Education and the Credit Crisis

Educated consumers would be a strong first line of defense in preventing a repeat of the current global financial crisis.

In the latest insult adding to the injuries assailing the housing market, stock market, credit market and all things financial, the default rates are rising on consumer credit card debt, prompting banks to cling even more tightly to their cash reserves. Well, we knew this was coming. Given rising unemployment rates and home foreclosures, and falling retail spending, it was obvious that the consumer was in trouble. As I wrote in a previous article, economic security is solidly linked to our overall national security, and indeed, the Treasury and Federal Reserve are intensively involved with the question of how to control the damage in the near term as the crisis spreads across the globe. My question is, how can we prevent this from happening in the future? I think educated consumers would be a strong first line of defense.

Two of the factors blamed for the current economic mess are really two sides of the same coin: predatory or careless lending practices on the part of creditors, and profligate spending on the part of consumers.

On the creditors’ side of the coin, there should be little sympathy for institutions that do not perform due diligence in making their loans, nor for banks which put an unacceptably large percentage of their capital into risky investments. These are business people who presumably come to the world of finance armed with specialized education and training. Assuming they should have known what they were doing, it is appropriate to call for a return to more stringent regulation after years of deregulated excess. But if deregulation has happened once, it can happen again, and our corporations have soundly demonstrated that in a deregulated capitalist system, ethics and caution can be thrown to the winds wherever there is a buck to be made. We need more durable protection than just regulations. And that brings us to the consumer’s side of the coin.

One might argue that the consumer, saddled now with his subprime mortgage (or his foreclosure notice), his SUV which is worth less than he owes on it, and unmanageable credit-card debt, is also at fault for failure to perform due diligence on his own behalf. But realize this: generally he enters the world of finance completely unprepared to think in terms of a basic personal budget, much less things like compounding interest, fixed or adjustable interest rates, amortization of loans, hidden fees, depreciation, and all that other stuff in the fine print. Add to this the dismal performance of our education system in imparting basic math skills, and it’s easy to see how the consumer can quickly be led down a road which he would have avoided, had he only known what he was getting into. Knowledge is power, the saying goes. We would do well as a nation to empower the consumer through the education system.

Currently most American children receive no formal education on even the most basic financial matters; if they receive any training at all, it most likely comes from their parents. But too many parents either don’t pass on their wisdom to their children, or are enmeshed in serious financial problems of their own. That may be starting to change, but by and large, our nation’s youth hasn’t a clue until they leave home for college or their first apartment, and then they quickly get into trouble.

As an Army officer, I frequently became aware of the financial problems of young troops who were away from their parents and managing their own finances for the first time. It was a frighteningly common mistake to think that “as long as you have checks there is still money in the bank.” No, it was not a joke; that same misconception cropped up a few times over the years. The thought that there might be actual math involved seemed not to occur to first-time bank account holders. Credit cards were even more insidious, with their high interest rates and hidden fees. When I asked one soldier if he would take out a loan with a 14% interest rate, he replied, “No way! That would be stupid, how would I repay that?” When I pointed out that was exactly what he was doing every month that he did not pay off his credit card in full, I could see a light go on in his expression. But it wasn’t a happy revelation.

Keep in mind that these were some pretty bright young people. Every single one of them had at least a high school diploma. Not a GED – an actual diploma. Yet they were woefully unprepared to navigate the most basic financial functions once they were on their own, and that is pretty typical. Happily, the Department of Defense has long been a leader in recognizing this problem and providing training and assistance as well as a comprehensive strategy to alleviate it. Come to think of it, a lot of government entities have financial education programs, including the Federal Reserve, the Federal Trade Commission, and the US Financial Literacy and Education Commission, to name just a few.

Yet even with all this information freely available, few people think about finances until they are adults and perhaps already in over their heads. The current administration recognizes the problem, if belatedly. Back at the beginning of 2007, when the housing markets were noticeably cooling and the storm clouds could be seen gathering, the President signed an Executive Order establishing the President’s Advisory Council on Financial Literacy. It reads in part: “To help keep America competitive and assist the American people in understanding and addressing financial matters, it is the policy of the Federal Government to encourage financial literacy among the American people.” Somewhere in the middle of the Order, there is a directive for the Council to provide advice on the means to “improve financial education efforts for youth in school and for adults in the workplace.” I’m all for that!

If high school is about preparation to perform and compete in the real world, then personal finances should absolutely be included as a standardized federal requirement on curricula everywhere – after all, this is real home economics! Materials for such courses already exist, thanks to a number of government agencies and private groups, for example the US Treasury and Junior Achievement, but these programs are nowhere near universal, and much of the effort depends on volunteers. Some teachers incorporate personal financial planning into their math or economics curricula, but this, too, is by no means universal.

All consumers must be financially enlightened before embarking on their adult lives. Advance knowledge would enable the average consumer to avoid predatory lenders, and help create more public pressure to keep credit practices fair and reasonable, which in turn would help avoid defaults and keep our institutions sound. I would advocate, at a minimum, a yearlong course – you can call it math or home economics – in which students would work with a notional family budget, realistic recurring expenses, and unexpected emergency expenses; learn how to manage a bank account, a credit account, and loans such as car notes or mortgages; and learn about how to earn money through basic investment vehicles such as certificates of deposit, bonds, mutual funds and retirement accounts. Not least, they need to be able to recognize the tipping point between a healthy cash flow and destructive debt.

We have known for years that our economy was riding an expanding bubble of credit, fueled by too many consumers carrying too much of that destructive debt. Much of this debt was never real money; it consisted of interest and fees and penalties that the creditors assumed they could collect, and the debtors assumed they could pay, until it all fell apart. As is the way of bubbles, it is now collapsing to reveal that there is nothing inside, with national and even global implications.

Copyright R.N. Phillips, October 2008

Complication, Obfuscation - Voter Confidence and Technology

While technological innovation vastly improves our quality of life, the more complex any system is, the more chance there is for something to go wrong.

Just 30 years ago, we did not even have a microwave oven in our house, and couldn’t even conceive of ever owning a computer. Just 20 years ago, the offices I worked in had only two computers and we marveled at the massive 20 megabytes of space they had on the hard drives. Now, riding the crest of an explosive wave of technology, I have an MP3 player with more than 1000 times the capacity of those office computers. Cell phones, electronic organizers, GPS and web surfing on mobile devices are commonplace. Even more recently, such science-fiction staples as robotic prosthetic limbs are edging into reality. All of this represents a vast improvement in our quality of life; however, the more complex any system is, the more opportunity there is for something to go wrong with it. I still have a manual typewriter, which can operate in blackouts and can survive being dropped or even getting rained on. It’s not fussy. And I have never met a pencil with dead batteries or a virus. Thus, for any process where the results are of great importance and high technology is not absolutely required, we are probably better off using the old stubby-pencil method – keep it simple! One of those instances is in the voting booth.

Following the disastrous 2000 Presidential elections, with Florida’s notoriously confusing “butterfly ballots” and election workers puzzling interminably over whether to count “hanging chads” or “pregnant chads,” Congress mercifully passed the 2002 Help America Vote Act. HAVA was intended to simplify the voting process and make it accessible to all eligible citizens. Unfortunately, many jurisdictions actually complicated the process even further by opting for electronic voting devices.

Electronic data is highly ephemeral in nature and easily corrupted or lost through malfunctions. Worse, it can be just as easily manipulated with trace evidence which is technically difficult to notice, much less identify, analyze and prove. Further, the otherwise desirable ability to store vast amounts of data on a small device has the undesirable consequence that a vast amount of data can be lost forever with a misplaced laptop or damaged hard drive.

The performance record of the voting machines thus far should give us pause as we approach the Presidential election. At the very least, every precinct should be required to maintain a paper trail and conduct exit polling and a paper audit of some percentage of the electronic votes. If there are discrepancies, the machines must be examined.

Across the country, there have been cases of faulty machines, including one recent example in the Washington, DC City Council elections, in which a memory cartridge was blamed for tallying thousands of nonexistent write-in votes. In New York State, some 50% of new voting machines have been found to be faulty. In Ohio local elections in 2007, the servers in Cuyahoga County crashed several times, and up to 20% of the printouts were lost due to printer jams, compromising the paper trail. And in the 2000 elections in Florida, a computer programmer, Clint Curtis, wrote a prototype hack for the existing touch-screen machines to steal the Congressional election (any number of YouTube videos demonstrate the ease of hacking electronic voting machines). He testified later on the technical aspects during an investigation into fraud allegations in the 2004 Ohio elections. The biggest take-away election officials should get from his testimony is that election officials “will never see” such tampering. The only ways to know, he said, are to examine the machines’ source code, or to examine the paper trail and compare it to the electronic vote. Another indicator which should raise suspicion would be if exit polling percentages were significantly different from the electronic vote.

The 2006 race for Florida’s 13th Congressional district demonstrates the absolute need for a solid paper trail. Some 18,000 votes were apparently lost with no way to determine what went wrong. After investigating, the Government Accountability Office concluded that it was not even possible to determine whether the machines actually malfunctioned. And so Sarasota County, Florida was left with an inexplicable 18,000-vote anomaly. Florida is now moving to machines that leave a paper trail.

Some election officials insist that the machines are secure and any errors are more likely due to voter confusion than to machine error or tampering. Even if that were the only problem, it is an indication that the system is just plain too complicated. Whether the machines confuse the voter, have ordinary errors, or are tampered with, the effect is the same: votes denied. The 2002 HAVA needs to be supplemented with a requirement for paper ballots and permanent markers everywhere. It would be preferable to have to hire more election workers and wait longer for the election results than to question whether our votes really mean anything.

Copyright R.N. Phillips, 10 October 2008

Coming Soon to a Neighborhood Near You: Guantanamo Detainees

Former detainees may eventually be released into the US for lack of anywhere else to go.

In June of 2008, the US Supreme Court ruled that detainees at Guantanamo have the right to challenge their detentions in federal court. In the first such challenge, on 7 October 2008, Federal Judge Ricardo Urbina ordered the release of 17 detainees from Guantanamo, where they have been incarcerated since 2002. A federal appeals court has temporarily blocked the order, but you may yet see former Guantanamo detainees coming soon to a neighborhood near you. If the ruling is carried out, it will mark the first time that Guantanamo detainees are released into the United States – but don’t expect it to be the last.

The 17 detainees in this instance are Uighurs, and they are a special case. An oppressed Turkic Muslim minority native to western China, they say that they were in Afghanistan as political refugees. Now they are unable to return to their native China for fear of persecution, and with no third-party country willing to accept them, they have nowhere to go. Despite the fact that the Bush administration is no longer trying to prove that they are enemy combatants, they oppose the Uighurs’ release into the United States. Thus the Uighurs are effectively sentenced to unending limbo at Guantanamo, and that is the crux of Judge Urbina’s ruling: it is a Constitutional violation to detain anyone indefinitely without charges.

The Uighurs’ release into the US would probably be fairly innocuous, despite the consternation of the Bush administration. The administration’s main fear, as pronounced by White House Press Secretary Dana Perino, is that Urbina’s ruling “could be used as precedent for other detainees held at Guantanamo Bay, including sworn enemies of the United States suspected of planning the attacks of 9/11, who may also seek release into our country.”

And therein lies the problem. While the Uighurs are a special case, they are not unique. There are other detainees who also will have nowhere to go upon release. Even among those who are found guilty of activities against the US, ultimately many will have served out any sentences (see the case of Osama bin Laden’s chauffeur, Salim Hamdan), and then may find themselves in a limbo similar to that of the Uighurs, with no remaining charges against them, yet unwelcome in their home countries or in any third-party country. The Bush doctrine on detainees also maintains that any individuals may be held indefinitely, even after completing their sentences, as unlawful enemy combatants. But given the impatience the Supreme Court and Federal courts have shown with this unconstitutional doctrine, and given both Presidential candidates’ vows to close Guantanamo, it is entirely possible that we will eventually have to resettle actual former enemy combatants in the US.

The Bush administration argues that the security risk of allowing former detainees into the US is too great to bear. The courts are ruling – repeatedly – that indefinite detentions without charges are illegal. Who is right?

I would argue that the US is a nation of laws, and to erode the law – especially Consitutional law and those laws protecting our freedoms – poses a far greater national security risk than any criminal, any bomb, or any would-be terrorist. US history is studded with incidents of domestic terrorism. We have had our McNamara Brothers, our Sam Melvilles, our George Meteskys, our Ted Kacinzskis, our Timothy McVeighs and many others, who have faced justice for their crimes. We have experienced such unsolved attacks as the 1916 Preparedness Day Bombing, the 1920 Wall Street Bombing, the 1970 bombing of the Portland, Oregon, City Hall, the 1975 bombing of LaGuardia Airport, and others. Whether the numerous acts of domestic terrorism in our history have been punished or remained unsolved, we have gone on as a nation of laws. We did not allow those domestic attacks to stifle our freedoms, nor should we allow attacks by foreign extremists – or the fear of such attacks – to do the same.

In the end, the idea of resettling former Guantanamo detainees into the US – while counterintuitive – should not be regarded as an unacceptable security risk. The US must continue to rely on the rule of law. Former detainees would be supervised by the courts, as Judge Urbina ruled in the case of the Uighurs. If these individuals perform criminal acts in the US, then law enforcement, the courts, and the US prison system will be our line of defense just as they are against any other criminals. We are a nation of laws. Let’s go forward.

Copyright R.N. Phillips, October 2008