King Consumer

September 3, 2014

The recently popularized phrase “financial literacy” to me implies real literacy which is an understanding of words and their arrangements in sentences and paragraphs both written and spoken. In mathematics “take away”, “less than”, “subtract”,”minus”imply the abstract sign “- “.

Financial literacy has included investment jargon taken from 19th century sea farers’ metaphoric archaisms:”head winds” and “tail winds” more properly “winds from astern” and the now moribund “fiscal cliff”. Recently financial literacy requires knowledge of acronyms such as “ECB”, “EU”, Q. 1- 4,”QE”, the phonetically creative “Bee Mow”, and perhaps mining jargon metaphors “upstream and “downstream” and LHIN an acronym masking how health care has been financed since 2006 by Ontario’s Ministry of Health.

Today Canada’s finance minister introduced an important distinction for the financially literate: “collateral mortgage” and “standard mortgage”. In introducing this mortgage contrast he stressed the need for home purchasers to be aware of which mortgage type they were using to finance their home, a collateralized one offered by TD Bank, National Bank, ING Direct and credit unions, or a standard mortgage offered by all the other large Canadian Banks. The collateralized mortgage permits adding debt up to 125% of the property value but could cost a 1000 dollar disbursement for legal fees to transfer a mortgage to another financial institution where you might need to pay another appraisal fee to increase your home based debt.

The finance minister’s announcement regarding these mortgages stressed the need for financial literacy for consumers to understand the kind of mortgage they were buying. But when I read some of the comments in response to a 2013 CBC investigation of collateralized mortgages at TD bank I came to realize that some people loved TD Bank and the freedom the collateralized 125% mortgage gave them to borrow for home renovations and such without complication.

Though there may be some need for full time investors to understand financial statements. Consumers of mortgages need basic mathematics skills, self knowledge, self control and that ancient adage: “buyer be ware”, a practice increasingly difficult in a financial system where the consumer is king and products with their labels and uses that too often seem a mystery to even the people who sell them.