St. Louis Fed’s Poole: Financial education can reduce money woes

Today’s financial turmoil won’t end soon, William Poole, president of the Federal Reserve Bank of St. Louis, said Wednesday in a speech to financial planners in west St. Louis County.

He, however,  sees hopeful signs, including  economic forecasts for more growth in the second half of the year.

Poole said the second half of the year could be better, if borrowers, lenders and investors learn some critical lessons from the mortgage mess that has dragged down the economy in recent months. And he emphasized that financial education, starting in elementary school, also could help Americans avoid the problems of the housing and credit crisis.

Poole said the current mess was caused or worsened by five critical mistakes:

• Borrowers who took on mortgages they couldn’t afford.
• Mortgage brokers who put too many borrowers in unsuitable mortgages
• Investment banks who turned the mortgages into securities without considering the inadequate standards used to grant them.
• Rating agencies who gave high investment grades to securities backed by subprime mortgages.
• Investors who bought the securities without analyzing the underlying investments.

Poole said financial education could help borrowers understand credit, its costs and risks - or at least help them know what questions to ask when taking out a loan.

Mortgage brokers could help by giving outstanding service to borrowers, including providing loans that best fit their circumstances and making sure the borrowers understand the products.

Investors also need to have a better understanding of the mutual funds and other securities they buy. He encouraged the planners to educate their clients better on investment products.

Poole commended states for including financial education in high school graduation requirements, but he said more work is needed to make sure students actually learn and understand the material.

The Fed has a two-pronged effort to improve financial education in schools and with community organizations. More information is available at the bank’s Web site, www.stlouisfed.org in the education section. Another site, www.federalreserveeducation.org provides help for teachers of personal finance and economics.