A recent New Yorker article by James Surowiecki on the Dangers of Financial Illiteracy is a must read, especially by the financially literate and the lucky "quants" among us. It is also a must read for anyone who believes that we can rely on (and blame when they default) individuals who "pick a loan payment".
Lest you read the article and assume that the financially illiterate are all at the bottom of the education-economic pyramid, let me assure you they are not. Twice during my lifetime, I have had friends approach me (I think because people often assume that a PhD in econ qualifies one to give financial advice) with a question about paying off credit card debt. The questions took the form of "should I pay off the balance on my credit card or should I (do something else)?" In one case the person was an extremely intelligent, well-read PhD candidate in a non-quantitative field. The other person was also smart and college educated.
In both cases, I explained in words how they would end up paying way more than their balance if they paid the minimum balance each month (which one was doing). In both cases they seemed unmoved by this so I had them plug their balance into the loan amortization spreadsheet that comes with MS excel along with whatever payment they had been making and then note 1) how long it would take them to pay off the balance and 2) the total amount they would pay. Both my friends were truly shocked when they saw the amount and the length of time. Granted these were nominal dollars, but inflation was relatively low (~2%) and the interest rates were quite high (~10%)in both cases. One friend had sufficient cash to pay off the loan in its entirety (about $5000) and did so immediately. He has never carried a balance since. The other adopted a payment schedule that resulted in a zero balance within 12 months.
My point here is that Surowiecki's suggestion that we adopt the "financial equivalent of 'driver's ed' " is right on and critical, IMHO. At least one undergrad program I'm familiar with provides exposure to interest/amortization in their basic required "math for poets" course. But, college is too late and interest/amortization is only a start. The material should be placed in a real world context, related directly and graphically to credit card balances as I did for my friends and to home loans.
In some ways this could be thought of as just one facet of a broader effort to improve the relevance of the math that most kids learn in high school and as undergrads. The areas where an informed electorate and informed consumers require math skills over the life cycle are in loans, credit, interest, investment and in probability and statistics, not calculus. This doesn't mean we should stop teaching calculus to the college bound. It means we should be arming everyone with the knowledge they need to avoid predatory lending practices and to make at least an educated stab at understanding and evaluating risk. The latter will matter if we are sincere about improving patient information and giving patients a greater role in medical decision-making.
Financial literacy is likely to yield real macroeconomic benefits for all of us. Until recently, the national savings rate had declined rather dramatically. It appears to be rising now, partly because consumers have finally confronted the true costs of borrowing. In an ideal world, household savings fuel rational, thoughtful, efficient investment and economic growth (as opposed to irrational, inefficient investment in dot.coms, excess housing, and derivatives).
Assuming new financial regulations are adopted and "fix" the moral hazard the bailout has created on the "investment" side, increased financial literacy should contribute to greater efficiency on the savings side. This would almost certainly generate significant and positive side effects for everyone, including those of us who are already financially literate.