I am following up my post of December 11th to let you know that the President’s Advisory Council on Financial Literacy will present its annual report on January 6th. The meeting is open to the public. To find out more, click here.
-John
3 comments:
Anonymous
said...
Curiously, the President's Advisory Council on Financial Literacy (PACFL) does not show any interest in using the mathematically-true (historically called the "EFFECTIVE") Annual Percentage Rate (EAPR) instead of the simple-interest (Nominal) APR (NAPR)... adopted in 1968 as part of the Truth In Lending Act in the Consumer Credit Protection Act. In PACFL's book, "Money Math", they have a through explanation of compounding in SAVINGS. The book is sponsored by the Treasury and Citi. Conspicuous absent is any mention of BORROWING and the fact that the current APR calculation is not compounded. At One of the meetings I ask the head of the Youth Committee about this disparity and that person said the kids did not borrow and (therefore) did not need to know about lending. Well, if advocacy groups's figures are correct, may students, when they begin college, take out college loans and use credit cards. When I asked a staff member who drew up the booklet why they didn't mention borrowing, that person said they were told on what to write. (Nuff said!) The Truth in Lending Act was passed when finding computers with compounding was diffucult. Now a $4.95 hand-held calculator (LeWorld) at Wal-Mart has a compounding function. The Truth in Saving Act (passed in the '90's) uses the mathematically-true compounded APR, the EAPR. So why not use that method in the Truth in Lendings Act? The PACFL do not mention any of this in their adopted draft to the President (who appointed them). Strangely there is no one in PACFL from consumer advocates.
It is a shame that we are skirting the real issue of our time. How do we get out of this economic quagmire? It seems that we are spending Billions in the hope that these monies will solve the problem. The real problem is the “lack of confidence” by the Borrower in his/her ability to make payments on loans and mortgages, and the “lack of confidence” by the Lender in believing that the Borrower will do so.
THERE IS A SOLUTION. The key is the Borrower’s ability to make the monthly mortgage payments on the Subprime and “Toxic” mortgages that will be Resetting in 2009 as part of the 2nd “Tsunami” Wave of Foreclosures.
If we can “naturally” guide the Borrower to avoid default, we will “turn it all around”. Everyone expects that the Borrower will default and be foreclosed. However, once the markets see that the mortgages are not defaulting, a few wonderful things will happen. First, the media will report that the rate of foreclosure is dropping. Second, the consumer will have more confidence in his/her ability to handle his/her finances. Third, the valuation of the Mortgage Backed Securities will “rise from the ashes”, and all of the previously downvalued securities, whose underlying assets were these “Toxic” mortgages, will encourage investors to come back into the market.
In fact, the biggest winner will be the US Gov’t who has the greatest stake in the valuation of these “Toxic” mortgages.
In conclusion, the key is the Borrower… The Solution is a program of “Immediate and Specific Financial Guidance” for the Borrower to make this all happen. The simple fact is that the underlying assets of the Mortgage Backed Securities and other related investments are the "Toxic" mortgages.
Everyone is betting that the borrowers will default and foreclosures will follow. The key to increasing the valuations of these securities is the borrower's ability to avoid default. The borrower's track record is poor. Note that after loan modification, the re-default rate is 60% within 6 months! The borrower's failure is to be expected. After all, the borrower has no guidance and is like a "boat without a paddle".
The solution is a program of "Immediate and Specific Financial Guidance" that will help the borrower "naturally" accomplish the monthly payment, without "bailout" or extensive loan mods which have proven to be a failure. This program is NOT the so-called Financial Literacy initiative that simply disseminates "information", but rather it is a program that will help the borrower "understand" how to manage money and avoid the pitfalls that have previously caused financial distress.
Samuel D. Bornstein Professor of Accounting & Taxation Kean University, School of Business, Union, NJ Tel: (732) 493 - 4799 Email: bornsteinsong@aol.com
Thank you for your post. It may be true that more practical borrower-centric approach to the immediately crisis at hand makes sense. In my view, though, lack of financial education is at the heart of this crisis. In the long term, financial literacy education can and should start early. See my 10/21 post about the McCormick/Godstead paper on emergent financial literacy for more. Kids must grow up as savers first and spenders second and I hope to help parents do that.
3 comments:
Curiously, the President's Advisory Council on Financial Literacy (PACFL) does not show any interest in using the mathematically-true (historically called the "EFFECTIVE") Annual Percentage Rate (EAPR) instead of the simple-interest (Nominal) APR (NAPR)... adopted in 1968 as part of the Truth In Lending Act in the Consumer Credit Protection Act. In PACFL's book, "Money Math", they have a through explanation of compounding in SAVINGS. The book is sponsored by the Treasury and Citi. Conspicuous absent is any mention of BORROWING and the fact that the current APR calculation is not compounded. At One of the meetings I ask the head of the Youth Committee about this disparity and that person said the kids did not borrow and (therefore) did not need to know about lending. Well, if advocacy groups's figures are correct, may students, when they begin college, take out college loans and use credit cards. When I asked a staff member who drew up the booklet why they didn't mention borrowing, that person said they were told on what to write. (Nuff said!) The Truth in Lending Act was passed when finding computers with compounding was diffucult. Now a $4.95 hand-held calculator (LeWorld) at Wal-Mart has a compounding function. The Truth in Saving Act (passed in the '90's) uses the mathematically-true compounded APR, the EAPR. So why not use that method in the Truth in Lendings Act? The PACFL do not mention any of this in their adopted draft to the President (who appointed them). Strangely there is no one in PACFL from consumer advocates.
It is a shame that we are skirting the real issue of our time. How do we get out of this economic quagmire? It seems that we are spending Billions in the hope that these monies will solve the problem. The real problem is the “lack of confidence” by the Borrower in his/her ability to make payments on loans and mortgages, and the “lack of confidence” by the Lender in believing that the Borrower will do so.
THERE IS A SOLUTION. The key is the Borrower’s ability to make the monthly mortgage payments on the Subprime and “Toxic” mortgages that will be Resetting in 2009 as part of the 2nd “Tsunami” Wave of Foreclosures.
If we can “naturally” guide the Borrower to avoid default, we will “turn it all around”. Everyone expects that the Borrower will default and be foreclosed. However, once the markets see that the mortgages are not defaulting, a few wonderful things will happen. First, the media will report that the rate of foreclosure is dropping. Second, the consumer will have more confidence in his/her ability to handle his/her finances. Third, the valuation of the Mortgage Backed Securities will “rise from the ashes”, and all of the previously downvalued securities, whose underlying assets were these “Toxic” mortgages, will encourage investors to come back into the market.
In fact, the biggest winner will be the US Gov’t who has the greatest stake in the valuation of these “Toxic” mortgages.
In conclusion, the key is the Borrower… The Solution is a program of “Immediate and Specific Financial Guidance” for the Borrower to make this all happen.
The simple fact is that the underlying assets of the Mortgage Backed Securities and other related investments are the "Toxic" mortgages.
Everyone is betting that the borrowers will default and foreclosures will follow. The key to increasing the valuations of these securities is the borrower's ability to avoid default. The borrower's track record is poor. Note that after loan modification, the re-default rate is 60% within 6 months! The borrower's failure is to be expected. After all, the borrower has no guidance and is like a "boat without a paddle".
The solution is a program of "Immediate and Specific Financial Guidance" that will help the borrower "naturally" accomplish the monthly payment, without "bailout" or extensive loan mods which have proven to be a failure. This program is NOT the so-called Financial Literacy initiative that simply disseminates "information", but rather it is a program that will help the borrower "understand" how to manage money and avoid the pitfalls that have previously caused financial distress.
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 - 4799
Email: bornsteinsong@aol.com
Samuel,
Thank you for your post. It may be true that more practical borrower-centric approach to the immediately crisis at hand makes sense. In my view, though, lack of financial education is at the heart of this crisis. In the long term, financial literacy education can and should start early. See my 10/21 post about the McCormick/Godstead paper on emergent financial literacy for more. Kids must grow up as savers first and spenders second and I hope to help parents do that.
-John
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