Come on, be honest: you never really understood most of this stuff. Not just the more complex terms, like credit swaps or derivatives, but the basic material. Compound interest. Balloon payments. You pretended. We all did. You would read about a hedge fund, and nod. You had no idea what a hedge fund did.
The great unspoken issue behind the tanking of the market, the mess in subprime mortgages and the bailout bill is that Americans don't understand the basics of the economy. Faced with financial instruments increasingly arcane and complex and financial institutions increasingly faceless and vast, most outsourced knowledge and responsibility to those they assumed were ethical and responsible. The banker, the broker, the rating agencies: they would look out for us.
Part of the current distress is discovering that this was not necessarily true, but part is knowing that we left ourselves no other choice. Most of us didn't know enough to suspect the emperor had no clothes, much less say it aloud. Is there any other possible explanation for the fact that millions of people clearly signed mortgage documents without understanding them, or that thousands gladly handed off their money to Bernard Madoff without ever hearing a clear explanation of his investment strategy?
John McCain took a lot of heat during the presidential race for saying he'd never really understood economics as well as he should have. But McCain's real sin wasn't only ignorance, but also candor, combined with the suspicion that many of his colleagues were no better versed in the subject than he was. When one senator inveighed against those who had not read the bailout bill, he was missing the point: if you read it, would you understand it?
Maybe this has always been so, given chronic math anxiety, but modern finance made widespread ignorance both more inescapable and more perilous. When pensions were a given, it was not necessary to understand the basics of a 401(k). When mortgage instruments were of the one-size-fits-all 30-year-fixed variety, it was not necessary to understand that "subprime" might become a synonym for "foreclosed." The United States was once a country whose biggest businesses provided goods and services. Only recently did it become a country whose biggest businesses provided financing for companies that provided goods and services, often through a process that resembled blackjack.
Don't get me wrong: this is not a big-bad-banks rant, nor is it a suggestion that the average taxpayer is responsible for corporate misfeasance. But if the current repression—worse than a recession, not quite a depression—can teach us anything, it's that you can't proceed knowledgeably, in terms of personal finance or political judgment, in an area you don't really know much about.
What's a nation to do? It might be helpful if parents talked Econ 101 with their kids, but it turns out that, like sex, most prefer teenagers to learn about investing elsewhere. Apparently their friends tell them this: just use plastic. A 2007 study by Sallie Mae showed that more than half of college students had run up in excess of $5,000 in credit-card debt while in school, and a third had more than $10,000.
So now certain states are mandating finance courses in high school. Some researchers argue that none of that does much good, but let's hear a shout-out anyhow for the teacher in Oregon who showed her students how much an item really costs if you put it on a Visa card and don't pay the full balance immediately. (For extra credit: do you know how much the rate is on your credit cards right now?)
It's easy to rail against the gatekeepers, against the ineptitude of the Securities and Exchange Commission and the uselessness of the ratings agencies that lauded corporations now on the skids. (It's also easy to give this common-sense advice to captains of industry: no office redecoration has to cost more than a starter home.) The operative mode at the moment for describing those who lost all their money in Madoff's Ponzi scheme is "victim." But it's axiomatic that one easy way to be victimized is not to ask the right questions.
Americans have given up understanding much of what passes for daily life. It was no accident that, 20 years ago, a book called "The Way Things Work" stayed on the bestseller list for a year. No one knows the way things work anymore; their houses flood because they don't know where the cutoff valve for the water is.
But there's also a precedent for assuming control, even of complex issues. Look at the way many Americans deal with health care today compared with a generation ago. Once doctors, like financial managers, were seen as keepers of a mysterious flame and patients as people who should simply do what they were told. Today many more patients think of themselves as partners and work hard to educate themselves about their health and their ailments before having surgery or taking medications.
I keep remembering a time, 30 years ago, when I was assigned a feature story about a bar that served Wall Street workers. Desperate, I went to a business reporter and told him I needed a tutorial because I really didn't understand the stock market. He burst out laughing, and when I cringed, he quickly said, "Half of the people in this newsroom don't understand it, either. But none of them would admit it." Sometimes the most useful thing you can do is admit what you don't know, because what you don't know will hurt you. By all means, trash AIG. But it would be best if you understood exactly what they'd done in the first place.