The fallacy of financial literacy

(MoneyWatch) Although it's Financial Literacy Month and it would be easy to drag out the old party line -- "financial education is the antidote to your ailing money woes -- I just can't this year. I blame the wonderful Helaine Olen and her book, "Pound Foolish," for being a buzz-kill on the subject of financial literacy.

When I interviewed Olen earlier this year, she admitted that during the research phase of her book, she too was disheartened to learn that the data indicate that fostering financial literacy, no matter how noble in its intent, simply doesn't work. The proof: Despite millions being spent on financial education projects, Americans are not that much wiser about the subject.

Not that experts are about to waving the banner. Said Federal Reserve Chairman Ben Bernanke just last week in arguing that one of the lessons of the financial crisis is the need for all citizens to have a "basic knowledge of finance and economics." He added: "These skills not only help people provide a better life for themselves and their families, but, by deepening their understanding of the world economy, having such skills also helps equip them to be engaged citizens and informed voters."

Is the implication of Bernanke's comments that somehow if U.S. citizens had a basic knowledge of finance and economics, the financial crisis would not have occurred? I asked Olen what she thought and she cut to the quick. "The best chance of avoiding the financial crisis would have been legislative reform that would have made a lot of the actions that caused the crash illegal," she said. "The idea that financial literacy could have prevented the advent of [collateralized debt obligations], excess leverage and shady lending practices is absurd."

• Say it ain't so, Suze!
• Financial advisors exposed
• Read it and weep: Why financial literacy is a crock

Of course, it's tough to argue against financial literacy. After all, it sounds like a good idea, and questioning the value of mortgage loan cram courses and tutorials on other consumer finance subjects makes it "sound like you are against apple pie," Olen said. But "the fact is," she added, "that it doesn't work."

That it doesn't work should not be surprising, since much of the push behind financial literacy effort is financed by big financial institutions, whose motives may be suspect. Many of these big companies promote their public education projects, while at the same time continuing to sell murky, complicated products.

If financial literacy efforts have fallen short, what does work? Pain. Perhaps the biggest motivator was the housing crash and ensuing financial crisis itself. According to a new study by Fidelity Investments, the 2008 meltdown spurred "both positive and permanent behaviors -- from increasing retirement savings rates to decreasing debt and building emergency funds."

Of course, waiting for the next crash hardly sounds like an optimal strategy for bringing people up to speed on financial matters. So what can someone like me, a former financial advisor and current money talking head, do to help? Olen counseled me to keep talking about the topic in ways that people can understand and to sound the alarm about dubious financial services so people can protect themselves against the onslaught of product-pushers. "We need to discuss openly and honestly that sometimes bad financial events can happen to us," she said.