When it comes to managing personal financial affairs, there is only so much an individual can know. For years, the financial literacy movement missed that. Greater financial education was seen as the answer to our debt and other money problems. But now we have a mind-bending scandal at the global investment bank Barclays to illustrate otherwise. Education alone is not enough.
Barclays has been socked with $453 million in fines from U.S. and U.K. regulators, which found that the bank had been manipulating market interest rates through false reports in order to bolster its own profit. The breadth of the investigation suggests that plenty other heavyweight global lenders from Citibank and J.P. Morgan to HSBC and Lloyd’s Banking Group have been engaging in similar behavior.
Never mind that in the current environment rates seem to have been manipulated lower — a plus for individuals using a credit card, borrowing for college or buying a house. Manipulation is manipulation. Next time, a megabank putting on a complicated trade for its own account might want higher rates. Besides, while low rates are good for borrowers they are a nightmare for savers and retirees living on a fixed income.
Beginning in 2005, Barclays (and probably others) reported their own borrowing costs as lower than they actually were. This influenced benchmark lending rates, including the widely used London Inter-Bank Offered Rate, known as LIBOR, to which many adjustable mortgages and other consumer rates are pegged. “It’s very important that we caught these guys,” Bart Chilton, a commissioner at the Commodity Futures Trading Commission, said in The New York Times. “Libor may sound like gobbledygook, but it’s the world benchmark for interest rates consumers pay.”
The key point is this: No amount of due diligence would have made this scheme apparent to a consumer — which is why the financial literacy movement is (and ought to continue) widening its approach. The movement began as an effort to teach people enough about money that they could help themselves with smart decisions and investments. This was embodied in the Bush-era idea of an “ownership society.”
In more recent years, though, a voice has emerged seeking greater focus on simplification of financial products, so that ordinary people can understand what they are buying. This voice also has called for greater institutional protections, like required third-party point-of-sale advice and shortened term sheets with key points in bold face. The argument is that the financial landscape changes so fast that no amount of financial education can keep up; that financial firms have so much marketing power they can overwhelm any lessons one might learn in a classroom.
Add to this the incentive to cheat. Individuals can learn to be wary of self-interested sales people. They can learn to budget and live within their means. But there’s little they can learn that would protect them from big banks manipulating the system. The Barclays scheme was not disclosed in anyone’s fine print. Education isn’t enough. Neither are simplified products and ready third-party advice. We need both—along with closer government oversight. Out there in Moneyland, it’s us against them. We need all the weapons we can get.