roger w ferguson, jr : reflections on financial literacy remarks by mr roger w ferguson, jr, vice chairman of the board of governors of the us federal reserve system, before the national council on economic education, washington, dc, 13 may 2002. * * * i am delighted to welcome the national council on economic education and the minneapolis federal reserve bank to washington. i want to commend your partnership and the important discussion you have organized for tomorrow. i also want to commend both institutions for their excellent leadership. in gary stern, president of the minneapolis fed and chair of the ncee, you have one of the most thoughtful, committed, and capable public servants i know. gary is also one of the world's best economic educators and is deeply committed to making economic and financial education a priority in this country. i decided to take advantage of your presence tonight to speak about the benefits of economic and financial education and about why such education matters to the federal reserve. i also want to spend a few moments examining the importance of focus and clarity in our goals and expectations. the benefits of education i know that i could speak for much longer than you care to listen about why the understanding of economics and finance is crucial for individuals in a market economy. knowledgeable and astute consumers promote competition among providers, which benefits us all. personal financial security enhances individual well - being. increasing national savings allows us to invest more productively for tomorrow. and, at a more fundamental level, our social fabric and national image are intimately connected to our material aspirations. the united states cannot be the land of opportunity unless all of our citizens have both the tools and the ability to use them to improve their lives and livelihoods. as you may know, i have been trained both as a lawyer and an economist. i think the point can fairly be made that the most critical underpinnings of our society are the constitution and our market structures. from my perspective, however, the education that we provide our citizens about the rule of law differs dramatically from what we provide about the functioning of markets. by the time i graduated from junior high school i had read the constitution ; not until much later did i study how prices are set in a market economy. this imbalance can and will be addressed by your work and that of many others. fortunately, as my federal reserve board colleague ned gramlich pointed out recently, changes in our financial system - - including the increasing complexity and diversity of product offerings - - have

held against investor mortgage lending, and the bank of england has proposed rules that effectively tighten lending criteria for investor mortgages. despite high rates of debt repayment, housing credit increased by 8 percent in the year to march 2016, its highest growth rate since 2008. new mortgage commitments are also elevated, running at an annual rate of 35 percent of outstanding housing debt. with high rates of churn in mortgage books, recent increases in interest - only lending and high debt - toincome lending could rapidly affect the quality of banks ’ overall mortgage portfolios, tending to dilute the improvement generated by the lvr restrictions. interest - only and high debt - toincome ( dti ) lending to housing investors has increased considerably more than for owner occupiers. persistent housing credit growth in excess of income growth has caused the household debtto - income ratio to grow steadily since 2012. at 163 percent this ratio now exceeds the previous peak reached during the gfc. there is a clear risk that on - going high house price inflation could lead to a further deterioration in the household debt - to - income ratio. while low interest rates have helped to contain debt - servicing ratios ( dsrs ) for new zealand as a whole, high and rising debt levels leave households very vulnerable to any future increases in interest rates or deterioration in economic conditions. while a large increase in mortgage rates is unlikely in the current global environment, at today ’ s high debt - to - income ratios, a relatively small increase in interest rates could put significant pressure on some borrowers. this is particularly the case in auckland, where dsrs for new buyers are close to 50 percent ( figure 3. 4 ). a 1 percentage point rise in interest rates for these new buyers would boost the proportion of income devoted to mortgage servicing by around 5 percentage points. bis central bankers ’ speeches figure 3. 4 representative buyer dsrs ( annual, % of average gross household income ) on the other side of the housing market is the inability of new supply to meet the growing demand, particularly in auckland. although auckland annual housing consents recently reached an 11 year high and are some 20 percent above last year in value, the number of residential building consents per capita in auckland is currently around 40 percent of the peak level achieved in the mid - 2000s. we estimate the shortage of houses in auckland has increased over the past year and may now be in the order of 20, 000 – 30, 000 houses. furthermore, the overall housing short