Tim Harford worries about financial illiteracy:
You buy a new £1,000 computer and borrow money to pay for it. You have a choice: either (a) pay 12 monthly instalments of £100; or (b) borrow money at an APR of 20 per cent, meaning you pay back £1,200 at the end of the year. Which offer is better – or are they (c) identical?
Back when I had time to read The New Yorker, I was a big fan of James Surowiecki. I would always look for his column; if it was there, it was usually the first thing I would read. Unfortunately, he’s no fan of mine.
Surowiecki makes three points about our recent long post on nationalization:
It makes intuitive sense that complicated mortgage products would pose the most danger the borrowers who were least able to understand them. But did that intuition bear out in the real world? Sadly, yes. According to a new paper by Kristopher Gerardi, Lorenz Goette and Stephan Meier, "foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared with the group with the lowest measured level.
Failing to pay for the deferred costs of current expenditures gets all those practicing credit card budget thinking in trouble. That includes lots of individuals. But it also includes many governments. They pay huge rewards to special interests and act like they think the cost doesn’t exist. Only an extremely financially illiterate society could elect so many of these people.
President Barack Obama called for linking financial aid to college affordability when he addressed Congress last month, but even as costs keep rising, some experts say not to expect crucial changes this year.
Reforming how financial aid is distributed – with incentives to keep tuition down – probably won’t come until after Congress tackles equally thorny changes in primary and secondary school education, known as K-12 in the U.S.