Frederic S Mishkin: The importance of economic education and financial
literacy
Speech by Mr Frederic S Mishkin, Member of the Board of Governors of the US Federal
Reserve System, at the Third National Summit on Economic and Financial Literacy,
Washington DC, 27 February 2008.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
* * *
As an educator myself, it's a pleasure to be here today to take part in this important event
that brings people together from educational organizations all over the country, with the
common goal of educating students and citizens in the fundamentals of economic and
financial literacy. As many of you know, the Federal Reserve has had a long and fruitful
relationship with the National Council on Economic Education (NCEE), through our many
Reserve Bank collaborative efforts around the country, and through leadership at the national
level. This leadership is evidenced, in part, by the involvement of my former and present
colleagues on the Federal Open Market Committee, Cathy Minehan and Gary Stern, who
currently serve as NCEE board members. Cathy, of course, is the former president of the
Federal Reserve Bank of Boston, a bank that under her leadership has played a key role in
furthering economic education in our New England states. Gary is president of the Federal
Reserve Bank of Minneapolis, from where he has served not only as a long-time member on
NCEE's board, but also as its chair. And they are just two of the many Federal Reserve Bank
presidents and officials who have worked to foster and improve economic education with the
National Council over the years.
There can hardly be a better time to make the case for economic and financial literacy than
right now. Others have doubtless stood before an audience like you in years past and made
the same case, but now we face a downturn in our housing industry fueled, at least in part,
by unwise mortgage borrowing and, at times, abusive lending practices. Improving
consumers' knowledge of the home mortgage process will better equip them to avoid
unsuitable mortgages in the future. Our national economy has been strained by this housing
slowdown and other forces, causing policymakers and others to debate what response is
necessary. Also, during this election season, we are reminded of the importance of economic
issues. Just a brief consideration of these three cases shows that a better-educated citizenry
can not only contribute to a better functioning economy, but also to a more-effective
government.
On the first point, many lessons can be drawn from the downward swing in the housing
industry, ranging from those that individual consumers can learn at the micro level, to those
that financial companies can learn about investment and oversight. In that regard, the
Federal Reserve has proposed new rules to strengthen regulatory oversight and to protect
consumers in the future, and we continue to assess this episode to determine what more can
be done to help homebuyers and homeowners. Of course, one of the most effective ways to
help consumers is to empower them with information. And this gets to our first case for
economic and financial literacy: Improving consumers' economic decision making will
enhance the effectiveness of new rules and regulations. And while we at the Federal
Reserve are charged with regulatory duties, we certainly see the value of education and the
positive impact it can have on the broader economy. While the current troubles in the
housing industry stem from a number of causes, a better-informed citizenry would likely have
resulted in more-prudent decision making and, consequently, less harm to the economy.
In the matter of the national economy, here the call for economic education is based on the
idea that a better-informed citizenry makes for better economic policymaking. This is a subtle
argument, but its logic is no less clear. As my friend Alan Blinder, the noted Princeton
economist and textbook author, as well as the former vice chairman of the Federal Reserve's
Board of Governors, has said, an uneducated citizenry can lead to simplistic policy solutions,
and those solutions are usually suboptimal. "The fact that the basic level of economic literacy
in the country, indeed in the world, is so low," Alan has said, "is one of the things that leaves
the political process so vulnerable to this malady."1 Now, even Alan would admit that it's
difficult to draw a direct line from economic literacy to economic policymaking, but politicians
listen to their constituents at home, just as they are supposed to do. And at a time when our
elected officials are confronted with a myriad of options to address a slowing economy, or
when they consider the increasing fears about a globalizing economy, it's fair to ask whether
they are getting good economic counsel from their constituents. This is not to say that there
is only one valid answer for these complicated questions, but it does mean that we get a
better answer when we are all better informed. Let me reinforce this point by sharing this
quote from Ben Bernanke, Chairman of the Federal Reserve's Board of Governors:
The Federal Reserve's mission of conducting monetary policy and
maintaining a stable financial system depends upon the participation and
support of an educated public. Accomplishing this mission involves
tradeoffs and tough decisions. As the Fed pursues the monetary policy
objectives that have been set out for us by Congress - to pursue price
stability, maximum employment, and moderate long-term interest rates - it
is essential that the public understand our objectives and our actions.
Educating the public about the reasoning behind our decisions helps build
confidence in our economic system - another critical factor in keeping our
economy running smoothly.2
Chairman Bernanke made those comments nearly two years ago, but the message is no less
relevant today.
Let's now consider our third case for economic and financial literacy - the role of citizens as
voters. Americans elect a president every four years and we also send representatives and
senators to Washington. As is so often the case, the pundits and the opinion polls tell us that
the top issues on voters' minds this year are those relating to the economy. What do the
candidates have to say about how, if at all, the federal government should address the
lagging national economy? How about issues relating to trade? Taxes? Income inequality?
Even issues that are not often described as economic - such as health care, education, and
the environment - are informed by an understanding of economic principles. All these issues
are better understood by an appreciation of tradeoffs, cost-benefit ratios, and opportunity
cost, to name just a few core economic tools and principles.
Finally, as we are so often told, people vote with their pocketbooks. And not only do they
vote with their pocketbooks, they also make a lot of pocketbook decisions every day that
have an impact on the health of the economy, such as whether to take on a particular
mortgage, how much to save and invest, whether to lease or buy a car, and how to manage
credit cards. This brings us back to the importance of financial literacy. The choices we make
as individuals - as consumers, investors, and even voters - are linked to the broader
economy in ways that we don't always appreciate. However, one thing is certain - we make
better decisions if we are better informed, and the whole economy benefits. That's the
promise of economic education - to get back to the title of this session - that it not only
improves the lives of individual consumers, but that it also makes for more-effective policy
and a better economy. Delivering on that promise is the hard part, of course, but that's where
the National Council comes in. We at the Federal Reserve are proud of our relationship with
the National Council and with other educational organizations around the country, and we
look forward to continuing this important work. The task at hand is not easy, as all of you
know, but the returns are high.