jrrosskampweb.jpgMay 2009 begins Month 18 of the longest-ever U.S. recession.  Blamed are “liar loans,” derivatives, credit-default swaps, mark-to-market accounting rules, regulatory laxity and greed.             

A more sinister force was at work:  Innumeracy.  The inability to reason with numbers felled the economy.  For years, complex calculations from the financial sector went unchallenged.  In reality, no one was doing the simple math.                

Belief that housing prices would go up 15 percent annually, doubling in value in 4.8 years, typified the problem.     

April was National Financial Literacy Month.  Few knew.  Financial education in the U.S. is abysmal.  Even those “in charge” at major institutions proved clueless in 2008.              

“No one understood those mortgage derivatives,” confessed the well-paid elite.  Or, “We relied on the quants” (quantitative analysts who fed rosy-scenarios into computers). 

Everyone forgot that economic truth derives from evidence, not assumption.  

Most damaging to average families was the complexity of debt they assumed.   Teaser low rates, and “affordable” mortgages quelled the fears of the normally cautious.  No one cautioned that, if assets decreased in value, indebtedness would still pile on.      

Most borrowers think in terms of simple, not compound, interest.  One dollar, increased by 10 percent each day, will grow to $28 million in six months.  This multiplying effect bankrupts companies and consumers.  It’s all in the numbers.

While compounding is certain, debt payment is not.  When Wall Street bundled risky “Alt-A” and subprime mortgages, it counted on a growing economy.  Subprime loans lacked the 50-year payment histories of prime mortgages; Wall Street was gambling.        

Now we know:  Mortgages are paid by people, not by computers.           

Rate-of-return naiveté permitted the $50 billion Madoff fraud, and spawned 19 more Ponzis in 2009.  Madoff victims came to believe in magical 12-percent annual gains.  Even the educated rich are snared by numerical fantasy.            

What will help consumers navigate through numbers-based decisions?       

1) Plain-language disclosure for all credit and investment transactions, without acronyms or complex terms, that outlines financial risk;        

2) Quick access to FICO (Fair Isaac Corporation) credit scores;   

3) Prohibition of predatory lending practices;    

4) Curtailment of fee expansion by banks and credit issuers (Congress is discussing);  

5) Financial literacy education, beginning in the first grade. 

The U.S. housing crash is rippling through the financial industry.  Credit-card issuers are now charging-off from 8 to 11 percent of their portfolios, defaults for which everyone will pay.         

With real interest rates in the U.S. currently at zero to one-quarter percent, banks can profit by lending at 6 to 8 percent interest—numbers significant to every consumer and business.            

The “word of the year” for 2008 was “bailout.”  For 2009, “innumeracy” might prevail. 

Businesses and consumers will resume spending and borrowing when the numbers add up.    

J.R. Rosskamp is an investor, entrepreneur, and managing director of Veritas Partners, Inc., a business consulting firm.  She can be reached at jrrosskamp@aol.com.