Athletes going bankrupt: We can stop it

I read the obituary of Ray Williams in the March 25, 2013, issue of the New York Times.  A talented basketball player, Ray Williams started his career playing for the New York Knicks and later for the New Jersey Nets. He also played for the Celtics, the Atlanta Hawks, and the San Antonio Spurs. As the article mentioned, “he had an outstanding shooting touch, he possessed superb body control, and had dazzled the crowds at Madison Square Garden in the late 1970s and early 1980s.” By the time his NBA career ended, he had accumulated impressive statistics.  His private life after he stopped playing is another story. While Williams had earned millions during his career, he declared bankruptcy in the mid-1990s, his marriage broke up, and by the summer of 2010 he was homeless, living in his car in Florida. After he talked about his problems in an interview with the Boston Globe, he received an offer from the mayor of his native Mount Vernon, New York, to work with youngsters at a recreational center. A former teammate interviewed for the article noted that “Williams flourished on the court but, like many athletes, was not prepared for life after the game.”

Williams’s story is surprisingly similar to that of many other athletes. Successful, skillful, and with impressive records, many athletes end up in bankruptcy courts, sometimes as soon as two years after they stop playing. Money mismanagement seems to be the norm, even if players, as in the case of Williams, had earned millions of dollars in their career. But the career of a professional athlete is short; they are lucky to be active past age 35. Their professional skills are many but do not necessarily translate into opportunities for jobs after they stop playing.

There are powerful lessons in these stories. First, skill, talent, and intelligence are not enough to manage finances. Incredibly successful athletes are able to do things that are unimaginable for the rest of us (I, for one, am so inept in basketball that I once fell on my face while trying to dunk a ball; I was alone on the court, so I could not even blame a teammate!) but they cannot necessarily be expected to be as skillful at managing money. While many people believe managing money is not rocket science (I am afraid it is), we need more than general skills to deal with high earnings, especially when those earnings last for only a few years. Second, while we recognize the importance of training to success in the game (and in any job, really), we tend to give less thought to how be successful in other parts of our life, such as managing our finances, which is equally important given that at a certain point we will stop working at our successful (or unsuccessful) jobs and need to support ourselves. 

There is a little bit of Ray Williams in all of us. How many of us have planned for the future so as to be able to support ourselves after we stop working? This is something that most people don’t start to think about until they reach middle-age. Fortunately, regular jobs last for a long time and we can earn income over a long career. But for professional athletes whose careers are very short, a lot more preparation is needed for “life after the game.” Three suggestions come to mind. Let’s make sure that athletes graduate from college so they have a degree they can rely on after they stop playing (Ray Williams did not graduate from Minnesota, where he studied after a year at San Jacinto Junior College in Texas). Let’s add money management to their courses before they go pro. We all need those courses, but the athletes even more! Finally, let’s create programs for professional athletes so that when they stop playing they can use their fame, skills, discipline, outstanding shooting touch, and superb body control to dazzle in their new jobs. 

All of us who cannot dunk without being hurt would enjoy seeing our heroes do well both on andoff the basketball court.

The Next Step in Europe's Implosion

Rome wasn't built in a day and the Eurozone will not collapse in a day.  But, the Eurozone will collapse.  It's just a matter of time.

Consider the stronger countries in the Eurozone -- Germany and France.  Both economies are now contracting.   Meanwhile their debt levels, acknowledged and unacknowledged, have exploded to new levels.   Both countries are now in the situation that faced Greece four years ago.  So, how is their future going to be any different that what is now taking place in Cyprus, Greece, Spain and Italy?

The ECB ministers are a group of political hacks who know little or nothing about economics (something they share with the Obama advising team).   Their idea of improving the economic plight of the Eurozone is to increase the level of debt, continue to implicitly guarantee profligate spending and bureaucratic regulations, and plunge the Eurozone into the economic dark ages.

GDP is falling, debt is rising, unemployment is rising, and recriminations are flying.  The Eurozone is coming apart at the seams.   Civil society has broken down in Greece and is in the process of breaking down in parts of Spain and Italy.  Cyprus is entering a dark period.  Nothing good lies ahead for the Eurozone.

So, what happens next?

Deposits will begin to seep out of the Eurozone -- most notably from Spanish and Italian banks -- but from other Eurozone countries as well.  After all, the ECB bureaucracy has changed the rules.  Deposits are now legitimate targets for the bureaucrats.  It wasn't the ECB that decided not to confiscate insured depositors in Cyprus, it was the Cypriot parliament who refused to ratify the ECB and IMF policy of confiscating insured depositors.  The confiscation of government insured deposits is now a legitimate policy weapon in the Eurozone, overturning a long past history of FDIC-like guarantees in the Eurozone.  Nothing is sacred to the bureaucrats.

The genie cannot be put back in the bottle.  The European banking sector cannot recover from this bureaucratic policy blunder.  Deposits in the Eurozone can never be considered secure, even in circumstances where the bank that houses them is secure.  The government can confiscate deposits wherever they may be.  This is now a legitimate Eurozone policy weapon.  It is also an IMF (read USA) policy tool as well.  Even US FDIC-guaranteed deposits may be fair game to the bureaucrats when US debt woes become a front page crisis.  An eventuality that must come in time.

Little Cyprus

So how big is Cyprus?  800,000 people with a GDP of about 18 billion Euros -- less than 10 percent of the size and wealth of the State of Virginia.  So, how can Cyprus rock the Eurozone?

Easy.  Let politics substitute for economics and anything can happen.

The grand Euro scheme of bailing out country after country is rapidly running up against reality. The sacrifices that the bailers require are politically unacceptable to the bailees.

Austerity traded for more debt -- this is the bailout scheme devised by politicians.  This scheme is an effort to change reality and it won't work.

The reality is that Cyprus banking is history.  Who, in his right mind, would willingly leave their money in a Cypriot bank after the events of the past week?  It doesn't really matter what solution is imposed, the Cypriot financial community will not recover.

Meanwhile, institutions with deposits in Italian and Spanish banks now face a new reality, hitherto not contemplated.  The European Central Bank and the IMF have this week endorsed a new policy tool for dealing with debtor nations -- confiscation of bank deposits.  Who would have thought?  But now the thinking begins.   Should I or shouldn't I move my cash deposits from Italian and Spanish banks for the safer confines of London or New York or Geneva or Singapore?  No doubt such thoughts are now extant in the minds of all institutional investors across the globe.

When economics no longer guides economies and the politicians take over, this is the outcome -- collapsing GDP, rising debt levels, and growing political anarchy.   We are just at the early stages of the coming demise of Europe.

Financial Literacy and the Educated American

The American Academy of Arts and Sciences convened a group of experts on Thursday and Friday of last week, March 14-15, in Cambridge, Mass.  The title of the conference was “Financial Literacy and the Educated American.” As you know, the Academy is one of the nation’s oldest learned societies, and during the reception on Thursday night, the President of the Academy guided us through parts of the building, showing us some of the acceptance letters which are framed and posted on the walls, including one by George Washington. I thought it was good omen and that all of these wise historical figures would inspire and watch over us at the meeting.

A special meeting it was. The caliber of the participants was extraordinary. We had members of the President’s Advisory Council for Financial Capability, the Assistant Secretary of Labor for the Employee Benefits Security Administration, the head of the Government Accountability Office, the President of FINRA Investor Education Foundation, and the heads of some of the top not-for-profit institutions working on financial literacy. The conference convened some of the top academics in the country, including the dean of one of the best business schools in Europe. We also had fellows of the Academy who work in the private sector and the CEO of a firm. These people normally do not meet in a single place, but the Academy was able to bring all of them together.

The invitation letter outlined the intent of the conference: “Recent financial crises in the US and abroad have highlighted the urgent need for an increased focus on educational and policy initiatives designed to promote financial literacy in citizens of all ages. To address this need, the American Academy of Arts and Sciences will convene a nonpartisan forum for diverse experts from academic, financial, private nonprofit, and government institutions to share theoretical approaches, best practices, and research methods and findings. The conference will focus on the beginning and end of the financial life cycle of American citizens in order to emphasize the necessity for sustained fiscal education from kindergarten through retirement.”

I co-chaired the first panel, Financial Education over the Life Cycle. We had a rich set of presentations and discussions in that panel and throughout the day. New ideas percolated and bounced around from presentations to discussions, and I kept an ear out for what could be implemented and could make a good next step for this extraordinary group. The importance of financial education in schools could not be overstated, and there was a lot of discussion about content, standards, implementation, and whether to add financial literacy questions to the SAT. There was a very engaging discussion about workplace financial education as well and what the government can do in this regard, given that it is one large and very important employer.

Our lunch speaker was the Chairman of the President’s Advisory Council and CEO of Ariel Investments. He spoke with simplicity, describing how the Ariel Community Academy in Chicago was created, how the students there manage a fund with the help of advisors from Ariel Investments, and how proud he was of it. He started that initiative many years ago and I am pretty sure without having any studies using control and treatment groups demonstrating that financial literacy works in schools (what we all want to see today). He did not mention it, but today the Academy outperforms all schools in the district and is ranked as one of the top elementary schools in all of Chicago. He also helped McDonald’s put in place financial education programs so that employees, in particular minority employees, could save more for their retirement. He had seen data about disparities in saving among African Americans and Hispanics and thought it was important to address that. Again, I do not think he had seen studies showing that workplace education works, but what important was to address a problem. I asked him what motivated his work. He replied that his father had given him stocks as a Christmas gift; that started his journey. I forgot to eat lunch when he spoke. He is a person with a vision, someone with the capacity to look into the future, which is critical when one is dealing with education.

But back to my panel. In my twenty years of work, I had never chaired a panel with the CEO of a company. But I did so at this event and I hope I will be able to do it again. I do hope that this conference was just the beginning of a conversation and partnerships among the public and private sectors. In a time of tight budgets, it is important to take leadership and have a vision of what academics, not-for-profits, and the private sector can do together to combat financial illiteracy.

Despite much enthusiasm for financial education initiatives, there were doubters and skeptics at the event, too. Some said we lack data. Others said we lack evidence. I hear such comments over and over at every conference I go to, and—true to form—one conference participant stated, “We do not have any evidence that financial education works.” Dorothy Wallace, a mathematician from Dartmouth, leaned toward me and whispered, “We do not have any evidence that ignorance works.” So, I would say we are even. I look forward to the next steps.

Empowering women

Today is International Women’s Day and I want to write a blog about a topic that has occupied a lot of my research in the past few years: gender differences in financial literacy. Starting from the very first paper I wrote on financial literacy, I found over and over that women were less likely to answer correctly to financial literacy questions. I did not focus on that finding until more recently, when I performed an international comparison of financial literacy. I found the same finding in as many as eight countries: women were less likely to answer correctly to the same financial literacy questions I had asked in the United States. And strikingly, in countries as different as Sweden, Italy, Japan, Russia, the Netherlands, New Zealand, and Germany, women answered in the same way to the financial literacy questions: they said they “did not know” the answer to the questions (the paper is posted on-line at: http://www.financialliteracyfocus.org/alusardi/Papers/FLAT/FLat_World.pdf).

I remember sitting in front of my computer and looking at the papers that became part of a special issue of the Journal of Pension Economics and Financeand comparing the tables across so many countries. It was so clear, so stunning, so evident; yet I had not seen when I considered the data from one country only. It took that comparison, which was done for a completely different set of reasons, to unveil that striking gender difference in financial literacy.

The finding can be interpreted in different ways and this is what my current research is exploring. First, women may simply be aware of their lack of knowledge and they are willing to admit it. This is consistent with some of my other data that show that women tend to give themselves low rating when assessing their financial knowledge. So, women know that “they do not know.” This may, in fact, be the first step to acquire or want to acquire knowledge. Second, women may have financial knowledge but are less confident in their knowledge and are less willing to guess or choose an answer when they are not sure it is the correct one. Some may view this attitude as a drawback, but I see it as a potential advantage. It takes gut to admit one does not know or does not know enough. Humility in the world of finance may give better results than being bold, assertive, and.. well wrong. In case you did not notice, we have experienced a lot of that in the past few years. Third, women may be less comfortable with the jargon that is used in finance. We assume that people know the technical financial terms, few bother to explain them, but most people do not have a clue about what inflation, real interest rates, and risk even mean, and women are willing to say “I do not know.”

What makes this result so important is that women may be the ideal target for financial education programs. Why attend such a program when one thinks he/she knows (according to my findings, only one third of the population has a very basic knowledge of financial literacy; believe me, that program is so much needed!). Many studies have found that women are not only more likely to attend financial education programs (in the program that I myself run, the large majority of participants were women), but women are also more likely to change their behavior after attending the program.

In summary, empowering women with the financial knowledge, the confidence, the terms that are used in finance could be a powerful tool; women may willing to use it. Happy International Women’s Day.

Schwartz's Quandary

Today's NYTimes features an interesting article by Nelson D. Schwartz headlined "Recovery in US is Lifting Profits, But Not Adding Jobs."  Surprise, Surprise!

The main tool for solving unemployment by the White House is to figure ways to make employees more expensive.  Businesses aren't dumb.  If you make a factor of production much more expensive, businesses will use less of it.  Machines aren't more expensive; outsourcing is not more expensive, but hiring American workers is much, much more expensive thanks to Obamacare and numerous "worker protection" rules, laws and regulations.

So, what to do?  Obama now suggests raising the minimum wage from $ 7.25 to $ 9.00 -- almost a 25 percent hike in the minimum wage.  That is in keeping with the philosophy of making employees more expensive.

The war on workers and the war on the middle class by this White House continues unabated.  Schwartz is puzzled by the "golden age for corporate profits" unaccompanied by meaningful increase in the demand for workers.  But why is there any surprise.  This is the predictable result of White House economic policy.

Three Cheers for Christina Romer

It has been somewhat of a puzzle that Obama's economists haven't rebelled at his Administration's assault on the US economy.   Economics is, after all, economics.  Finally!

In today's NYTimes, Christina Romer, former head of Obama's Council of Economic Advisors, questions the necessity of the minimum wage.  She not only wonders openly about increasing the minimum wage, but questions the very idea of minimum wage legislation.

Romer is right that the minimum wage is not the way to go.  While she doesn't go far enough to oppose the minimum wage outright, it is hard to see her op-ed piece as anything but a plea for sanity and clear opposition to Obama's recent call for a minimum wage increse.