The GLBA allows the formation of financial holding companies that can offer an integrated set of commercial banking, securities and insurance products. The tenth anniversary of the most sweeping financial legislation reform in the industry’s structure is a natural benchmark for assessing the effects of the law and for questioning whether changes are necessary in the working of this historic legislation. The importance of this review is reinforced by a variety of proposals in the last several years to reform the regulation of financial institutions that have attracted considerable attention among regulators and in the financial firms that they regulate. Most recently, the financial crisis and the failure of some large financial institutions have called into question the legitimacy of America’s current financial structure and its regulation, including to some degree the GLBA. There is no doubt that regulatory reform is front and center on today’s policy agenda. The lessons of the GLBA experience and its effects, both domestic and international, on financial markets and competitiveness, risk-taking and risk management by financial services firms and their regulators will be critical to the direction the country takes and the effort to ensure that future financial crises do not occur or have less costly damage. With contributions from academics, policy experts, and a sponsor of the GLBA, Congressman James Leach, this book is invaluable to anyone interested in financial system reform.

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We are please to present the proceedings from Improving Financial Literacy and Reshaping Financial Behavior, a conference we held on May 14-15, 2009 in Indianapolis.

Networks Financial Institute strives to facilitate broad collaborative thinking, dialogue and progress in the evolving financial services marketplace, focusing on the areas of student programs, financial literacy and thought leadership. This conference brought together our work in promoting financial literacy and in thought leadership. NFI is a primary source for objective and applied research within the financial services industry, and, as such, aims to promote and improve academic research on financial literacy and improving financial behavior. We have sponsored and published research on financial literacy based on several of our conferences, as well as the work of our Fellows and other experts on financial literacy. This conference is a continuation of these efforts and we are happy that we can make a record of the event available.

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Government regulation of corporate governance has taken major and controversial strides forward since the crisis of corporate governance and scandals that contributed to the high-tech boom of the 1990s and subsequent stock market crash. Sarbanes-Oxley (SOX) was passed in 2002, but its most onerous provisions, section 404, came into effect more recently for most firms. The notion that new government mandates for corporate governance will improve corporate performance has achieved widespread acceptance.

On November 28, 2006, Networks Financial Institute (NFI) held a Financial Forum, "In Search of Effective Corporate Governance" to discuss these issues and whether the steps taken in recent years should be revisited. Three experts were invited to present their analyses of various aspects of the corporate governance issues. The papers were prepared by Professor Kenneth Lehn, the Samuel A. McCullough Professor of Finance in the Katz School of Business at the University of Pittsburgh and a former Chief Economist of the U.S. Securities and Exchange Commission, Roman L. Weil, PhD, CMA, CPA, the V. Duane Rath Professor of Accounting at the Graduate School of Business of the University of Chicago, and Lawrence J. White, the Arthur E. Imperatore Professor of Economics at New York University’s Stern School of Business and Deputy Chair of the Economics Department at Stern. They addressed questions pertaining to the financial effectiveness of corporate boards of directors and their standards of financial literacy, effective government regulation of corporate boards, and standards and definitions of good corporate governance financial practice.

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Introduction by John A. Tatom, Ph.D.

Second Thoughts on Public Systems by David Gratzer, Ph.D.

Consumer Directed Health Care by John C. Goodman, Ph. D.

The implications of Paying for Current Medicare by Thomas R. Saving, Ph.D.

Health Care Reform in the United States: Why, When, and How? by Douglas J. Holtz-Eakin, Ph.D.

The Ills of America's Heali:h Care System: Root Causes and Potential Cures by Sydney Taurel

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These experts explore the essentials of and alarming state of financial literacy, how to assess it, what we know about how to improve it, the effectiveness of financial education for asset accumulation by the poor, the problems of boosting financial literacy through educational programs and the implications for public policy. While the results of formal financial educational efforts are often dismal, research has derived many positive answers to these questions. Bodie presents 4 basic financial principles that everyone should know:

1. the Law of One Price, which implies that if something looks too good to be true, it is;
2. the inter-temporal choice problem is that one cannot spend more than one has over a lifetime;
3. in choosing assets and insuring against risk, it is important to match assets to goals and to know how to pool or subdivide risks through diversification; and
4. it is important to take account of taxes and transaction costs.

Caskey asks whether financial education is an effective mechanism for helping lower-income households accumulate financial assets and improve credit histories.

Lerman and Bell argue that financial literacy education should focus on essential and major life choices and the importance of saving and budgeting for them.

Lusardi reviews an array of financial education programs in her discussion of workers’ financial preparedness and suggests that financial education is most important at the points of need for particular financial decisions. Mandell summarizes his findings from his work on the Jump$tart coalition for Personal Financial Literacy’s national survey and shares the conclusion of other panelists that propaganda and compulsory programs can help to improve financial behavior.

The volume concludes with a position paper by David Godsted and Martha McCormick of NFI on the importance of early childhood financial education for adult financial literacy.

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Michael Bordo, Professor of Economics at Rutgers University and Director of their Center for Monetary and Financial History, reviews past experiences with price booms and busts. He discusses the implications of a large house price decline and whether such declines create recessions or financial crises, based on national and international evidence.

Jonathan McCarthy and Richard W. Peach, respectively Senior Economist and Vice President at the Federal Reserve Bank of New York, review the evidence of whether, in fact, there is a bubble in the U.S. The standards of assessment used by McCarthy and Peach are to look at house prices relative to rental prices, affordability indexes, and price measures relative to income. Depending on the house price measure used, one can conclude that there is a bubble, but much of the run-up in prices is due to a failure to correctly account for improvements in quality. McCarthy and Peach also show that, by any measure, some local markets do appear to be experiencing bubbles.

Amy Crews Cutts, Deputy Chief Economist, and Frank E. Nothaft, Chief Economist at Freddie Mac, assess whether house prices have to fall sharply, based on "mean reversion," the tendency for individual securities or entire asset classes to revert to their long-term averages after periods of relative under- or over-performance. Their question is, under a worst case, bubble-type scenario, what is the outlook and does it include a collapse in prices? This forecast is then compared with what the authors regard as a more likely scenario based on the economic outlook for factors affecting house prices. Using relatively standard forecasts for these measures, they find that national house prices will rise 3.6 percent per year over the next five years.

The last paper in this volume is by NFI Director of Research John A. Tatom; it explains the extent of the house price "problem" and looks at whether house prices suddenly and sharply collapse following major booms in house prices. The paper explains the three major channels of influence of a house price decline and suggests that the evidence does not support the notion that a sharp house price decline could have a significant economic effect on the national economy through any of these channels.

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They also discussed alternative fixes, including the importance of holding down the cost of fixing the problem by addressing it sooner rather than later. Professor Thomas R. Saving is a Distinguished Professor at Texas A&M University and is the Jeff Montgomery Professor of Economics as well as the Director of the Center for the Study of Free Enterprise. Mr. William G. Shipman is the Chairman of CarriageOaks Partners, LLP, and Co-Chairman of the Cato Project on Social Security Choice. Jason Furman is currently a Senior Fellow at the Brookings Institution, where he is Director of the Hamilton Project. Furman is also a Visiting Scholar at New York University's Wagner Graduate School of Public Service.

Saving’s article, "Social Security Reform: Can It Secure the Rights to Your Pension Benefits?" argues that it cannot, but a personal retirement account could do so. Saving explains that a projected funding gap is currently estimated by the Social Security Trustees to be $12.8 trillion. As Saving says, this gap will have to be made up by benefit cuts or tax increases, so that the issue is which generation is going to absorb the cost of fixing this gap. Saving explains that personal retirement accounts effectively "prepay" future benefits, reducing costs to future generations, and he concludes that for three reasons, the restoration of solvency, personal ownership of retirement saving and increased saving, the introduction of such accounts offers a promising reform alternative.

William G. Shipman argues in his article, "The History and Future of Social Security," that demographic realities and the financial promises of the pay-as-you go Social Security system are on a collision course, exposing the flaw in Social Security plans in the U.S. and abroad. He claims that a switch to a governmentally overseen plan that is otherwise private would avoid the collision and pay superior benefits to current and future generations. Shipman has developed a market-based investment and administrative plan based on the 401(K) model as an option for Social Security.

Jason Furman in his paper, "Encouraging Financial Security: First Do No Harm," notes that the principal problem is not the baby boomers’ retirements, because the deficit will grow even after all the boomers are dead. He suggests that the problem is really the "baby bust," the sharp decline in fertility that will keep tax receipts growing more slowly than benefits. Furman outlines an alternative approach that restores Social Security solvency and encourages new saving by moderate income families, addressing increased life expectancy by a combination of benefit reductions, tax increases and later retirement. Furman emphasizes that a lack of national saving is a part of the Social Security problem facing the nation.

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