The problem of financial illiteracy starts at an individual level and then balloons out to
negatively impact the larger American economy. 99 One might compare its effect to that of a
vehicle crash during rush hour. When a single driver crashes into a beam on the highway, every
car behind the initial one is impacted. Now, every car has to wait for emergency services to come
see to the health of the first driver, tow away the car, and clean up any mess left on the road. Just
one car can cause an extensive delay; now imagine if most of the cars on the road crashed on the
drive home. The impact on traffic would be horrendous! This example is illustrative of the
impact individuals can have on our economy. One person alone may cause minimal damage, but
the statistics above show that almost half of Americans struggle to make financial ends meet, and
most adults score a “C” on financial literacy tests. 100
A recent example of financial illiteracy negatively impacting the American economy was
the 2008 financial crisis. 101 The crisis, which came to be known as The Great Recession, 102
“demonstrated the lack of understanding of basic financial management information and skills,
and the lack of access to fair, affordable, and appropriate financial products and services, which
was costly to society and disproportionately impacted America’s low- and middle-income
earners.” 103 A prime example was the bust of the booming housing industry. 104
A. The Housing Bust
Many agree that financial illiteracy was a major factor in Americans losing their homes to
foreclosure during the Great Recession. 105 When the housing market was at its height, millions of
people were purchasing homes even though they “lacked the skills, knowledge, judgment, and
experience to evaluate risk; make responsible buying and borrowing decisions; plan, save, and
budget appropriately; and protect themselves against fraud, abuse, and conflicts of interest.” 106
Millions of Americans simply lacked the knowledge necessary to appropriately evaluate the
situation and financial position they were putting themselves in by purchasing a home. 107 How
exactly did financial illiteracy play a role in the housing bust that kicked off the worst recession
since the Great Depression? 108 The answer to this question will be discussed in three parts.
1. The False Belief that Real Estate Will Only Appreciate in Value
99 See FORD & CROWTHER, supra note 26, at 123 (“If only the man himself were concerned, the cost of his maintenance and the profit
he ought to have would be a simple matter. But he is not just an individual. He is a citizen, contributing to the welfare of a nation.”);
see also Financial Literacy Hearing, supra note 23 (discussing how individual financial literacy increases market efficiency).
100 PRESIDENT’S ADVISORY COUNCIL ON FIN. CAPABILITY, supra note 4, at 3; see also Lusardi & Mitchell, supra note 47 (analyzing
additional financial literacy data).
101 Dinwoodie, supra note 24, at 182-83.
102 DAVID B. GRUSKY, BRUCE WESTERN & CHRISTOPHER WIMER, THE GREAT RECESSION 5 (2011).
The Great Recession [ ] stands out because it was brought on and prolonged by an unusually dramatic housing
crisis; because this housing crisis in turn engendered a financial crisis that evoked memories of the Wall Street
Crash of 1929; because the associated financial problems triggered a deep labor-market crisis that continues to
this day; and because the federal government’s response to these housing, financial, and labor-market crises was
both substantial and multipronged.
103 PRESIDENT’S ADVISORY COUNCIL ON FIN. CAPABILITY, supra note 4.
104 Dinwoodie, supra note 24.
106 Id. at 183.
108 Thomas F. Siems, Branding the Great Recession, 1 FIN. INSIGHTS, May 31, 2012, at 1, 2, available at
http://www.dallasfed.org/assets/documents/banking/firm/fi/fi1201.pdf (explaining that several economic indicators, including job
losses and the drop in real GDP, illustrate that the 2008 economic downturn—eventually dubbed The Great Recession—was the
“longest and deepest economic contraction . . . since the Great Depression”).