I Want It Now

An email from someone I respect says to take a look at today's column by David Brooks on savings behavior since the issue of adequate saving is particularly important in an era of increasing life expectancy. In addition, Kevin Drum says:

Culture of Debt, by Kevin Drum: ....This isn't exactly what I've come to expect from David Brooks, but today he decries the fact that "the social norms and institutions that encouraged frugality and spending what you earn have been undermined" and then goes on to name names...

I doubt that I'd end up agreeing with Brooks 100% about how to address this problem, but this isn't a bad start. It's a worthwhile column to read.

Mathew Yglesias reacts similarly:

Brooks on Debt Culture, by Mathey Yglesias: Kevin Drum recommends David Brooks' column on America's seduction by the culture of debt and then says "I doubt that I'd end up agreeing with Brooks 100% about how to address this problem." I actually tend to think that Brooks (and Drum) are overstating the problem somewhat, but Brooks' proposals seem like good ideas to me...

The idea of trying to establish some kind of non-predatory mechanism that would soak up some of the demand for "payday loans" seems especially promising to me.

Here's the column:

The Great Seduction, by David Brooks, Commentary, NY Times: The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality. Millions of parents, preachers, newspaper editors and teachers expounded the message. ...

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. ...

The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. ... Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents.

The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable. Social norms, the invisible threads that guide behavior, have deteriorated. ...

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. ... Payday lenders have also played a role. ... Credit card companies have played a role. ... Fifty-six percent of students in their final year of college carry four or more credit cards.

Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs ... onto the backs of future generations. It’s only now become respectable to do so. ...

The list could go on. But the report ... also has some recommendations. First, raise public consciousness about debt the way the anti-smoking activists did with their campaign. Second, create institutions that encourage thrift.

Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should ... do more to encourage savings up and down the income ladder.

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

I've been wondering lately if technological change has been a factor in the fall in saving, but I'm not sure the story hangs together. Suppose that, consistent with what behavioral economists find, we play tricks on ourselves to "nudge" our choices in the direction we'll be happy with over the longer run. For example, if money "burns a hole in your pocket," then you don't bring it with you when you go out (the debit/credit card stays home too). If you don't have it, you can't spend it on immediate gratification (and regret it in the future). We sometimes do the same with food sometimes. If we want to avoid overindulging on something, we don't buy it because if it's there, we won't be able to avoid eating too much, and regret it later (I will eat as many peanut M&Ms as you put in front of me, so I have to limit how many are in the house at any one time).

The idea is that technology has made some of those tricks harder to use on ourselves. For example, if you are at home and have a computer, you can go shopping on the spur of the moment. It's a lot harder to hide your money from yourself than it used to be. Transactions costs are much lower for financial transactions, so it's not as easy as it once was to put the equivalent of a trip to the store to buy ice cream as a barrier to spending money.

But is it really that different? You could always order goods by phone from a catalogue, so the internet isn't all that revolutionary (or is it? - the variety of goods you can buy and information about them is much greater today than when we had to rely on the Sears catalog). If you go out, debit cards make all the money in your account accessible, but so did checks in the old days (though they weren't as widely accepted), and credit cards are nothing new. Still, transactions costs have fallen substantially making it much harder for people to erect barriers in front of themselves to prevent them from acting on the emotion of the moment and preserving longer term plans, so maybe technology has played some role in bringing about this transformation in savings behavior over the last few decades.

One other thing with regard to technology and financial innovation. Twenty years ago I couldn't go on the internet, sign up for a credit card, and then transfer money to my checking account in less than a day. Having that capability - having fast credit available from a variety of sources - could make people willing to save less. Roof starts leaking? Put it on credit - no need to save for a rainy day, the credit will be there. Time for the kids to go to college but didn't bother to save enough? There was no need, you knew that you could take out a home equity loan, etc. So, the fall in saving may also be a response to the widening credit availability brought about by financial innovation. The change in saving behavior (including the accumulation of debt) we have seen is probably too large to be explained by this alone, but I do think the security - and the temptation - that easy credit brings is a factor.

Update: In comments, Richard H. Serlin writes:

I teach one of the largest university personal finance courses in the country at the University of Arizona. I am also president and co-founder of AAA Personal Finance Education, one of the largest providers of the personal finance education course required by the government for those in bankruptcy (since the BAPCPA law of 2005). So, I am an expert on this.

The gist of Brook's article is wrong and misleading (a common occurrence for David Brooks). As Harvard bankruptcy expert Elizibeth Warren puts it:

The beauty of the Over-Consumption story is that it squares neatly with many of our own intuitions. We see the malls packed with shoppers. We receive catalogs filled with outrageously expensive gadgets. We think of that overpriced summer dress that hangs in the back of the closet or that new power drill gathering dust in the back of the garage. The conclusion seems indisputable: the “urge to splurge” is driving folks to spend, spend, spend like never before.

But is it true? Deep in the recesses of federal archives is detailed information on Americans’ spending patterns going back for more than a century. It is possible to analyze data about typical families from the early 1970s and from the early 2000s, carefully sorting spending categories and family size.12 If today’s families really are blowing their paychecks on designer clothes and restaurant meals, then the expenditure data should show that they are spending more on these frivolous items than their parents did a generation earlier. But the numbers point in a very different direction.

From: The New Economics of the Middle Class: Why Making Ends Meet Has Gotten Harder: Testimony Before Senate Finance Committee, May 10, 2007

For a more in-depth explanation I recommend her books, "The Two Income Trap" and "All Your Worth: The Ultimate Lifetime Money Plan".

Essentially, the main causes of today's debt explosion and financial distress are

1) The great increase in income insecurity and other economic insecurity for the poor and middle class over the last generation, aided by Republican shredding of government support and safety net (well explained in Yale political scientist Jacob Hacker's book, "The Great Risk Shift)

2) The 80% increase in the real, inflation adjusted, median home price since 1970.

3) The great real, inflation adjusted, increase in other large fixed costs like medical and education.

4) Stagnation or decrease in real wages for most of the poor and middle class.

5) People requiring much more education to make a middle class wage. Therefore they begin earning well much later, and due to constant Republican pressure to cut spending on education, they are forced to graduate, and start their adult career lives with far higher levels of student debt than a generation.

6) The great increase in income inequality causing what Cornell Economist Robert Frank calls an expenditure cascade (prestige fever, arms race)

I have what I think is a very nice, brief, working paper explaining this, titled, "Let's Cut the Ammunition to the Housing Arms Race Permanently."

Comments

[bakho]

"You haul Sixteen Tons, whadaya get?
Another day older and deeper in debt
Saint Peter don't you call me cause I can't go
I owe my soul to the company store."

Maybe Brooks is writing about the way things never were?

[gordon]

Aha! I think I see a new use for an old idea - namely my idea of a Commonwealth Bank of the United States.

That idea had its origins in the now old-hat debate about how to prevent a credit crunch arising from the subprime meltdown doing damage to the "real economy". But since Bear Stearns, concern about the real economy has evaporated, and we're now only worried about not "destabilising the system". It looked as though the majestic and historic march of ideas (ie. three months and a panic) had left the Commonwealth Bank of the US behind.

Until now. A Govt. bank which offered savings accounts at low fees and reasonable (break-even) interest rates might make a considerable impact on the poor savings behaviour of the citizenry of the US. It could offer short-term unsecured loans cheaper than the loan sharks, and maybe even do some Grameen-style lending. It could offer credit-card products with sane borrowing limits, also at low fees. Student loans? Sure. Hey, it could even offer mortgage refinancing.

Think about it. Govt. enterprise is sometimes a pretty good alternative to regulation. It can be simpler and more flexible.

[Bruce Wilder]

Rather obviously, there's something amiss in credit card land, when technological progress has resulted in rising, not falling rates and drastic penalties. Credit-card peonage is not at all far-fetched. And, it has been brought about by old-fashioned rent-seeking Republicans, lobbying in Washington to tweak this law and that -- eliminating State usury laws, undermining student loan programs, revising the bankruptcy code and on and on.

The S&L crisis back in the late 1980's wiped out an institutional bulwark of thrift institutions, many of them organized on a mutual basis. Combine that with the universal banks like CitiGroup, which can substitute a CitiFinancial office for a Citibank branch, the better to advance its predatory practices, and the institutional decay continues.

[Bruce Wilder]

gordon: "Govt. enterprise is sometimes a pretty good alternative to regulation. It can be simpler and more flexible."

Maybe, after they go belly up, Fannie Mae and Freddie Mac can also go back to being government agencies.

[don]

I think U.S. asset appreciation has had more to do with the decline in saving than technology or changes in moral attitudes. The source of the asset appreciation is debatable, but after the dotcom bust, I would guess it came from overly loose monetary policies and a global savings glut, exacerbated by interventions in currency markets by Asian central banks.
Of course, the U.S. financial services industry clearly made things worse in recent times by loosening lending standards. This, along with the appreciation in home values, proved a toxic mix that seems to have disproportionately hurt lower income people. Other than these things, I would put social security and medicare ahead of the other things that were mentioned as sources for the decline in U.S. saving.

[David]

I don't know if it's the same in the US, but for the past few years advertisements and stores in Switzerland literally bombard you with the low monthly cost at which you can pay off purchases. (the monthly amount is right on the sticker price, and in much smaller letters you can read "24 months") Conveniently you get the loan for it approved right in the store.

Laws mandating the disclosure of the full cost you end up paying don't seem to have much effect. It's no longer a TV that costs $2,000 but a TV that costs $100/month. As spending slowed down, the offer now is that you don't have to start with the payments until 3 months after the purchase.

A phenomenon I came across online was also quite interesting: a store offered to spread out the charge on your credit card over three months. They charged no fee or interest for this, clearly hoping it'd increase sales.

I think offers like this greatly contribute to the spending problem. They're incredibly effective at masking the true cost and people seem unable to make rational choices. They're charged twice the interest rate of a normal small loan at a bank and the "qualifications" needed to get it are exactly the same. Surely the convenience of getting it right in the store isn't worth it, especially on higher priced items?

[A.Citizen]

What crap.

Bombard the citizen consumer with endless ads showing a fantasy land that appears as if everyone lives in.

Decrease real income year over year for over 20 years.

Make debt as easy to get into as it is to catch a cold.....

And then we are going to be scolded by the likes of David Brooks a fifth rate hack propagandist for the uber-rich who, by the way, own all the credit card companies?

I think with a rigid middle finger and an increase in my walking pace I will....

Take a pass on such nonsense.

[piglet]

"Time for the kids to go to college but didn't bother to save enough? There was no need, you knew that, and you take out a home equity loan, etc. So, the fall in saving may also be a response to the widening credit availability brought about by financial innovation."

Hm, and I thought, the fact that the cost of education has skyrocketed out of control and that most graduates start their professional lives with a millstone of college debt around their heads might also have something to do with the fall in saving.

[mrrunangun]

How can you folks honestly be surprised that people on average make the wrong financial decisions? Just as everyone knows that eating five fruits and vegetables per day, keeping your weight down, getting 5 thirty minute periods of exercise per week, and not smoking will preserve life and health and enable us to avoid doctors, but only 3% of us are actually doing all 4 things. It's a lot harder to consistently do the right thing in practice than in theory. Resisting temptation is neither easy nor simply a matter of knowledge, and temptations to do the wrong things in your money life are as ubiquitous as in your health life. We know more than ever about what to do to maintain our health, but the country on average is far more obese and sedentary than it was 30, 40, or 50 years ago.

[ken melvin]

“Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. ...”

Maybe, over the past thirty years the working class have, other winning the lottery, lost all hope of getting ahead?

“The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. ...”

Maybe the loss of good jobs to go to had a wee bit to do with it all? Maybe credit card companies buying off congress? Maybe the me first philosophy of libertarians and St. Ronnie got extended?

“The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable. Social norms, the invisible threads that guide behavior, have deteriorated. ...”

Yah sure, the bastards put together a package to fleece the poor working class of LA and a few novice investors it’s the poor working class bastards fault?

“The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. ...”

Lotteries were voted in as way of avoiding taxes with every intent of fleecing the poor working class.

“Payday lenders have also played a role. ...”

Payday lenders are, obviously the fault of the poor working class and not republicans.

“The list could go on.”

[Denis Drew]

Left out of this discussion seems to be the phenomenon (assuming it exists; I do) that Americans left behind by economic growth (most) sense they should be living better and better (in accord with overall economic growth) but aren't able to realize that fulfillment with their stagnant pay checks so they borrow and borrow to try to attain the standard of living they think they should be someway be enjoying. Can't prove it.

[Winslow R.]

MattY wrote: "The idea of trying to establish some kind of non-predatory mechanism that would soak up some of the demand for "payday loans" seems especially promising to me. "

I agree that the debt creation process is broken but going after "payday loans" side tracks the real need to fix the broken Fed transmission mechanism. We shouldn't need debt to be created by entities leveraged 33x.

David Brooks is just scratching the surface of the obvious and to me it looks an awful lot like a diversion. He's providing International/New York bankers cover by pointing at the Payday guys and their customers. He even blames the victim.

Don't fall for it.

[drydiggins]

David Brooks and doppelganger George Will tut-tutting over the excesses of the lesser classes. Makes me a bit ill. Did I miss the part where the golden age of family fiduciary prudence took place in the context of single-breadwinner families. AYUP, the thrifty Yankee intones, it's all Bubba's fault. Gotta say "Bubba" when what you really want to say is "Rastus", no?

[RW]

"Payday lenders are, obviously the fault of the poor working class and not republicans."

Good point: Brooks doesn't appear to be as venal or revanchist as neo-con swine like Kristol but the apologia rings the same ...just as Republicans run from Bush these days: They certainly weren't complaining when Dubya had 60% approval ratings while he undermined constitutional protections and they lined their friends pockets with pork but now that the approval ratios are down, as if by magic, ol' Dubya doesn't really represent those realo-trulo conservative values any more.

It's fascinating, like watching cockroaches scurry from the light, but even if you are glad you don't have to look at them for awhile (and lord knows most of us probably are) you know they're in the walls and will be back as soon as the lights dim.

[Expat]

How are checks like credit cards? If you kite checks, you ultimately end up in jail. Or if you are Congressman, you end up working on K Street as a lobbyist.

People are, in general, idiots. By that I don't mean they are drooling or unable to read soup labels, but that they operate on an intellectual level that no one on this blog can comprehend. I deeply believe that intelligent people grossly overestimate or misunderstand how the average and below average person reasons (or not).

We might let rocket scientists and physicists play with nuclear bombs and excimer lasers because we trust them to reasonably understand the consequences of setting them off or pointing them at each other. We do not give hand grenades to the average doofus because we know he won't resist using them for fun or in a fight.

Governments exist because the rocket scientists and physicists don't want hoi polloi running about with grenades (though assault weapons seem to be fine with us!). Government exists to protect us from our enemies, but also from ourselves.

Perhaps mortgage and credit card rates and limits should be a function of IQ. If you are below a certain level, you are severely limited in what or how you can borrow. If you are above a certain level, the penalties for bankruptcy or fraud are severe.

[PT Barnum's Successor]

You people just want more suckers to put money in savings accounts at negative interest rates so you can rip them off. Never give a sucker an even break.

It ain't gonna happen. Debt is inflated away, so get lots of debt. Savings accounts are inflated away, so don't bother. If your employer makes you save in a 401k, then you have no choice. Can't risk making the boss mad by making waves. Other than that, borrow lots of money and remodel the kitchen. The loan will be inflated away, the kitchen looks nice, and you can sell the home to fund your retirement (once the current bubble is over).

[Richard H. Serlin]

The gist of Brook's article is wrong and misleading (a common occurrence for David Brooks). As Harvard bankruptcy expert Elizibeth Warren puts it:

The beauty of the Over-Consumption story is that it squares neatly with many of
our own intuitions. We see the malls packed with shoppers. We receive catalogs filled
with outrageously expensive gadgets. We think of that overpriced summer dress that
hangs in the back of the closet or that new power drill gathering dust in the back of the
garage. The conclusion seems indisputable: the “urge to splurge” is driving folks to
spend, spend, spend like never before.

But is it true? Deep in the recesses of federal archives is detailed information on
Americans’ spending patterns going back for more than a century. It is possible to
analyze data about typical families from the early 1970s and from the early 2000s,
carefully sorting spending categories and family size.12 If today’s families really are
blowing their paychecks on designer clothes and restaurant meals, then the expenditure
data should show that they are spending more on these frivolous items than their parents
did a generation earlier. But the numbers point in a very different direction.

End quote.

From: The New Economics of the Middle Class: Why Making Ends Meet Has Gotten Harder: Testimony Before Senate Finance Committee, May 10, 2007, available at: http://finance.senate.gov/hearings/testimony/2007test/051007testew.pdf

For a more in-depth explanation I recommend her books, "The Two Income Trap" and "All Your Worth: The Ultimate Lifetime Money Plan".

Essentially, the main causes of today's debt explosion and financial distress are

1) The great increase in income insecurity and other economic insecurity for the poor and middle class over the last generation, aided by Republican shredding of government support and safety net (well explained in Yale political scientist Jacob Hacker's book, "The Great Risk Shift)

2) The 80% increase in the real, inflation adjusted, median home price since 1970.

3) The great real, inflation adjusted, increase in other large fixed costs like medical and education.

4) Stagnation or decrease in real wages for most of the poor and middle class.

5) People requiring much more education to make a middle class wage. Therefore they begin earning well much later, and due to constant Republican pressure to cut spending on education, they are forced to graduate, and start their adult career lives with far higher levels of student debt than a generation.

6) The great increase in income inequality causing what Cornell Economist Robert Frank calls an expenditure cascade (prestige fever, arms race)

I have what I think is a very nice, brief, working paper explaining this, titled, "Let's Cut the Ammunition to the Housing Arms Race Permanently", available at: http://works.bepress.com/richard_serlin/14/ .

[Richard H. Serlin]

I teach one of the largest university personal finance courses in the country at the University of Arizona. I am also president and co-founder of AAA Personal Finance Education, one of the largest providers of the personal finance education course required by the government for those in bankruptcy (since the BAPCPA law of 2005). So, I am an expert on this.

The gist of Brook's article is wrong and misleading. I left an earlier post giving some basic explanation why, but it was caught by the spam filter, so I'm not sure if it will eventually appear. Here, I'd like to just reference some good material to explain the situation:

Articles:

-- Harvard bankruptcy professor Elizabeth Warren's, "The New Economics of the Middle Class: Why Making Ends Meet Has Gotten Harder: Testimony Before Senate Finance Committee May 10, 2007, available at: http://finance.senate.gov/hearings/testimony/2007test/051007testew.pdf

A quote, "The beauty of the Over-Consumption story is that it squares neatly with many of our own intuitions. We see the malls packed with shoppers...But the numbers point in a very different direction."

-- A brief working paper of mine, "Let's Cut the Ammunition to the Housing Arms Race Permanently", available at: http://works.bepress.com/richard_serlin/14/

A quote: "The largest roots of the problem are the great increase in economic risk over the last generation (see
Hacker, 2006) and the great increase in the percentage of individual and family budgets spent on large fixed expenses, what Harvard bankruptcy expert Elizabeth Warren calls 'Must-Haves'."

Books:

-- The Two Income Trap, by Harvard professor Elizabeth Warren

-- "All Your Worth: The Ultimate Lifetime Money Plan" by Harvard professor Elizabeth Warren, with Amelia Warren Tyagi

-- "The Great Risk Shift", by Yale Professor Jacob Hacker

[superduperdave]

Once again, Americans are confusing regulatory failure with moral failure. End access to revolving credit and the problem will disappear tomorrow.

Americans are no different from anyone else. South Koreans had the same problem a few years ago. Countries where revolving credit is difficult or impossible to come by don't have to deal with this.

[Michael McKinlay]

Why would anybody save ?

The returns are negative to begin with then taxed on top of that. The fact is that the game of money is rigged by the Federal Reserve so that money will always be cheap to favor their member banks and owners with wider spreads.

Until we have a Public Central Bank that manages credit to the benefit of society returns on savings will never add up.

[financial analyst]

"You people just want more suckers to put money in savings accounts at negative interest rates so you can rip them off. Never give a sucker an even break"

bullseye!

[a]

"The 80% increase in the real, inflation adjusted, median home price since 1970."

Cause and correlation, please? Maybe the willingness to take on debt has led to an increase in home prices?

I think the big difference is cultural. Also, this cultural change took place sometime in the 1950s (thereabouts!). So I'm not sure what "data about typical families from the early 1970s" would show - in the 1970s the change had already taken place.

Also, I think Brooks should have placed some blame on the profession of our gracious host. Economists have come up with some doozies ("the paradox of thrift") to make it seem that thrift and non-consumption are bad for the economy and indeed bad in and of themselves.

Anyway, let's leave blame out of it. If you want to discourage consumption (and everyone seems to think that's a great idea), then you tax it. Tax consumption on everything but necessities (food, basic clothing, and medical care), and see how consumption goes down.

[cm]

David: But when racking up a certain number of purchases, there will come a time when at the end of the money there is too much month left. Unless that gap is filled with "paying" the past debt off with ever more new credit. And somebody has to spring for it.

Of course, one can "spring" funds based on credit, i.e. in the absence of effective financial regulation debt can be repackaged, "securitized", and then re-leveraged to "back" new debt. But leverage can increase only so much before aggregate credibility takes a hit, the traction mechanisms of palming off new "investments" fail, and central banks have to create fairly specious schemes to issue new money (e.g. the series of recent Fed "facilities").

All of that has been sufficiently explained, at least in qualitative terms, in recent mortgage crisis coverage. I don't know whether Europe can pull off the same thing.

[Root Cause]

Is the root cause of all this debt and moral decay so hard to see? This is exactly what negative real interest rates do. As the reserve currency, one can create the mother of all credit bubbles. Party on, dudes.

Societies decay with unearned easy money, just as Spain did after the discovery of new world gold. Leads to a society that produces little, imports most of it's needs, and has no reward for thrift and hard work. This is not the first time a society has been destroyed by easy money. You can thank the Fed for this one.

[odograph]

I've been a big saver all my life, and it has been a recurring theme that most people are not interested. They simply think it is appropriate to balance debt, and that the loans you can carry are what you can "afford."

I think that has risen, with feedbacks, to be a cultural norm. People who judge what they can afford by what they can save money for are odd-balls.

(I have seen the author of "The Two Income Trap" on video, and get that piece too ... but I think Brooks is right that this idea of "whats sensible" comes first. Are the two incomes trapped because they are buying a house a too many times income?)

[anne]

http://www.nytimes.com/2008/06/10/health/policy/10health.html?ref=business&pagewanted=print

June 10, 2008

Ranks of Underinsured Are Rising, Study Finds
By REED ABELSON

The number of people in this country who have health insurance but not the ability to afford adequate medical care continues to climb.

About 25 million Americans — or approximately one of every five adults younger than age 65 with health insurance — did not have sufficient coverage last year to shield them from financial hardship if they ended up in the emergency room or were seriously ill, according to a new study to be released on Tuesday by the Commonwealth Fund.

"We're moving in a direction where you can be insured all year and still face medical bankruptcy," said Cathy Schoen, the study's lead author and a senior vice president for research and evaluation at the Commonwealth Fund, a private foundation in New York specializing in health research.

The relentless rise in the cost of medical care, combined with a growing number of insurance plans that require patients to pay a higher portion of their medical bills has led to a 60 percent increase in the number of underinsured adults from 2003 to 2007, according to the study. The Commonwealth Fund first calculated the number of underinsured in 2003 when it estimated that 16 million Americans did not have sufficient coverage.

As the nation debates how best to improve its health care system, including how to insure the increasing number of Americans without coverage, policy makers also need to discuss the quality of available coverage, said Karen Davis, the president of the Commonwealth Fund.

"Lack of insurance is only part of the problem, as even the insured have serious gaps in coverage," she said.

The study, to be published by the medical policy journal Health Affairs, also indicates that the sharpest increase in the underinsured were middle-class families whose coverage still left them vulnerable to medical costs equal to 10 percent more of their incomes. While coverage offered by large companies remains fairly generous, people who try to buy individual policies or who are covered through small companies increasingly must settle for policies that require high deductibles or that sharply limit the benefits as way of reducing the size of the premiums.

Like the approximately 50 million uninsured Americans, the underinsured often choose to forgo necessary medical care, the study indicated. Twice as many people who are underinsured said they did not fill a drug prescription or see a recommended specialist for care, the survey found, compared with the number of people who had more generous coverage. They also tend not to get preventive care, choosing not to get mammograms or have their cholesterol checked.

"The underinsured look a lot like the uninsured," Ms. Schoen said. "Disturbingly, even adults with chronic diseases, when underinsured are not filling their prescriptions." ...

[MG]

PT Barnum's Successor, Michael McKinlay, financial analyst and Root Cause:

Just because return on saving is low/negative does not mean it makes sense to go into debt. Those 20% interest rate credit card balances? Pretty hard to inflate those away.

[IdahoSpud]

Interesting bumper sticker I saw in the 70's and 80's: "We're spending our kid's education money!" Usually seen plastered on a careening RV.

I wonder how that smug self-indulgence worked out for them and for their children?

BTW, where is the incentive to save, when interest rates are significantly below inflation, and interest earned is taxed as normal earnings?

People have been responding rationally to actual economic conditions. Debt was cheap and savings was (and still is) brutally punished.

[anne]

"BTW, where is the incentive to save, when interest rates are significantly below inflation, and interest earned is taxed as normal earnings?"

Idiocy.

The Vanguard long-term investment-grade bond fund has returned 8.68% a year since 1973. While actual index fund investing has only be available for American stocks since 1976, the return has been 12.01%. The European stock index has returned 10.89% since 1990.

Real estate investment trust index, 12.9 since 1996. Heath care and energy funds, 18.5% and 15.6% since 1984. Precious metals and mining, 9.0% since 1984.

[jamzo]

david brooks the GOP apologist writes this piece as though the economic policies and regulatory "reforms" he advocates had nothing to do with creating an economic environment in which savings for most people is their mortgae and their 401K

in the days of yore that brooks romaticizes savings accounts in banks paid interest rates of as much as 5 and 6 percent

the personal savings rate peaked around 1982-85 at around 10% and has been declining steadily from year to year - it is currently a negative rate

you can see the chart in a columbia journalism review article on the plight of the middle class

http://www.cjr.org/the_audit/turning_point_middle_class_und.php

[40-hours and a Full Load.]

Two answers for lower and middle-class Americans are obvious:

Free college tuition
Govt. paid universal health care

These are the two items crushing average working Americans. We need to find those responsible for keeping these programs permanently off the political agenda and crush them (and do it quickly).

[IdahoSpud]

@ Anne

Please learn and understand the difference between investment and savings. One is liquid and one is not, as Bear Stearns and Lehman have figured out.

[IdahoSpud]

... and as always your well thought out and lovely demeanor are charming.

[IdahoSpud]

And anne, one other point: The *investments* you discussed are not taxed as income (like savings is), since they are *ahem* investments not savings.

[anne]

"Please learn and understand the difference between investment and savings. One is liquid and one is not, as Bear Stearns and Lehman have figured out."

The Vanguard long-term investment-grade bond fund has returned 8.68% a year since 1973.

The Vanguard stock index fund has returned 12.01% a year since 1976.

[Huh???]

[anne]

"One is liquid and one is not...."

No liquidity for you! Huh???

[anne]

The Vanguard inflation-protected securities fund has returned 8.05% a year since June 29, 2000.

[IdahoSpud]

@Anne. A bond fund is an *investment*. Please don't try to blur the line between a savings account and a mutual bond fund like the knuckleheads do.

Savings = $1 in $1 out whenever you need/want it. Interest is taxed as earned income, higher than capital gains rate. For some reason, savings also happens to make families financially stronger. I haven't heard of anyone being wiped out by "bad savings account", but I have heard of being wiped out by "bad investments".

Investment = $1 in and ? out (depends on how the market is doing at the exact moment you need your money). If you need your money from your *investments* when the market is tanking, too bad (as Bear and Lehman learned). Is this what you are suggesting *savings* is???

Income derived from investments is taxed as short or long term capital gains. One more tool used to discourage savings, in addition to the pathetic interest rate.

[Gene O'Grady]

No one else seems to have mentioned it, but one of the strangest things Brooks said was his lumping of financial planners with what people ought to be looking to. Half of those birds are crooks, and a quarter are misleading, and the introduction of spreadsheets and other software has given them a chance to print out scenarios that look much more likely than they really are (and fail to list their fees).

[IdahoSpud]

Interestingly enough, among the highest interest rates paid on savings right now is from banks that you probably wouldn't want to trust your savings with:

Countrywide, Indymac, E-Trade, Capital One, GMAC.

Companies you certainly wouldn't want to *invest* in! :)

[Lafayette]

Article (Culture of debt by David Brooks): The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity.

Stupid is a stupid does, I guess. If there were no state lottery, the money would surely go offshore to a non-taxable entity (likely owned by the Russian mafia).

Who is Brooks trying to kid? Doesn't he know that betting money is highly fungible. It's gone global. That money, both discretionary and non-discretionary, is spent on the Internet. And, if the money is non-discretionary, it means the kids will be eating potatoes for a long, long time.

Si, if it does not go to state expenditure on education, which one may assume is its proper destination, where does it go. Given the level of stupidity, as measured in secondary school tests, one is right to at least wonder. Or, is that Left to wonder?

I dunno, I'm too stupid to figure it out.

The nation's leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It's only now become respectable to do so.

This is a political expedient found in all countries. Europe is still paying, in terms of budget allocations, for its excesses of the past in terms of welfare.

But, lead-head will having us paying his 3 trillion dollar (retirement from politics) debt for generations to come.

Of course, BO will be different, won't he. Won't he? He'd better tell us, then.

See how important it is, friends, to elect the right person as PotUS and not just the "least bad"?

[anne]

The Vanguard inflation-protected securities fund has returned 8.05% a year since June 29, 2000. The ultimate in secure liquid saving or investment.

Seriously; what am I missing?

[piglet]

"End access to revolving credit and the problem will disappear tomorrow."

An interesting detail, I think, is the fact that revolving credit in the US is not just easily available, it is also almost mandatory if you want to be a respected member of the community. In the US, and I think this is unique in the world, you are not considered creditworthy (e.g. for a mortgage) if you do not have several credit cards. In other countries, creditworthyness is defined by ability to pay (i.e. sufficient income) and absence of negative items on your credit report (no evidence of over-indebtedness, no delinquent accounts). In the US, incredibly, an empty credit report (i.e. I never borrowed money and always paid my bills on time) is almost worse than a credit report littered with delinquency. "Credit history insufficient" or "too few accounts" will show up on your report and knock down your credit scores. It doesn't make sense at all but it's the American way. And consider how ubiquitous advice about maintaining credit scores (those lovely inventions that have allowed US lenders to divorce credit checks from reality) has become. Advice like, "don't pay off that credit card, it may hurt your scores". And this advice inadvertently gives the impression that credit is a game you have to play. The rules may not make sense but as long as you know them, you are fine.

[piglet]

Richard H. Serlin: thanks for your enlightening posts. Another book that I find relevant is Strapped, by Tamara Draut.

[cm]

piglet: Maybe the missing piece in your conundrum is that "making sense" always comes with "to whom". (As in "what do you mean we, paleface".) Nudging the general population to go into debt certainly makes sense, to some.

[cm]

anne, IdahoSpud: Well anne, not to dispute your facts, but you have not been listening. How about "savings" as in "FDIC insured savings account". Where are the 5%+ returns? And the rates offered by CW and other institutions whose integrity has been called into question have to be "risk adjusted" to compensate for the expected complications getting at your money when things get tight.

You may get your money, or most of it (is only the principal insured or also current interest?), but not right when you want/need it (e.g. an expense may come down the pipe and you have to tap your credit card as you cannot get your money out of the bank right then, or cannot write a check against it).

[cm]

I chose 5% as the threshold as I have seen an advertisement in the 4+ ballpark not too long ago (from one of the institutions that IdahoSpud named).

When I put actual inflation (price level increase after taking out highly discretionary and hedonically adjusted consumer products/electronics) in the 5%+ range (quite likely a bit higher), savings accounts generally have returns below inflation, even before taxes.

[Lafayette]

mrr: How can you folks honestly be surprised that people on average make the wrong financial decisions?

Because if "How to handle your money" was taught instead of Football, perhaps students would understand when they are being suckered into a proposition that is evidently too true to be good.

Just look at the mindless ads that pass on TV. Should anyone be surprised that the "dumbing down of America" is associated with the Credit Mess, and also the chronic deficit?

A propensity to spend can be learned, in terms of common sense instruction of the difference between discretionary and non-discretionary income. Do schools do this?

I don't know. I do know that they don't here in France, so we have an entire generation of young adults who've grown up thinking that purchasing Madonna's next hit record is a non-discretionary expenditure; like paying the rent if not even more important.

If adolescents are not taught how to answer the question, "Can I afford this purchase?", then getting into debt is just a slip-slide away.

[cm]

Lafayette: But you can afford it. It's only $NN/month!

[paine]

i love the M&Ms peanut confession

but why confuse a dubious avenue
for our middle class
self improvement cult
to for go to resist
to build will power
to plan to be prudent
the horse called
household savings
pulls only one homes future wagon
why in and of itself is it anymore worthy
of a policy grapple
then "say no to drugs "

three good points here however

folks in the middle aren't
more improvident these days
mostly
they're borrowing more
because
they are being squeezed more

the house lot value boom
financed by easy and large borrowing
is a self fulfilling trap

and
mortgage racketeering
and other related and unrelated
household loaning practices
are in serious need of federal regulation
and a string of jailed culprits

says...

I know, I know; I am just now being told I am smart enough to use a smartphone, so how could I possibly understand, like, the world of investing; no fear though I may even be able to get a date to show me how at least if I can ever figure out how to get a date.

Saving is not investment, and the point of saving is to save in such a way as to make no money for making, like, money would be investing. Spank me, Daddy, for not knowing.

The whole point though is for anyone with more brains than your average turnip, who is fortunate enough to be able to save, making a decent salary and having decent benefits, for anyone who is even to save considerably the need is to invest. No one in my family has used a bank for saving in at least 20 years, similarly no one uses a money market account other than for smallish transfers. Checks are written directly from investment accounts, and the idea of worrying about changing balances never occurs to us.

Let me return now to that smartphone and finding whether there is a use there for like finding a date.

[anne]

Darn; just as I was learning to use that smartphone, I forget how to use a computer.

That was unsmart me, above.

[paine]

"A propensity to spend can be learned, in terms of common sense instruction of the difference between discretionary and non-discretionary income. Do schools do this?"
right off the laff rack

"and the stuff shirt award goes to ...."

[dd]

Geithner's latest missives indicate that regulatory bodies are not the answer; nor will they punish the culprits:

"Let me just finish by saying that confidence in any financial system depends in part on confidence in the individuals running the largest private institutions. Regulation cannot produce integrity, foresight or judgment in those responsible for managing these institutions. That's up to the boards and shareholders of those institutions."
http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html

Who knew shareholders were at fault for the credit crisis and if shareholders had punished those imprudent managers then everything would be just fine?

Then there is Geithner's FT Op Ed stressing that it is the "regulatory system" that will do the changing not those imprudent managers whom shareholders everywhere love:
"As we reshape the incentives and constraints for risk-taking in the financial system, we have to recognise that regulation has the potential to make things worse.Regulation can distort incentives in ways that may make the system less safe. One of the strengths of our system is the speed with which we adapt to challenge. It is important that we move quickly to adapt the regulatory system to address the vulnerabilities exposed by this financial crisis."
http://www.ft.com/cms/s/0/e9e5c4f0-35bb-11dd-998d-0000779fd2ac.html

The tea leaves say the wagons are being circled under the guise of financial stability because the credit crisis is far more serious and runs so deep that the culprits must be protected otherwise confidence will totally evaporate.

[anne]

Guy has an economic adviser who has advised cutting Social security benefits, * and now another who has suggested privatizing Social Security but not raising benefits as Sweden chose to do in privatizing. Guy also has another adviser who has told the Canadians not to worry about what the guy says about trade because the guy means something different though what the difference may be is not at all clear to non-Canadians. So conservatives are gushing, and I am wondering what the guy's policies actually are.

* Jeffrey Liebman

[lightly]

By way of anecdotal observation. If there is no way to earn more than 3% on small savings deposits, is there much point in bothering? If inflation and the dropping value of the currency mean that saved money is actually losing value, is it really so ignorant for the peasants to do our spending now instead of waiting until our little greenbacks are worth even less?

[Plato and the Founders]

"A propensity to spend can be learned...Do schools do this?"

Plato noted long ago that spendthrifts tend to be elected in democracies. Put spendthrifts in charge, and lots of debt is the result. Put spendthrifts in charge of raising the nation's children (public school system), and children learn to be spendthrifts.

The Founders were aware of this phenomenon. Originally there were checks and balances to reign in this trend. However, many of them have long since been amended away, or creatively bypassed. We are now more or less on the road Plato observed in ancient Athens. Spendthrifts are squandering the nation's resources.

[Tom W]

Anne says:

"The Vanguard inflation-protected securities fund has returned 8.05% a year since June 29, 2000. The ultimate in secure liquid saving or investment."

That fund has benefitted from unexpected increases in inflation, and from reductions in the interest rate. If the interest rate goes down, then the amount people are willing to pay for an older bond that pays higher interest will go up. That bond fund has seen its share price increase because of unexpected factors; but the share price in the long run is as likely to go down as up.

Almost all of the share price increase on that bond fund has happened in the last 1.5 years due to unexpected changes in inflation and interest rates.

The annual yield on that bond fund, however, is 1%. So 1% is what a reasonable investor should expect the fund will pay. Of course, the fund has virtually no risk of default since it invests in TIPS.

So, the long-term real risk-free rate of interest is about 1% right now. That 1% is taxable.

Although the rate of return is not very high, it's definitely above 0.

I believe that fund is quite liquid because you can sell your shares in the bond fund on the open market before any of its bond holdings mature.

[MG]

lightly:

...is it really so ignorant for the peasants to do our spending now instead of waiting until our little greenbacks are worth even less

I suppose not if your income is guaranteed or you don't mind begging.

Tom W:

Although the rate of return is not very high, it's definitely above 0.

...assuming the inflation index is accurate.

[anne]

"If inflation and the dropping value of the currency mean that saved money is actually losing value, is it really so ignorant for the peasants to do our spending now instead of waiting until our little greenbacks are worth even less?"

There are people who are unable to save at any time or for long times, and that is unfortunate, but to not save when possible makes no sense regardless of inflation since hedging against inflation by investing has been and is simple and safe. Inflation has been moderate for 25 years, but can be handled by investing. I do not understand arguing that there is a point in not saving when fortunate enough to be able to.

[anne]

When last domestic inflation was significant, the attractiveness of investing was simply astonishing; though the irony is that such attractiveness meant many people even professionals were sadly reluctant to invest. Warren Buffett wrote an essay about just how attractive investing was in 1979 or so, but for many conditions seemed to show otherwise. Buffett was of course simply being reasonable and was ever so right.

[anne]

I am only using the inflation protected securities fund as an example of what would be a perfectly secure way of earning a return higher than inflation over time, with immediate liquidity and worry about losses near term losses being minimal. Checks can be written directly from the fund. That bond interest is taxed as ordinary income is however unfortunate, and this is a problem.

[hari]

You've a good point about investment security from market fluctuations due to inflation - Rabo Bank (Netherlands) is perhaps only AAA rated public banking system on the continent with such a guranteed private investment accounts. It has now opened offices in Dubhai and Gulf States.

[paine]

"to not save when possible makes no sense "

anne
you are trying to make brads critical omega a reality

ie
increase the share of household income
that is from investments
the rentier-jobbler
a centaur for our time

[dave]

Warren is correct, the issue is the stagnation of wages. Working poor have no wiggle room in their cashflow. To "create" cashflow, some dubious lending mechanisms are used, such as car title loans and whatnot. These are immoral and should not be allowed in our country.

[Lafayette]

cm: But you can afford it. It's only $NN/month!

NN standing for No Nonsense, presumbably?

Nahhhh ...

[ken melvin]

Best to always remind oneself that Brooks, Kristol, Krauthammer, et al are propagandists. I've no idea whether by way of academic study, personal therapy, or whatever, but thought control is their objective. Always.

Not by way of lending credence to Brooks, but i do suppose that if lazy working class workers were to take a third job they could manage to save a bit but doing so on $10-12/hr is simply impossible.

[IdahoSpud]

@ Anne:

There is a huge difference between investing and saving. Here is what the Federal Reserve Bbank of San Francisco has to say about the difference between savings (they call them "deposits") and investing.

http://www.frbsf.org/publications/consumer/products.html

The upshot: You can get all your money back with savings because it is insured, while you can lose every penny of your money with investing. This is yet another example of the great risk shift being dumped onto the working masses.

I have money *invested* right now for future needs, while keeping all my fingers and toes crossed that these investments do well in the time frame that I need solid performance for.

I keep my *savings* (or deposits) to an absolute minimum because inflation eats away the low returns and *guarantees* losses. This is a bad situation, because if I need a large amount of money quickly, I will have to sell shares - possibly at a much lower price than I purchased them at.

As you should know if you have ever read the prospectus for an investment such as your chosen bond mutual fund, you will read this disclaimer: "Past results are no guarantee of future performance". Just because the fund you mentioned did well in the chosen period does not mean that it will always do so, or that you cannot incur losses. OTOH, with savings accounts, you get your entire deposit back, up to the insured limit.

This is why I get so incensed when someone bemoans the "poor savings rate". The system (through higher tax rates and low interest paid) is set up to punish what were once considered prudent savers (or depositors). Meanwhile the system stages the appearance of great reward for (often eager and ill-informed) investors who, without being aware of it, are taking greater risks than ever with their money and futures.

Bring back incentives to save and people will do so.

[anne]

I get your point, though....

I am only using the inflation protected securities fund as an example of what would be a perfectly secure way of earning a return higher than inflation over time, with immediate liquidity and worry about losses, near term losses, being minimal.

Long term losses are impossible.

[Not True]

"Long term losses are impossible."

Not true, because ordinary income tax rates are applied to the inflation adjust portion. If inflation is high enough, taxes will eat up the entire real return, and then start eroding the inflation adjust portion.

[cm]

anne: Unless your inflation "protected" fund managers can print money or raise funds at will, the inflation RISK will have to be HEDGED by contracting OBLIGATIONS to COUNTERPARTIES. (All phrases we have heard a lot of late.) I don't know from where you get your guarantees, but I won't argue this at length. Protection always works best when it's not needed, or at least not at scale.

[cm]

And few funds that I know of insure loss of principal (and if so, at a substantial deduction from net returns). Then again, if the insurance is not through Uncle Sam, you are back to counterparty obligations. (We will assume, with best wishes, that Uncle Sam is Too Big To Fail.)

[Lafayette]

Lucre

cm: (We will assume, with best wishes, that Uncle Sam is Too Big To Fail.)

Hubris -- ordinary, garden-variety hubris. Comes up every Spring.

There's a first-time for everything under the sun. And, with out Golden Boys in charge of Financial Engineering nowasdays, they are capable of just about anything in their rapacious greed for lucre.

They make billions and the nation goes bust. That sort of justice is sweet revenge. Unfortunately, the cure is far worse than the illness (for must of us peons just spectating).

[cm]

Lafayette: Well, if Uncle Sam can fail, that would take some strength out of my point ... At any rate, everything is a matter of degree. Uncle Sam's guarantees will go quite a bit farther than investment insurers. How much farther we should perhaps rather not test.

[BJ Feng]

"Warren is correct, the issue is the stagnation of wages. Working poor have no wiggle room in their cashflow. To "create" cashflow, some dubious lending mechanisms are used, such as car title loans and whatnot. These are immoral and should not be allowed in our country."

The reason why there are no savings is because Americans refuse to defer their consumption. They consume all their income, that is spend everything they make. And don't tell me they CAN'T save, I grew up in a household that was very keen on saving. We never bought new clothes, a lot of my clothes were from older cousins, my parents didn't buy me games and we ate all our meals at home. That allowed my parents to save enough to start their own business, and we became wealthy, but still managed to save a substantial amount.

Saving is accomplished by living below your means. That allows you to have excess funds left over every month. And with those savings, you can "invest" in bank CDs, stocks, or TIPS given your risk tolerance. The key is to live below your means, and not consume all your income. Americans just aren't willing to do that, and those who do are called cheapskates. What would you call a person who makes $70,000 a year yet drives a perfectly drivable 10 year old car? I call him a saver.

[BJ Feng]

I was about to agree with Anne that TIPS held to maturity would guarantee a positive real return, but after further research, the real rate can indeed be negative after taxes. The only way to guarantee a gain is to hold your TIPS in an tax exempt account like a ROTH IRA (since you use after tax money, this is cheating, you already paid your taxes).

Another risk with TIPS is that the government can change the index TIPS are linked to at any time. Currently, the CPI-U is the index, but the government can decide to use whatever they wish to measure inflation. And the CPI-U may not be a good measure of inflation in the first place. Argentina's inflation indexed bonds have been roiled by blatant government manipulation of the official inflation numbers. There is simply no way you can guarantee your money will be safe from the prying hands of the government.

[anne]

"I don't know from where you get your guarantees...."

TIPS are Treasuries only.

"I was about to agree with Anne that TIPS held to maturity would guarantee a positive...return, but after further research, the real rate can indeed be negative after taxes. The only way to guarantee a gain is to hold your TIPS in an tax exempt account like a ROTH IRA (since you use after tax money, this is cheating, you already paid your taxes)."

Right.

[anne]

Correcting:

"I was about to agree with Anne that TIPS held to maturity would guarantee a positive...return, but after further research, the real rate can indeed be negative after taxes. The only way to guarantee a [real] gain is to hold your TIPS in a tax exempt account like a ROTH IRA (since you use after tax money, this is cheating, you already paid your taxes)."

Right.

[piglet]

"The reason why there are no savings is because Americans refuse to defer their consumption."

Which is exactly what politicians and economic experts have been urging them to do for years. Just imagine Americans started to consume less. The whole "robust economic growth" house of cards of the last decade would collapse. As it will in any case.

[ken melvin]

We hear economists and politicians sing the praises of hard work and frugality, aka, greed and grub, as if therein lies the answer to all Americas’ problem. If only all Americans were more like the immigrants from China, … I propose that, if ‘twere so, America would be more like China, … What the hell kind of economy requires that its people overwork themselves and do without? For whom? Strange god, this. Sure, people who’ve long existed on next to nothing see America as an unlimited opportunity, and ‘tis by comparison, but does it follow that this is good for the inclusive ‘Americans’? In those golden days of yore, it meant that immigrants and citizens worked themselves to death on the chance that they might be able to accumulate wealth and thus better themselves. In times like these when we don’t need the labor allst that happens is someone else loses out either by lost employment or reduced wages. Ride SF’s 30 bus and tell me that this is America’s future. That this is the better way..

[cm]

Anne: TIPS are in the "Uncle Sam" category.

[Lafayette]

cm: At any rate, everything is a matter of degree.

Yes, quite.

But "failure" in this case means default on obligations (that is, debt maintenance).

This is by no means impossible should the large overhang of T-notes being held abroad as debt instruments are abruptly monetized. Which is why the Chinese have got Uncle Sam by the short and curlies.

[Lafayette]

The back of the tiger

piglet: Which is exactly what politicians and economic experts have been urging them to do for years.

Let's not blame, yet again, politicians for our own frailities. Even less, economists.

No one forced the American people, and especially its youth, to purchase far more than they earn, then ride the back of the tiger paying credit installments.

No one induced them either, if we are considering interest rates. Each individually was swept up in the frenzy. We are nation that has forgot that the flip side of the Liberty coin is called responsibility.

We have met the enemy and he is us. (Pogo by Walt Kelly)

[piglet]

"Let's not blame, yet again, politicians for our own frailities. Even less, economists."

Oh please. You prefer to blame poor suckers for the frailties of our own politicians? I'm pointing out the hypocrisy of complaining that people don't save enough when they have been encouraged, for years, to spend consume borrow spend more by those in power, and their political, scientific and media personnel. Bush's message to the nation after 9/11 was, go shopping if you are a true patriot. And people did, and it helped them forget about Iraq and everything else. And it helped keep nominal GDP numbers up, all that borrowing and spending. There is no single group of people to blame, really. Almost everybody was part of the scam, really, like in a good old pyramid scheme.

[Holly W.]

BJ Feng: ... we became wealthy, but still managed to save a substantial amount. Gee, being wealthy makes it so darned difficult to save money! ;-)

[Holly W.]

But never mind me, BJ, I'm mostly just reminding people I still exist and am following some of the discussions here even though I don't have much time to post lately.

[Lafayette]

piglet: I'm pointing out the hypocrisy of complaining that people don't save enough when they have been encouraged, for years, to spend consume borrow spend more by those in power

There's not a shred of evidence of this assertion, despite the fact that it may be your opinion. To get reelected, all a politician cares about is the unemployment rate.

Not the rate of personal bankruptcy.

[JBookley]

If you want people to save, you might consider paying them a decent rate of interest on their money. That way, even if they lack the resources or risk tolerance to join the investor class, they could at least join the saver class.

[dd]

"We will assume, with best wishes, that Uncle Sam is Too Big To Fail."

That was an old investment adage until Bush II.

[cm]

dd: I meant it in the way of a logical prerequisite, not an assertion.

[Lafayette]

Not Rocket Science

JBook: If you want people to save, you might consider paying them a decent rate of interest on their money.

Right! Easily done.

Just tax the hell out of capital gains and do away with taxation of i-rate savings; which thus makes the latter look considerably a better option.

May I suggest that the very large expansion of equity investing was sparked by making its unearned income look a lot better by taxing it lightly.

That's not Rocket Science, is it?

[Holly W.]

Seems to me that if you want people to save, you need to make it illegal for banks to nickel and dime people to death on their small accounts. Banks are fine places to keep your money if you can meet their minimum balance requirements for free services, but otherwise, the various fees can really add up. One overdraft charge can wipe out several years' worth of interest at today's lousy rates, and make check cashing services look like bargains in comparison. And yes, there are on-line banks with no fees and no minimums, but not everyone has easy access to such services.

Anne suggests that people can put their money in Vanguard funds to get a decent rate of return, but you need $3000 to get in the door at Vanguard. How are you supposed to come up with that when your bank keeps sucking money out of your accounts while you're trying to reach that amount?

As for paying a decent rate of interest, if banks are allowed to legally charge 18% to 33% in credit card interest, they should darned well be able to pay a bit better than the 3.45% top interest rate on savings less than $10,000 that Bankrate is showing me.

And speaking of credit card rates, maybe David Brooks would like to rant a bit against legal usury while he's at it. I wonder if those anti-debt ads he's imagining would tell people what they're really paying for purchases if they carry a credit card balance? I can hardly see the credit industry sitting still for that.

[piglet]

"There's not a shred of evidence of this assertion"

Excuse me?? Where have you been these last years?

"As we work with Congress in the coming year to chart a new course in Iraq and strengthen our military to meet the challenges of the 21st century, we must also work together to achieve important goals for the American people here at home. This work begins with keeping our economy growing. … And I encourage you all to go shopping more."
http://thinkprogress.org/2006/12/20/bush-shopping/

[Lafayette]

lead-head: This work begins with keeping our economy growing. … And I encourage you all to go shopping more."

This is evidence?

It can be just as easily construed that his intent was to sustain demand and therefore employment. That's goodness, were it not from his mouth.

[John]

Lafayette wrote the following:

lead-head: This work begins with keeping our economy growing. … And I encourage you all to go shopping more."

This is evidence?

Absolutely. This is a shred of evidence for the assertion that people have been encouraged to spend and consume.

[piglet]

"It can be just as easily construed that his intent was to sustain demand and therefore employment. That's goodness"

That's exactly what I'm talking about: sustaining demand by unsustainable borrowing. Lafi, today you come over as dim-witted. ROLL EYES

[Real Person from the Real World]

I'm with A. Citzen, Rich Serlin, and others. What do banks pay in interest? It used to be cash (including checks) or credit card, now it's both (Check cards & Debit cards from your bank). Also, variable pay, variable income. I have been with my employer for 4 years now, and my pay has edged up from $8/hr to wal-mart level, and I am well educated and this is not a flunky type job. Maybe he thought he could get away with it because of my age and sex, but this bum will be up a creak, if I get something else with all the stuff I now know! meanwhile, his wage costs are up, up, up. He hired a sales lady who is a shipping ditz looking for pin money, and a young, wet behind the ears salesman, ALL far more expensive then me. I live within my means, even meaning I have to go two flights down stairs to go to the bathroom in the middle of the night and have no air conditioning despite health issues.

All I can say is screw him (my employer), and especially screw Dave Brooks. This country' corporations have milked everyone for all they're worth for TOO LONG, while exporting decent paying jobs. Now the chickens have come home to roost. We're in a recession.

[Lafayette]

piglet: Lafi, today you come over as dim-witted. ROLL EYES

This is ad hominem and does not merit a reply.

When you find the wherewithal to employ reasoning instead of mindlessly subjective invective, do come back to the discussion.

[Lafayette]

MT: One other thing with regard to technology and financial innovation. Twenty years ago I couldn't go on the internet, sign up for a credit card, and then transfer money to my checking account in less than a day. Having that capability - having fast credit available from a variety of sources - could make people willing to save less.

The issue, I suggest, is not the facility with which one obtains credit but the inability to manage it. Facilitating credit obtainment certainly does render acquisition more easy. Which no doubt leads to insolvency, indebtedness and personal bankruptcy.

So, isn't it the consequence of indebtedness, i.e., personal bankruptcy, that matters to most people -- especially those who obviously have no competence in managing their expenditures? (Whatever did they learn in school?)

That is, people do not realize, a bit like cocaine, that they are hooked by debt. Meaning that they arrive at such a point of indebtedness, they cannot, at their wage level, pay their way out of it. The do literally "owe their soul to the credit company".

To correct this would necessitate a personal accounting mechanism that takes into consideration the stream of current expenditures and, when a debt repayment limit is attained, to simply stop the facilitation. Such a mechanism should not be avoidable. For instance, a credit-card is refused until a credit-balance level is restored to one's account.

Finally, should this addiction become irremediable, then perhaps a period in which a recalcitrant consumer had to pay in cash, obtained only from an solvent account, would perhaps work wonders to change their habits?

In fact, why not require banks to make available to depositors this mechanism as a prerequisite to opening a checking account? Since a checking account has, for all practical purposes, been supplanted by credit cards.

It is obvious that banks have no vested interest whatsoever that people do not overspend, since they earn interest when they do. The above suggested mechanism would therefore have to be imposed.

Childish, isn't it. But, that is what has happened to America.