Greenspan stresses importance of financial literacy for homeownership

(Editor's note: The following excerpts are from a speech given by Federal Reserve Board Chairman Alan Green-span at the Ninth Annual Economic Development Summit, held Jan. 10 at the Greenlining Institute in Oakland, Calif.).

In our economy, the three principal means for household asset accumulation are through homeownership, small-business ownership, and savings. As important as these are for the individual, they also represent distinct and important benefits to the broader economy and, therefore, play prominent roles in the operation of our financial markets and the priorities of our public policy.

The choice to buy a home is a decision to plant a family's roots in a community with all the implicit incentives to make that community thrive.

Where homeownership flourishes, it is no surprise to find increased neighborhood stability, more civic-minded residents, better school systems, and reduced crime rates.

Just as important is the effect of homeownership on a household's ability to ac-cumulate assets. For most households, homeownership represents a significant financial milestone and is an important vehicle for ongoing savings. The Federal Reserve's 1998 triennial Survey of Con-sumer Finances indicates that homeownership represented 44 percent of gross assets for families earning $50,000 or less annually. Further, investment in residential property has been generally more stable than other types of investment, and it is perceived to be largely permanent.

With these important benefits, an in-creased rate of homeownership has been chosen by our society as a national priority, with many public- and private-sector resources devoted to achieving this goal. Indeed, measurable progress has been made toward this end, with the overall rate of homeownership reaching 68 percent, a new high, in the third quarter of last year. In assessing the opportunity for homeownership in underserved markets, the Census Bureau reports significant gains.

The homeownership rate for Blacks and Hispanics, between 1997 and 2001, grew at more than double the pace for the general population. Additionally, the homeownership rate among households earning less than the median income in-creased more than three times the pace for households with incomes above the median.

Small business accounts for about half of private gross domestic product in our economy. It is an important vehicle for significant numbers of minority families to accumulate assets.

Recently released data from the Census Bureau, for example, indicate that, between 1992 and 1997, the number of minority-owned businesses, grew more than four times as fast as the number of U.S. firms overall, increasing from 2.1 million to about 2.8 million.

In addition, the Census Bureau estimates that during this five-year period the number of women-owned businesses increased 16 percent, to 5.4 million enterprises.

These data suggest that the increases in small-business ownership and equity investment by traditionally underserved populations result, in part, from in-creased access to appropriate financing to fund the start-up and growth of businesses.

It is essential that the opportunity to start an enterprise is open to anyone with a viable business concept. We must continue to seek ways to promote the creation and expansion of viable firms by lowering barriers to funding and financial services.

To the extent that market participants discriminate consciously or, more in-sidiously, unconsciously capital does not flow to its most profitable uses, and the distribution of output is distorted. In the end, costs are higher, less real output is produced, and national wealth accumulation is slowed. By removing the non-economic distortions that arise as a result of discrimination, we can generate higher returns to human capital and other productive resources. Investors and lenders need to understand that failure to recognize the profitable opportunities represented by minority enterprises not only harms these firms, it harms the lending institutions as well. Accordingly, we must make further progress in establishing business relationships between the financial services sector and the rapidly growing number of minority- and women-owned businesses.

Doing so is crucial since pursuing the obviously worthwhile goal of increasing homeownership in minority communities also increases the debt of homeowners in these communities. Debt cannot indefinitely be pyramided against home equity as the principal or sole asset. Developing non-home equity, largely through small-business ownership, not only enhances homeownership among business owners in minority communities, it more importantly offers a source of risk capital to budding entrepreneurs in that community.

Household saving, of course, is a fundamental component for increasing fi-nancial capacity and serves as a starting point for the accumulation of future tangible assets, such as homes and businesses.

It is also a source of funding for education, which can materially improve fu-ture earning capacity. In the 1998 Survey of Consumer Finances, the top three reasons for saving given by respondents were retirement, liquidity, and education. These survey data, once again, exhibit positive trends among lower-income and minority populations.

Some progress is being made regarding the ownership of financial assets by families in the bottom quintile of net worth and by those who are nonwhite or Hispanic.

In addition, survey respondents in these two categories experienced the largest increases in the ownership of transaction accounts, an important indicator of financial progress because the accounts often serve as the point of entry into the financial services industry. Despite these gains, however, lower-income and minority families continue to represent a large fraction of families that do not possess a checking account or, for that matter, other assets.

Sparse holdings of financial assets may, in part, be due to lack of access to savings vehicles such as individual re-tirement accounts and 401(k) retirement plans.

Recognizing this possible link, community organizations have collaborated with their partners in government and the private sector to design innovative mechanisms for saving. One such vehicle is the individual development account, which state and federal government agencies have embraced as a means for facilitating saving for low-income households.

Through tax benefits and matching funds, this instrument helps individuals earmark funds to achieve longer-term fi-nancial goals, such as purchasing a home, starting a business, or pursuing higher education or job training. Besides providing a structured account that offers a high incentive to save, individual development account programs require participation in financial training to help individuals continue on the path of economic betterment.

Structural changes in the financial services industry, in recent years, have heightened competition, encouraging market efficiencies that continue to help drive down costs and to foster the emergence of increasingly diverse and highly specialized organizations.

These organizations which range from firms that offer their services through electronic delivery mechanisms to local partnerships that provide one-on-one counseling and financing arrangements provide consumers with in-creased access to various credit and savings instruments.