[Congressional Record Volume 152, Number 85 (Tuesday, June 27, 2006)]
[House]
[Pages H4559-H4562]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
IN DEFERENCE TO DR. BEN BERNANKE, CHAIRMAN OF THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE, AND MR. RICHARD W. FISHER, CEO AND PRESIDENT OF
THE FEDERAL RESERVE BANK OF DALLAS
Mr. HINOJOSA. Madam Speaker, recently, I held my Fifth Regional
Leaders Issues Conference in the Jefferson Building of the Library of
Congress. Over 140 of my constituents attended the conference,
including elected officials, presidents of universities, educators,
heads of chambers of commerce, and many other community leaders in the
15th District of Texas.
On Tuesday, June 13, 2006, I was honored to have Dr. Ben Bernanke,
Chairman of the Board of Governors of the Federal Reserve, give remarks
to the conferees. He referenced data from the Survey of Consumers
Finances, which is a triennial survey sponsored by the Federal Reserve
Board.
The latest survey revealed some discouraging and alarming statistics:
Households whose income placed them in the bottom fifth of the
population were less likely than the average respondent to maintain a
checking or savings account, and almost 25 percent of those families
were unbanked compared to less than 10 percent of families in the other
income levels.
According to the survey, reasons given for not having an account
varied. Some respondents said they would not write enough checks to
make having an account worthwhile; others were dissuaded by minimum
balance requirements, or said that they did not have enough money to
justify opening a bank account.
Chairman Bernanke noted that, in some cases, consumers lacked the
knowledge about the services that banks offer, including deposit
insurance, or even misunderstood the important role banks play in our
economy. Chairman Bernanke went on to say that some of the general
approaches to helping families of modest means build wealth and improve
their economic well-being include community economic development,
financial literacy, and other programs that encourage saving and
investment.
As the cofounder and cochair of the Financial Economic Literacy
Caucus, I was pleased by all the information he provided my
constituents, and I am pleased with the efforts the Federal Reserve is
undertaking to improve financial literacy rates across the United
States. I want to take this opportunity to express my sincere
appreciation for Chairman Bernanke taking time out of his very busy
schedule to speak to my constituents.
It is my hope that the media will focus more attention on what the
chairman and the Financial and Economic Literacy Caucus members have to
say with regard to financial education and literacy, instead of
focusing solely on Chairman Bernanke's comments on the direction of
interest rates. I find it odd that the media and some legislators have
yet to realize that there is a correlation between the country's poor
financial literacy rates and the actions the Federal Reserve has to
take from time to time.
Madam Speaker, I include for the Record the remarks Chairman Bernanke
gave before my Fifth Regional Leaders Issues Conference.
Remarks by Chairman Ben S. Bernanke, Federal Reserve Board, At the
Fifth Regional Issues Conference of the Fifteenth Congressional
District of Texas
Increasing Economic Opportunity: Challenges and Strategies
Washington, June 13, 2006.--I am pleased to be here to
discuss some strategies for helping families, particularly
lower-income families, improve their economic and financial
well-being. Families today face a financial marketplace that
is increasingly complex, with numerous products and service
providers from which to choose. Today I will touch on several
approaches for helping people of modest means take advantage
of these financial opportunities while managing the risks and
avoiding possible pitfalls.
Today's Financial Marketplace
Technological advances have dramatically transformed the
provision of financial products and services in recent years.
To cite just one example, the expanded use of computerized
credit-scoring models, by reducing the costs of making loans
and by increasing
[[Page H4560]]
the range of assets that lenders can sell on the secondary
market, has made possible the extension of credit to a larger
group of borrowers. Indeed, we have seen an increasingly wide
array of products being offered to consumers across a range
of incomes, leading to what has been called the
democratization of credit. Likewise, technological innovation
has enhanced financial services, such as banking services,
and increased the variety of financial products available to
savers.
The range of providers in consumer financial markets has
also increased, with the number of nonbank entities offering
credit and other financial services having risen particularly
quickly. For example, a recent study of alternative providers
of financial services found the number of nonbank check-
cashing establishments doubled in the United States between
1996 and 2001. Payday lending outlets, a source of credit
that was almost non-existent a decade ago, now number more
than 10,000. And data from the Survey of Consumers Finances,
a triennial survey sponsored by the Federal Reserve Board,
indicate that the share of households with a loan from a
finance company increased from 13 percent in 1992 to 25
percent in 2004.
Financial Challenges of Lower-Income Families
Despite the increased complexity of financial products and
the wider availability of credit in many forms, U.S.
households overall have been managing their personal finances
well. On average, debt burdens appear to be at manageable
levels, and delinquency rates on consumer loans and home
mortgages have been low. Measured relative to disposable
income, household net worth is at a fairly high level,
although still below the peak reached earlier this decade.
Families with low to moderate incomes, however, face
special financial challenges. These families generally have
less of a cushion to absorb unanticipated expenses or to deal
with adverse circumstances, such as the loss of employment or
a serious health problem. Results from the Survey of Consumer
Finances show that the median net worth for households in the
lowest income quintile--those whose income placed them in the
bottom fifth of the population--was only $7,500 in 2004, well
below the median for all survey respondents of $93,000. The
Survey data also indicate that households in the lowest
quintile were significantly less likely than the average
respondent to maintain a checking or savings account; almost
25 percent of those families were ``unbanked,'' compared to
less than 10 percent of families in the other income
quintiles. The reasons given for not having an account
varied: Some respondents said they would not write enough
checks to make having an account worthwhile, but others were
dissuaded by minimum balance requirements or said that they
did not have enough money to justify opening an account. In
some cases, a lack of knowledge about the services that banks
offer or even a distrust of banks is likely a factor.
The Survey also found that lower-income households are less
able than others to manage their debts. A greater fraction of
these households had debt-to-income ratios of 40 percent or
more or had a payment past due at least sixty days. The data
also reveal that only 40 percent of families in the lowest
quintile own a home, compared with a homeownership rate of 69
percent among all families surveyed. Finally, the data on
retirement account ownership show an even larger gap, with
only 10 percent of lowest-quintile families holding a
retirement account, whereas 50 percent of all families
responding to the survey reported participation in some type
of retirement savings plan.
How can these disparities be addressed? Some general
approaches to helping families of modest means build assets
and improve their economic well-being include community
economic development, financial education, and programs that
encourage saving and investment. In the remainder of my
remarks, I will discuss each of these approaches briefly and
offer some insights into their effectiveness based on
research and experience.
Community Economic Development
In my time with the Federal Reserve, I have had a number of
opportunities to meet with community economic development
leaders--representatives of groups working to assist lower-
income families become homeowners, start small businesses,
better manage their finances, and save for the future. In
fact, my first trip as a Federal Reserve Board member was to
Brownsville, Texas, where I saw how a grassroots nonprofit
organization is helping to build communities and to provide
residents with the chance to build wealth through
homeownership. The Community Development Corporation (CDC) of
Brownsville works with multiple funding partners--governments
at all levels, financial institutions, foundations, and
corporations--to construct housing and to design innovative
loan products that enable low-income families to qualify for
mortgage credit. For example, because of the mix of funding
sources, mortgage loans can be offered with features such as
down-payment assistance or a below-market interest rate. The
CDC of Brownsville also offers a program that allows
prospective homeowners to acquire ``sweat equity'' in a
property by working on construction teams to help build their
own new home and those of other participating families.
As in the case of many community development organizations,
the Brownsville CDC has also made financial education a
critical element of its efforts to help lower-income
residents improve their financial status. For example,
participation in financial counseling or in an education
program is typically required for a borrower to obtain a loan
through the CDC or through one of its lending partners.
However, the broader aim of these programs is to improve
borrowers' prospects for longer-term success in
maintaining their credit and handling their overall
finances. Since 1994, through this combination of
leveraged financing arrangements and borrower education,
the CDC of Brownsville has helped make homeownership
possible for more than 2,500 low-income families. I cite
the Brownsville example because of the opportunity that I
had to learn about their work (and I recently had a
similar opportunity to see some impressive community
development efforts in the Anacostia neighborhood of the
District of Columbia). But this localized approach to
community development and wealth-building is playing out
in neighborhoods throughout the country, in most cases
through strategies tailored to the distinct needs of the
particular community.
Financial Education and Financial Literacy
Financial education has not only been integral to community
development but has also begun to play a larger role in the
broader consumer market. Clearly, to choose wisely from the
wide variety of financial products and providers available,
consumers must have at least basic financial knowledge.
People who understand the financial aspects of purchasing a
home or starting a business, or who appreciate the importance
of saving for children's education or retirement, will almost
certainly be economically better off than those without that
vital information. Financial literacy can be acquired through
many channels: in school, on the job, through community
programs and counseling, or through self-education and
experience.
Studies generally find that people receiving financial
education or counseling have better financial outcomes. For
example, research that analyzed data on nearly 40,000
mortgage loans targeted to lower-income borrowers found that
families that received individual financial counseling were
less likely later to become delinquent on their mortgage
payments. Similarly, another study found that borrowers who
sought and received assistance from a credit counseling
agency improved their credit management, in particular, by
reducing the number of credit accounts on which they carried
positive balances, cutting overall debt, and reducing
delinquency rates. More broadly, the research shows that
financial knowledge is correlated with good financial
outcomes; for example, individuals familiar with basic
financial concepts and products have been found to be more
likely to balance their checkbook every month, budget for
savings, and hold investment accounts.
Studies that establish an association between financial
knowledge and good financial outcomes are encouraging, but
they do not necessarily prove that financial training and
counseling are the causes of the better outcomes. It could
be, for example, that counseling is associated with better
financial outcomes because the consumers who choose to seek
counseling are the ones who are already better informed or
more motivated to make good financial decisions. In medicine
and other fields, researchers gain a better understanding of
what causes what by doing controlled studies, in which some
subjects are randomly assigned a particular treatment while
others do not receive it. To translate this idea to the
analysis of the effects of financial counseling, the Federal
Reserve Board's Division of Consumer and Community Affairs is
collaborating with the Department of Defense to conduct a
three-year study of the effects of financial education. This
study will evaluate the impact of various educational
programs on the financial decisions of soldiers and their
families. It includes a treatment group of those receiving
financial education, with the programs each family receives
and when they receive it being determined randomly, and a
control group of similar soldiers and their families who have
not received this formal financial education. Because
assignments of individuals to programs will be random, any
observed changes in behavior can be more reliably attributed
to the type and amount of counseling received. Among other
things, the results of this study should help us better
understand whether financial education leads to changes in
behavior for participants in general or only for those at
critical teaching moments, such as the period before making a
major financial decision such as choosing a mortgage.
I would like to say just a few words about the Federal
Reserve's broader role in promoting consumers' understanding
of financial products and services. Beyond conducting surveys
of consumers and doing research, we work in a number of ways
to support consumers in their financial decisionmaking. For
example, through our consumer protection rule-writing
authority, the Federal Reserve sets requirements that specify
the information that must be disclosed to consumers about the
terms and fees associated with credit and deposit accounts.
These disclosures provide consumers with the essential
information they need to assess the costs and benefits of
financial services and compare products among different
providers. We are currently reviewing many of our disclosures
and plan to use focus groups and
[[Page H4561]]
other methods to try to make these disclosures as clear and
as user-friendly as possible.
The Federal Reserve System also works to promote financial
education and financial literacy through various outreach and
educational activities. We provide a great deal of
substantive financial information, including interactive
tools for economic education, on our education website
www.federalreserveeducation.org. The website links to a wide
variety of financial education resources at the local,
regional, and national levels.
Additionally, the Federal Reserved Board collaborates with
educational and community development organizations to
support their efforts. Our national partners include the
Jump$tart Coalition for Personal Financial Literacy, the
Conference of Mayors' DollarWi$e Campaign, Operation HOPE,
the American Savings Education Council, and America Saves,
among others. At the regional level, the 12 Federal Reserve
Banks work with organizations to support financial education
and financial literacy. For example, the Federal Reserve Bank
of Cleveland has worked with community financial educators to
form regional networks that combine resources and share best
practices. The Federal Reserve Bank of Chicago sponsors
``MoneySmart Week,'' partnering with banks, businesses,
government agencies, schools, community organizations, and
libraries to host activities designed to help consumers learn
how to manage money. The Federal Reserve Banks of San
Francisco and Minneapolis have worked with leaders in the
Native American community to develop financial education
materials. My recent testimony to Congress on financial
literacy provided information on many other projects and
programs. The Federal Reserve will continue to make financial
education a priority.
Strategies to Encourage Saving
Even if people know that they would be better off if they
saved more or budgeted more wisely, we all know from personal
experience that translating good intentions into action can
be difficult. (Think about how hard it is to keep New Year's
resolutions.) The field of behavioral economics, which
studies economic and financial decisions from a psychological
perspective, has cast new light on consumer behavior and led
to recommendations about how to improve people's financial
management. For example, studies of individual choices in
401(k) savings plans strongly suggest that workers do not pay
adequate attention to their saving and investment decisions.
Notably, despite the tax advantages of 401(k) contributions
and, in some cases, a generous employer match, one-quarter of
workers eligible for 401(k) plans do not participate. Studies
have found, however, that if firms change the presentation of
the plan from an ``opt-in'' choice to an ``opt-out''
choice, in which workers are automatically enrolled unless
they actively choose to remain out of the plan,
participation rates increase substantially. The impact of
changing from ``opt-in'' to ``opt-out'' is particularly
evident for younger and lower-income workers, who may have
less financial expertise.
In addition, participants in savings plans evidently do not
understand the various investment options that are offered. A
survey by the investment management firm, The Vanguard Group,
found that many plan participants cannot assess the risk
inherent in different types of financial assets; for example,
many did not appreciate that a diversified equity mutual fund
is generally less risky than keeping most of one's wealth in
the form of the employer's stock. Indeed, employees appear to
invest heavily in their company's stock despite the fact that
their income is already tied to the fortunes of their
employer. More than one-quarter of 401(k) balances are held
in company stock, and this high share arises not only from an
employer match but from voluntary purchases as well.
These insights into consumer behavior have prompted some
changes in the design of retirement plans and in education
programs focused on saving for retirement. More employers now
feature automatic enrollment in their 401(k) plans in an
effort to boost participation. Also, some have set the
default investment option to a diversified portfolio that is
rebalanced automatically as the worker ages or have set
contribution rates to rise automatically over time in line
with salary increases.
However, although these changes in program design may boost
saving and improve investment choices, they are not a
substitute for continued financial education. Employers,
including the Federal Reserve Board, offer financial
education at the workplace to help their workers gain a
better understanding of retirement savings options. Helping
people appreciate the importance of saving and giving them
the tools they need to translate that knowledge into action
remain major challenges.
Conclusion
Let me close by observing that many factors influence
consumer financial behavior. Financial education is clearly
central to helping consumers make better decisions for
themselves and their families, but policymakers, regulators,
nonprofit organizations, and financial service providers must
all help ensure that consumers have the tools and the
information they need to make better decisions. Success can
only come through collaborative efforts. I see much interest
today in increased collaboration toward these objectives,
both in Washington and around the country.
Thank you for the opportunity to speak with you today. I
encourage you to continue working together to help provide
increased economic opportunity in your communities, and I
wish you the best of luck in your efforts.
Mr. HINOJOSA. I also want to take this opportunity to thank Richard
W. Fisher, CEO and president of the Federal Reserve Bank of Dallas, for
hosting me recently at the Federal Reserve Bank of Dallas. Richard W.
Fisher assumed the office of president and CEO of the Federal Reserve
Bank of Dallas on April 4, 2005. President Fisher serves as a member of
the Federal Open Market Committee, the Federal Reserve's principal
monetary policymaking group.
During my visit, President Fisher provided me with valuable economic
information on the 15th District of Congress, as well as insight into
the Dallas Bank's efforts to improve financial literacy. I want to
commend President Fisher and the Federal Reserve Bank of Dallas for
publishing an excellent brochure entitled, Building Wealth, a
Beginner's Guide to Securing Your Financial Future, which is an
introduction for individuals and families seeking to develop a plan for
building personal wealth. It contains four sections: Learn the
language; budget to save; save and invest; and take control of debt.
The publication is available in both English and Spanish, and is
available in print and it is available as an interactive version on the
Dallas Fed's Web site. I encourage you to look it up.
The Dallas Fed is an active partner in several asset-building
initiatives throughout its district, including the Texas Asset Building
Coalition which promotes personal financial education, affordable
homeownership opportunities, individual development accounts/matched
savings programs, the earned income tax credit, and antipredatory
lending measures.
Again, I want to thank Chairman Bernanke for speaking at my Regional
Leaders Issues Conference and President Fisher for hosting me at the
Federal Reserve Bank of Dallas.
Mr. HINOJOSA. Madam Speaker, recently, I held my Fifth Regional
Leaders Issues Conference in the Jefferson Building of the Library of
Congress. Over 140 of my constituents attended the conference,
including: elected officials, presidents of universities, educators,
heads of Chambers of Commerce and other community leaders in the 15th
district of Texas. On Tuesday, June 13, 2006, I was honored to have Dr.
Ben Bernanke, Chairman of the Board of Governors of the Federal
Reserve, give remarks to the conferees. He referenced data from the
Survey of Consumers Finances, which is a triennial survey sponsored by
the Federal Reserve Board. The latest survey revealed some discouraging
and alarming statistics: households whose income placed them in the
bottom fifth of the population were less likely than the average
respondent to maintain a checking or savings account; almost 25 percent
of those families were ``unbanked,'' compared to less than 10 percent
of families in the other income levels. According to the survey,
reasons given for not having an account varied: Some respondents said
they would not write enough checks to make having an account
worthwhile, but others were dissuaded by minimum balance requirements
or said that they did not have enough money to justify opening an
account. Chairman Bernanke stated that, in some cases, a lack of
knowledge about the services that banks offer including deposit
insurance or even a misunderstanding of the important role banks play
in our economy.
Chairman Bernanke went on to say that some of the general approaches
to helping families of modest means build wealth and improve their
economic well-being include community economic development, financial
literacy, and other programs that encourage saving and investment. As
co-founder and co-chair of the Financial and Economic Literacy Caucus,
I was pleased by all the information he provided my constituents, and I
am pleased with the efforts the Federal Reserve is undertaking to
improve financial literacy rates across the United States. I want to
take this opportunity to express my sincere appreciation for Chairman
Bernanke taking time out of his very busy schedule to speak to my
constituents. It is my hope that the media will focus more attention on
what the Chairman and the Financial and Economic Literacy Caucus have
to say with regard to financial education and literacy, instead of
focusing solely on Chairman Bernanke's comments on the direction of
interest rates. I find it odd that the media and some legislators have
yet to realize that there is a correlation between the country's poor
financial literacy rates and the actions the Federal Reserve has to
take from time to time.
[[Page H4562]]
Madam Speaker, at this point, I ask unanimous consent to enter into the
record the remarks Chairman Bernanke gave before my Fifth Regional
Leaders Issues Conference.
I also want to take this opportunity to thank Richard W. Fisher, CEO
and President of the Federal Reserve Bank of Dallas, for hosting me
recently at the Federal Reserve Bank of Dallas. Richard W. Fisher
assumed the office of president and CEO of the Federal Reserve Bank of
Dallas on April 4, 2005. President Fisher serves as a member of the
Federal Open Market Committee, the Federal Reserve's principal monetary
policymaking group. He is former vice chairman of Kissinger McLarty
Associates, a strategic advisory firm chaired by former Secretary of
State Henry Kissinger. From 1997 to 2001, Fisher was deputy U.S. trade
representative with the rank of ambassador. He oversaw the
implementation of NAFTA, negotiations for the Free Trade Area of the
Americas, and various agreements with Vietnam, Korea, Japan, Chile and
Singapore. He was a senior member of the team that negotiated the
bilateral accords for China's and Taiwan's accession to the World Trade
Organization. Throughout his career, Fisher has served on numerous for-
profit and not-for-profit boards. A first-generation American, Fisher
is equally fluent in Spanish and English, having spent his formative
years in Mexico. He attended the U.S. Naval Academy, graduated with
honors from Harvard University in economics, read Latin American
politics at Oxford and received an M.B.A. from Stanford University.
During my visit, President Fisher provided me with valuable economic
information on the 15th district of Congress as well as insight into
the Dallas Bank's efforts to improve financial literacy. I want to
commend President Fisher and the Federal Reserve Bank of Dallas for
publishing an excellent brochure entitled Building Wealth: A Beginner's
Guide to Securing Your Financial Future, which is an introduction for
individuals and families seeking to develop a plan for building
personal wealth. It contains four sections: learn the language, budget
to save, save and invest and take control of debt. The publication is
available in both English and Spanish and is available in print and as
an interactive version on the Dallas Fed's Web site. The Dallas Fed is
an active partner in several asset-building initiatives throughout its
district, including the Texas Asset Building Coalition, which promotes
personal financial education, affordable homeownership opportunities,
Individual Development Accounts/matched-savings programs, the Earned
Income Tax Credit, and anti-predatory lending measures.
Again, I want to thank Chairman Bernanke for speaking at my Regional
Leaders Issues Conference and President Fisher for hosting me at the
Federal Reserve Bank of Dallas.
____________________