Remarks by Chairman Alan Greenspan
At the JumpStart Coalition’s Annual Meeting, Washington, D.C.
April 3, 2003
I am pleased to be here today to share with you my perspective on the importance of financial education. I commend the leadership of the JumpStart Coalition and the activities it has undertaken to support teachers working on the front-line of financial education.
Trends in Consumer Finances
As you are aware, today’s financial world is highly complex when compared with that of a generation ago. An understanding of how to maintain a checking and savings account at a local financial institution may have been sufficient twenty-five years ago. Today’s consumers, however, must be able to differentiate between a wide range of products, services, and providers of financial products to successfully manage their personal finances. Certainly, young adults have access to credit at a much earlier age than their parents did. Accordingly, they need a more comprehensive understanding of credit than was afforded to the previous generation–including the impact of compounding interest on debt balances and the implications of mismanaging credit accounts. In addition, as technological advances have contributed significantly to the dramatic changes within the financial services market, consumers more generally must be familiar with the role that computers play in the conduct of every traditional financial transaction, from withdrawing funds to gaining access to credit.
While the focus of your efforts is to provide youth with a solid foundation for understanding personal financial management, the benefits of that objective extend to a much broader audience. Data, both empirical and anecdotal, point to trends in consumer financial conditions that have caused concern among some consumer groups. For example, Federal Reserve statistics indicate that household debt outstanding increased more than 9 percent last year– the largest rate of increase since 1989. And while analyses suggest that, overall, this level of debt is being serviced adequately, reports of nonbusiness bankruptcy filings reaching record highs in 2002 reveal that many consumers are experiencing significant financial crises.
Regulators, lenders, community leaders, and consumer advocates continue to be concerned about abusive home mortgage lending practices. More recently, the emergence of certain deposit-linked products has also sparked debate among these parties. For example, one product marketed as protection against bounced checks has generated concerns among consumer groups ranging from the appropriateness of assessed fees to the possible unintended effect of reinforcing poor account-management practices on the part of consumers who do not properly monitor their accounts.
Trends in the Financial Services Industry
Perhaps, some may judge such information as an indication that the combination of market forces and industry trends has had negative effects on consumers. On the contrary, many benefits have accrued to consumers of household and business credit as the result of the remarkable growth and technological developments that have occurred in financial services. Computer and telecommunications technologies have lowered the cost and broadened the scope of financial services. As a consequence, specialized lenders and new financial products tailored to meet very specific market needs have proliferated. At the same time, the development of credit-scoring tools and the securitization of loan pools hold the potential for opening doors to national credit markets for both consumers and businesses. Deregulation has created important structural changes in the financial services industry and has contributed significantly to creating a marketplace that is increasingly competitive and highly innovative as a result of the entry of new players or expansion of existing players.
Throughout our banking history, we have seen significant adjustments to existing policies to enable markets to respond to the demand for services. These structural changes have heightened competition, resulting in market efficiencies that continue to help drive down costs and foster the emergence of increasingly diverse and highly specialized organizations. These entities range from banks and brokerage firms that offer their services exclusively through electronically based delivery mechanisms to locally based public-private partnerships that provide counseling and financing arrangements to low- and moderate-income families. Corporations, for example, often allow employees to self-direct their investments in pension and other benefit plans, whereas employers dictated such decisions twenty years ago. The advent of on-line brokerage firms has enabled individual investors to directly conduct stock transactions.
The Role of Financial Education
However beneficial, constant change, of course, can be unsettling, and one challenge we face is overcoming such anxieties. But just as the rapid adoption of new information technologies has expanded the scope and utility of our financial products, so, too, has it increased our means for addressing some of the challenges these changes pose. For example, just as universities provide remote learning options to allow students to pursue continuing education via the Internet, consumers can use software to create customized budgets to develop long-term savings strategies for retirement or for their children’s college education. In both scenarios, technological advances represent the opportunity for achieving efficiencies and exercising preferences, but only when the end users possess the knowledge necessary to access pertinent information and to capitalize on it.