A lack of individual financial responsibility has destroyed the American dream for many, critically injured the city of Detroit, and crippled the great state of California. An unimaginable level of stress has been induced on the masses, all while many people became filthy rich. While many are to blame for creating a global financial crisis, many lessons must be learned. First and foremost, everyone must become financially literate.
Burton Malkiel noted in his classic book, A Random Walk Down Wall Street:
“Greed run amuck has been an essential feature of every spectacular boom in history . . . unsustainable prices may persist for years, but eventually they reverse themselves.”
While shopping for a vacation home in Miami in 2003, I told my realtor I decided not to buy in Miami because the homes were too overpriced. My realtor was furious and advised that I better act quickly, as prices were doubling every two years. Well, the house my former realtor bought for herself in 2006 has lost 50% of its value. So much for being a real-estate expert, her $800k home is now worth $400k.
Yesterday, Ben Bernanke stated at the Federal Reserve Bank Economic Conference in Boston:
“Today represents an unusual opportunity to educate the public…many people are not prepared to participate in the financial markets.”
Dr. Ben, I take that a step further: many bankers and realtors are not prepared to participate in the financial markets, and many politicians are not prepared to do anything.
Everyone must learn “real-world finance.“ It’s not taught in high school, or college for that matter. Even finance majors must learn “real-world finance.” Fortunate people learn “real-world finance” from their parents. Some learn on-the-go, others never learn at all. Some people take financial advice from self-proclaimed experts, often the very bankers vested with the malicious intent to prey on the weak, i.e. those who lack knowledge.
This is not limited to sub-prime lending to lower income individuals. Highly paid professionals are also the targets of bankers. In fact, bankers love dealing with doctors, lawyers, Phd’s, and other professionals. Large incomes allow for larger potential loans, greater fee income, and therefore larger bonuses for the bankers. The key is, stereotypically, financially successful people think they’re smart. After all, one has to be smart to earn a high income – not really.
Financially successful people stereotypically also want to look and feel like they’re successful by spending their money. Many “professionals” are extremely intelligent, but pure intellect, academic credentials, job title and financial intelligence, are mutually exclusive. The quest to live like the very banker CEOs enriched by the mass of fee revenue, is a ticket for bankers and realtors to market the American dream, at the expense of America. . . “wow, what a great McMansion, its even got French molding & it’s only $900,000, I’ll just re-fi in 3 years.”
It’s everyone’s responsibility to educate themselves financially. What’s your financial IQ? Be financially responsible and you will always be a winner.
“Don’t worry about making friends, don’t worry about making enemies, don’t worry about security, worry about winning. If you win, your enemies can’t hurt you, and if you lose your friends can’t save you. “
-Coach Paul Bear Bryant’s advice to Coach Lou Holtz