Ignorance is bliss for scammers

Dear Mr. Berko:

I'm a barber who loves your column and listens to lots of bad luck stories. Your October column about the church people who invested $9,000 in 1,000 U.S. $1 silver certificates prompts me to ask why so many financial scams work. A customer told me he had lost $17,000 in an oil drilling partnership that had promised him a 32 percent return. Another invested $7,000 in Iraqi dinars, losing it all, and a bowling buddy lost $11,000 trading stock options. I hear stories about 15 percent annuities, paying off mortgages in nine years, guaranteed stock trading and other investments that sound too good to be true, but people still rush to do them. Why are these obviously fake investments so successful? Maybe I am in the wrong business.

FS, Cleveland

Dear FS:

This may be the first letter I've had from a barber, but it's also one of many that ask the same question. The number of Americans who are truly financially literate and the number of Americans who can play the piano are probably identical. About 1 percent of Americans can play the piano with a high degree of talent, and about 1 percent of Americans are financially literate, within their various areas of expertise. For example, some of us might compare Van Cliburn's classical performances to Bill Gross' style at Pimco or Peter Duchin's refreshing music to Peter Lynch's skill at Fidelity or Victor Borge's clever mastery to Warren Buffett's brilliance at Berkshire Hathaway.

Last year, just before Labor Day, the Securities and Exchange Commission published a report assessing the financial literacy of Americans, and according to a November 2012 Wall Street Journal article, "it's pretty darn pathetic." Small investors, the SEC concluded, "have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud." The SEC's 41-month study (can you believe it took that long to conduct?) cost taxpayers more than $23 million. Hells bells, I could have saved those stupids at their feckless, influence-prone political bureaucracy 41 months of time and paper-shuffling and the taxpayers $23 million if they had asked me for an opinion.

Here's proof of the SEC's conclusion. Ask any 30-year-old the following questions: What's the difference between the national debt and the deficit? Why do we have a deficit? Can you name five top pitchers in the American League for the latest season? Who was the MVP, and what was his batting average? What's the difference between compounded interest and annual interest? Can you name three people who appear in the TV series called "Jersey Shore''? How much money must one invest at 8 percent to earn $24 a year? If you are in the 30 percent tax bracket, is 4 percent tax-free income better than 6 percent taxable income? What is the retail cost of a pair of LeBron James Nike shoes? Can you name the three top NBA scorers and their teams? What causes inflation or interest rates to rise? Can you explain why General Motors went bankrupt or how tax rates affect economic activity? Those are simple questions, but very few Americans can answer them.

Ignorance is why these schemes succeed. I remember asking a 29-year-old ophthalmology resident how much her car cost. She responded with "$396.04 a month," and she was right. But she couldn't tell me what she paid for that car. After speaking at a community fundraiser two years ago, I asked an assistant branch bank manager why people have so much credit card debt. He responded, "They charge too much on their credit cards." That's true, but it's not the answer.

For grins and giggles (between 2000 and 2006), I visited 17 high-school economics classes and was gabberflasted at the wasted efforts. The course material was as dry as beans, and the teachers were dreadful. And I suspect that most undergraduate college courses are as bad. That's shameful because it's so easy to make economic classes innovative, fun, interesting and applicable. Today's textbooks are worthless; few teachers have any real-world context; and most school board members are political toadies.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Mon, Jan 7, 2013