Friday, March 26, 2010

Regional Feds and Financial Literacy

I recently visited the Federal Bank of Richmond to give a presentation at their Community Development Advisory Council’s spring meeting. Under the leadership of President Jeffrey Lacker, the Community Affairs Office of the Bank is making the promotion of financial literacy one of their strategic goals.

Regional Feds are ideal vehicles for the promotion of financial literacy. They have an intimate knowledge of the local economy and of the problems and most pressing needs in the community. They are in contact not only with local banks but with business owners and employers, community development agencies and not-for-profits. Much of the conversation that took place during my short visit to Richmond—including during coffee breaks and on a shared cab ride to the airport—was about using business principles to help development in the local community. This is ideal grounding for financial literacy; we need to develop and implement effective programs and avoid feel-good initiatives that may go nowhere.

So, I welcomed the hard questions that I was asked during the presentation, the insistent focus on what works and what the evidence shows about the effects of financial literacy. I prepared a lot for this audience because I knew I would be facing researchers who understand the nuances of research work and also economists and businesspeople who are interested in the relevance of the subject to their work.

Regional Feds have active research departments and some of the best research originates from these banks. Not only do these researchers not have teaching commitments (which—believe it or not—take a lot of time!) but they often have access to great data. They are confronted all the time by tough and important questions and this directs them toward research that is of economic and policy relevance. Economists from the Richmond Fed’s research department have written about entrepreneurship and financial education, among other topics. They had produced a review of the effectiveness of financial education that I have used in my research and that I discussed with them at the meeting.

During the lunch discussion in an elegant room in the high floor of the building, we talked about financial literacy in schools. Two main ideas emerged that I want to credit to the economists from the research department.

First, the advancement of learning normally builds over the years: one first learns beginning Spanish, then masters intermediate Spanish, and then can take advanced Spanish courses in the later years of high school. Similarly, one starts by reading short chapter books, then simple essays, short stories, then novels . . . it takes a while to build up to War and Peace. But financial education is often a stand-alone course offered in the final year of high school without much, if any, preparation in previous years. It is hard to imagine, even from a simple pedagogical perspective, that this method could be effective either in teaching financial literacy or in making financial knowledge stick. (In my case, I remember little from my one Spanish course but I could challenge Schwarzenegger to a Hasta la vista, baby! contest.)

The second idea is that one of the objectives of financial literacy education should simply be to make people interested in learning more; laying the groundwork so that people will seek out information and education over the course of their life. In the same way that good English literature instruction makes us appreciate a good book and fosters a taste for reading, so good financial literacy instruction may give people a taste, early in life, for future learning: reading the business section of the newspaper and making an effort to incorporate good financial practices into everyday life.

President Lacker took me around the building that houses the Richmond Fed, with its stunning views of the James River. He pointed out the bridges from the Civil War era that are still standing across the river. He spoke of the history of Richmond, and how much he enjoys living there. And he spoke with pride about the work that the Bank is doing. I returned home content and very much convinced that, in the Richmond district, financial literacy is in good hands.

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