speeches · January 8, 2008
Speech
William Poole · President
Dollars and Sense
FinancialPlanningAssociationofMissouriandSouthernIllinois
St.Louis,Missouri
January9,2008
We are certainly living in extraordi- thingstheFederalReserveisdoingtoaddress
nary financial times. Our nation thisissue.Finally,I’lllookatwhatwecanalldo
has enjoyed a long economic tohelpAmericansknowmoreabouttheirfinances
expansion and inflation has been andtogivethemthetoolstomakebetterchoices.
relativelylow.However,sincelastAugust,finan- Asfinancialplanners,youofcoursehavealarge
cial markets have been in considerable turmoil stakeinthisenterpriseandwillbenefitinthe
resulting from subprime mortgage lending and longrunfromhavingbetter-preparedclients.I
a deflating housing boom. The Federal Open knowyourorganizationisalreadyinvolvedin
Market Committee (FOMC) is watching both someeducationefforts,andIapplaudyourefforts.
recession and inflation risks. Recession risks are Beforeproceeding,Iwanttoemphasizethat
primarily a consequence of financial turmoil, theviewsIexpressherearemineanddonot
whichhasthreatenedtospreadhousingindustry necessarilyreflectofficialpositionsoftheFederal
woes to the broader economy. ReserveSystem.Ithankmycolleaguesatthe
Willhousingsectorproblemspushtheecon- FederalReserveBankofSt.Louisfortheircom-
ments.JosephC.Elstner,publicaffairsofficerat
omyintorecession?Itistooearlytotellrightnow,
theSt.LouisFed,providedspecialassistance.
butwhatwecandoistoexaminethecurrentsit-
However,Iretainfullresponsibilityforerrors.
uationcloselyandtrytolearnfromit.Perhaps
“relearn”isabetterword,becausethemistakes
thatbroughtustothispointhavebeenmade
FIVE MISTAKES
before.Therearenonewlessonshere.Thelessons
arefamiliaronesthatneedtobemoreforcefully Let’sreviewthefivemajormistakescreating
drivenhomeandincorporatedinstandardfinan- thesubprimemess.
cialpracticeinthefuture.ThatiswhyI’vetitled First,toomanyborrowerstookonmortgages
myremarks“DollarsandSense.”TheFediswork- theycouldnotafford.Nothingnewthere,except
ingonprovidingthepublicwithbetterandmore forthenumberofsuchborrowers.Howcould
usefulfinancialinformationthatwehopewill somethingseeminglysopreventablehappen?
reducetheoddsonthehousingfinanceindustry Oneofthemainculpritswastheadjustablerate
repeatingitsrecentfinancialmistakes. mortgage,orARM.Actually,theproblemisnot
Myplanistoreviewthecurrentsituation theARMitselfbutgrosslyinadequateborrower
andexaminefivekeymistakesbyborrowersand understandingofthistypeofmortgage.The“Two/
othermarketplayers.Althoughmanyborrowers Twenty-Eight”ARMcalledforlowinitialpay-
havelittlefinancialexpertise,wewouldhave mentsfortwoyears,whichwouldthenresetto
expectedalltheotherplayerstobemoresophis- higherlevelsfortheremaining28yearsofthe
ticatedandexperienced.ThenI’llreviewwhere 30-yearmortgage.Toomanyborrowers,though,
thecountrystandsintryingtoeducateAmericans didnotinsistonknowingjustwhatthe“higher
inbasicfinancialliteracyandeconomicthinking. level”wouldmean,andtoomanymortgagebro-
Aspartofthatreview,I’llincludesomeofthe kersdidnotprovidethatinformationinaway
1
ECONOMICEDUCATION
theborrowercouldunderstand.Otherborrowers, erstoselltheirpropertiestorepaythemortgages.
wantingtotakeadvantageoflowinitialpayments, Theratingagencies,apparently,didnotbelieve
gavemisleadingorfalseinformationabouttheir thathousepricesmightstoprising,inwhichcase
abilitytorepay.Itisimportanttoemphasizethat themusicwouldstop.
thereisnothinginherentlywrongwithadjustable Thefinalentryonourmajormistakelistis
ratemortgages,andtheymakesenseformany investorswhoboughtthosesecuritieswithout
borrowers.However,borrowersmustbeprepared conductinganadequateanalysisoftheunderly-
forinterestrateresetsandabletopayhigherrates. inginvestments.Investorstooreadilyaccepted
Inrecentyears,toomanyborrowerswerenot theAAAratingsatfacevalue.Asfinancialplan-
prepared.Borrowersalsoneedtounderstand ners,youareveryfamiliarwiththeclichéthat
prepaymentpenaltiesintheirmortgagecontracts. “ifsomethinglookstoogoodtobetrue,itproba-
ThesecanmakerefinancingARMsintofixed-rate blyis.”Areachforyieldwithinadequateattention
mortgagesterriblyexpensive. toriskisanotherbasiclessonthatapparently
Secondinourmistakessummary,mortgage cannotberelearnedoftenenough.
brokersputtoomanyborrowersintounsuitable Itisinteresting,andabitdepressing,that
mortgages.AsImentionedinaspeechtoaSt. investmentprofessionalsmadefourofthefive
LouisrealestategrouplastJuly,withwidelyheld mistakes.Icanunderstandthemistakesmany
expectationsofrisinginterestratespricedinto financiallynaïveborrowersmadebuthavea
themarketsthroughoutthe2003-2005period,it hardtimeunderstandinghowsomanyinvest-
isdifficulttoavoidthejudgmentthattheseARM mentprofessionalscouldhavebeensowrong.
loanswerepoorlyunderwritten.Itwasimprudent Manyobserverspointtogreed,butIpreferadif-
formortgagebankersandlenderstoapprovebor- ferentexplanation.Shortsightednessratherthan
rowerswholikelycouldnotservicetheloans greedexplainsactionsthatledtolossesoftens
whenratesrose.Itisimportanttounderstand ofbillionsofdollarsandthefailureofmany
thatrisinginterestrateswerenotjustariskbut financialfirms.
actuallythemarketexpectation.Poorunderwrit-
ingnotonlyjeopardizedtheborrowersputinto
unsuitablemortgagesbutalsothebrokersthem- AVOIDING FUTURE MISTAKES
selves.Numerousbrokersarenowbankrupt,and
Iwillnowaddsomedetailtothreeofthese
manysurvivorshavesufferedlargelossesand
mistakecategories—borrowerswhocannotrepay,
sulliedreputations.
mortgagebrokersputtingpeopleintounsuitable
Third,itissurprisingtomethatinvestment
loansandinvestorswhodidnotdotheirhome-
banksjeopardizedtheirreputationsbysecuritizing
work.Hereismyquestion:Howcouldbetter
thesemortgageswhentheunderlyingloanswere
educationandfinancialdecision-makinghave
backedbyinadequateorspuriousinformation.
helpedpeopleavoidthesemistakes?
Damagedreputationsarealsocasualtiesofthe
fourthmajormistake:ratingagenciesthatplaced
Borrowers
AAAratingsonmanysecuritiesbackedbysub-
primemortgages.Theratingagenciesseemedto Toomanyknowtoolittleaboutcreditand
havebasedtheirratingsonabackwardlookat whatitscostsandrisksare.Startingwithcourse-
defaultexperienceonsimilarmortgagesbefore workoncreditusageinelementaryandmiddle
2006,ratherthanonaforwardlookbasedoncare- schoolsandcontinuingwithfinancialliteracy
fulanalysisofthelikelyabilityofborrowersto andeconomicsinhighschoolwouldgoalong
repayinlessfavorablemarketcircumstances.The waytowardequippingborrowerswiththeinfor-
reasondefaultexperienceonsubprimemortgages mationtheyneed,oratleastgivethemenough
wasrelativelyfavorablebefore2007isthathous- knowledgetoasktherightquestionsaboutwhat
ingpriceswererising,permittingstressedborrow- theycanaffordandwhatlendingtermsmean.
2
DollarsandSense
Mortgage Brokers nomicbasics?Thebriefansweristhatefforts
acrossthenationaremakingprogressbutwe
Manyhaveclosedtheirdoorsandgoneout
havealongwaytogo.
ofbusinessthroughunsatisfactorylending.In
Accordingtoa2007surveybytheNational
theJulyrealtorspeechImentionedearlier,I
CouncilonEconomicEducation:
emphasizedthatadurablestreamofprofitsin
mortgagelendingrequiresacontinuingflowof • Economics,traditionallypartofthesocial
capitalfrominvestorswillingtobuythemortgages studiescurriculum,isnowincludedinthe
anoriginatorwantstosellandsecuritize.Given educationalstandardsofallstates.
thedifficultyanymortgagebrokerfacesindiffer-
• 41states,upfrom28in1998,nowrequire
entiatingitsownproducts,thebestwaytostand
thesestandardsbeimplemented.Sounds
outandsurviveoverthelongtermistogiveout-
goodsofar,butthere’smore.
standingservicetomortgageshoppers.Turning
• Only17states,notincludingMissourior
outstandingserviceintofuturebusinessprospects
ispreciselytheroleforreputation.Afirm’sgood Illinois,requirestudentstotakeaneco-
namespreadthroughwordofmouthwillpay nomicscourseforhighschoolgraduation,
thehighestdividendsoverthelongterm.And upfrom13statesin1998.
goingtheextramilebymakingcertainthatbor- • Only22states,notincludingMissourior
rowersunderstandlendingtermsandareableto Illinois,requiretestingofstudentknowl-
servicethoseloanscancementthatreputation edgeineconomics,threefewerthanin
andkeepthosedoorsopenalongtime. 2004.
Personalfinance,anewersubjectincompari-
Investors
sonwitheconomics,isnowincludedintheedu-
HereIwanttolookatindividualinvestors,
cationalstandardsof40states,upfrom21in1998,
theonesyouknowsowell.Itmaybetruethat
with28statesrequiringthesestandardstobe
manyifnotmostsuchinvestorsputtheirmoney
implemented.Still,though,onlysevenstates
heavilyintomutualfunds,reducingsomeofthe
requirestudentstotakeapersonalfinancecourse
riskofholdingindividualstocksandbonds.What
forhighschoolgraduationandonlyninerequire
wouldhelpthemgreatly,Ibelieve,isamuch
thetestingofknowledgeinpersonalfinance.
betterunderstandingofwhattheirfundshold.
Missourinowrequirespersonalfinanceforgrad-
Mutualfundsareprofessionallymanaged,but
uationandtestsforknowledge;Illinoisrequires
thesubprimefallouthashittheproshard,too.
aconsumereducationcoursebutdoesnottest
InoneexamplefromourFederalReserveDistrict,
onthesubjectforgraduation.
twoinvestorsintwoRegionsMorganKeegan
Whatwehave,then,isamixedbagwhenit
mutualfundsseverelyaffectedbysubprimemort-
comestopreparingstudentstolearnaboutmoney
gageproblemsaresuingoversharpdeclinesinthe
andthechoicestobemadeinhandlingit.Our
valuesoftheirinvestments.AsofDecember13,
nationismakingprogress,butaswehaveseen
2007,theSelectIntermediateBondFundand
withthesubprimemess,weasasocietyhavea
theSelectHighIncomeFundweredown47and
56percent,respectively.Newsmediaaccounts lotmoretodoinequippingstudentsandadults
tellofdisastrousresultsbeingfacedbyother withtheknowledgetheyneedtomakewiser
investorsinsimilartypesofsecurities.Would financialdecisions.
investorsequippedwithbetterknowledgehave IknowtheFinancialPlanningAssociationof
avoidedsuchsteeplosses?Moreorganizations MissouriandSouthernIllinoisbelievesinboost-
shouldgetbehindeffortstoimproveinvestor ingfinancialliteracy.Yourwebsitetellsofthe
knowledge. projectsyou’veundertakentobettereducateyour-
Wheredoesthecountrystandintermsof selvesandyourclientsandthevolunteerwork
educatingourcitizensinthefinancialandeco- you’vedoneforthecommunity.AttheFederal
3
ECONOMICEDUCATION
ReserveBankofSt.Louis,andinourBranch findwecanreachmanymoreofthembyworking
citiesofLittleRock,LouisvilleandMemphis, throughtheirteachers.Ouraimistodroplarge
we’retryingtodoourpart,too. bouldersintheeducationpondandtoencourage
We’vegotatwo-prongedeffortgoing,with theripplestoexpand.
onepartaimedatcommunitydevelopmentand Wehavealotgoingoninthisareatoo;I’ll
acomplementaryeffortaimedatimprovingfinan- highlightsomeofthekeyprojects.
cialeducationintheschools.Onthecommunity ImentionedearlierthatMissourinowrequires
developmentside,weworkoneducatingcom- aone-semesterpersonalfinancecourse.TheSt.
munitygroupsandthroughthosegroups,their LouisFed’seconomiceducationexpertsare
members,aboutimprovingcommunitiesthrough helpingtotraineducatorswhowillbeteaching
makingbetterfinancialdecisions. thosecourses,settingupworkshopsforthem
Lastmonth,forexample,wehostedaseminar, andtrainingteachersinthenewcurriculum.
“HMDAtoHomeImprovement,”inSt.Louis. Wealsotakepart,asdorepresentativesfrom
HMDAistheacronymforHomeMortgage commercialbanks,inTeachChildrentoSaveDay,
DisclosureAct.Attendingweremortgagelending anannualeventforfirst-throughthird-graders.
experts,communitygrouprepresentatives,econ- IntheSt.Louismetroareaalone,ourvolunteer
omistsandgovernmentofficials.Discussions employeestaughtlessonsinover400classrooms
wereaimedathelpinghomeownersavoidfore- lastyearontheimportanceofsavingregularly
closuresandtakeadvantageofprogramsmaking andwhatitmeanstosaveoverthelongtermfor
homeimprovementsaffordable. somethingyoureallywant.
TheSt.LouisFedalsoparticipatesintheSt. Therearemanyplacesteacherscangotofor
LouisForeclosureInterventionTaskForce.It’sa usefulinformationandclassroom-readylessons
collaborationofrepresentativesofgovernment, onmoney,creditandeconomicconcepts.Twoof
financialinstitutions,andrealestateandnon- thebestarewebsites:first,ourBank’swebsite
profitorganizationsOneoutgrowthofthateffort atwww.stlouisfed.org.Clickingonthe“education”
isahotline,888-995-HOPE,thatcounselshome- linkbringsteacherstoconferences,materials,
ownersconcernedaboutforeclosure.Brochures lessons,teachingtipsandmuchmore.Theother
andtelevisionappearanceshelpedpromotethe siteisactuallyaportalat
hotline.Wehelpedinstartingasimilarprogram www.federalreserveeducation.org.It’sanentry
inSpringfield,Missouri. towebsitesprovidinghelpofallkindsforteach-
InLouisville,Kentucky,ourBranchstaffis ersofpersonalfinanceandeconomics.Just
involvedintheDon’tBorrowTroubleCoalition, aboutanytopicunderthegeneral“economics
anorganizationhelpingcitizensdealwithlending andpersonalfinance”headingisincludedin
issues,particularlyastheyrelatetomortgages. oneorbothwebsites,alongwithsupportmate-
TheKentuckyPredatoryLendingPrevention rialsandtipsonusingthem.
Committeeisanotherorganizationwehelpsup- InSt.LouisandourBranchcitiesofLittle
port;ithelpsfamiliesavoidmoneyscamsandto Rock,LouisvilleandMemphis,oureconomic
resolvefinancialproblems.We’realsoactivein educationstaffin2007conductedwellover100
similareffortsinArkansas,Indiana,Tennessee separatemeetings,workshops,competitionsor
andotherlocations. othereventsaimedatequippingteacherstopro-
Besidesourcommunitydevelopmentefforts, videtheirkindergartenthroughhighschoolstu-
theSt.LouisFedandotherFederalReserveBanks dentswiththeskillstheyneedtodealwithmoney,
workthroughstateeconomiceducationcouncils, debt,credit,savingandeconomicdecisionmaking.
centersforeconomiceducationandlocalschool Forexample,inearly2007,highschool
districtstooffermostlyfreeeconomicandfinan- teachersinSouthhaven,Mississippi,attendeda
cialeducationmaterialsandcurriculatoteachers. “GrowingSmartwithMoney”workshopledby
Wedosomeworkdirectlywithstudents,butwe ourMemphisBrancheconomiceducationstaff.
4
DollarsandSense
IntheSt.Louismetroarea,weworkedwithlocal • Writeop-edpieceshighlightingtheneed
librariestoputonaprogramformiddle-schoolers forexpandedfinancialeducationandoffer
called“MoneySmartsforKids.”Weworkedwith themtolocalnewsmedia.Don’toverlook
theKansasCityFedandcentersforeconomic influentialinternetbloggers…theycanhelp
educationstaffatMissouriuniversitiestoconduct spreadthewordquickly.
thefirst-everMissouriPersonalFinanceCompeti-
• Getbehindorstartfinancialandeconomic
tioninSt.Louis,KansasCity,Springfieldand
educationprogramsinprofessionalorgani-
Columbia,withthechampionshipheldin
zationsandlendyourskills.Weaskalot
JeffersonCity.AprogrambegunbyourLittleRock
ofoureducators;theycandoalot,butthey
Branchstaff,thePiggyBankPrimer,hashelped
can’tdoitall.Wecanalladdourvoices…
earlygradeschoolstudentsthroughoutourDistrict
andourselves.
tolearnmoreaboutsaving.Aprogramwehelped
rolloutinQuincy,Illinois,“YourPaycheck”is
expandinginourDistrict.It’saimedatteenagers,
CONCLUDING COMMENT
particularthoseholdingtheirfirstjobs,and
Thecurrentfinancialturmoilwilltakeawhile
teachesthemaboutpaychecks—whatthevarious
toplayitselfout.Thefundamentalsofourecon-
deductionsmeanandhowyoucanlearnmore
omyremainstrong,however,and2008looksto
aboutbenefits,saving,withholdingandmore.
beayearofrisinggrowth.Economicforecasters
That’sjustapartiallistingofthecommunity
expectslowexpansioninthefirsthalfoftheyear
developmentandeconomicandfinancialeduca-
andaquickeningpaceinthesecondhalf.Mean-
tioneffortswe’vegotgoing.Andthere’smoreof
while,ifborrowers,lendersandinvestorscan
thatcomingfor2008andbeyond.
refocusonfinancialbasicsandre-emphasize
Whatcanwealldotomovethistrendalong,
criticallessonsaboutcreditandrisk,thefinancial
toputlearningthebasicsofsaving,borrowing
futurecanbebrighterthanthesecondhalfof
andcredithigherinthepublic’smind?Thereare
2007.Forthatbrighterfuture,weneedtoinfuse
anumberofthings,anditisgoingtotakethe
oureducationatalllevelswiththelessonsof
FederalReserve,theFinancialPlanningAssocia-
2007—oldlessonstobesurebuteasytounder-
tionofMissouriandSouthernIllinois,andthou-
standataverypracticallevelfrom2007experi-
sandsofotherorganizationstopullitoff.
ence.Withcontinuingeffortwecanexpectthat
• Contactyourlocalschoolsandaskthem
financialupsetssuchasthecurrentonewillbe
wherelearningaboutsaving,spending,
infrequentandmilderwhentheydooccur.
investingandborrowingfitintotheircur-
ThankyouandI’dbegladtotakeyour
ricula,whatlessonsarebeingtaughtand
questions.
how.Bringupthissubjectatschoolboard
meetingsandparentmeetings.
• Supportlegislativeeffortstorequirecourse-
workineconomicsandpersonalfinance
forhighschoolgraduation.Letyourstate
representativesandsenatorsknowthrough
calls,lettersore-mailsandpersonalcontact.
5
Cite this document
APA
William Poole (2008, January 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20080109_poole
BibTeX
@misc{wtfs_speech_20080109_poole,
author = {William Poole},
title = {Speech},
year = {2008},
month = {Jan},
howpublished = {Speeches, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/speech_20080109_poole},
note = {Retrieved via When the Fed Speaks corpus}
}