial literacy.
Let me now turn the podium over to my colleague here in Chicago, Doug Tillett, who directs our Public Information and Economic Education efforts and is moderating the opening panel of the conference.
Thank you again for coming to this timely and important conference. I hope you enjoy the conference and your stay in Chicago.
Note: Opinions expressed in this article are those of Charles L. Evans and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.
1 Annamaria Lusardi, 2008, "Financial Literacy: An Essential Tool for Informed Consumer Choice?," Joint Center for Housing Studies, Harvard University, paper, February, No. UCC08-11.
2 Lawrence K. Roos, President Federal Reserve Bank of St. Louis, 1976, "A Proposed Plan for Improved Public Information for the Federal Reserve System," Roos report, August.