Don't Think, Spend Money

A few weeks back Tim Iacono posted Americans and their Finances: Poor Planners, Bad Investors, and Not Taught Very Well. It seems that our economic establishment is very concerned that Americans are not very good at managing their finances. Tim sums up our sad history, and then quotes from a National Bureau of Economic Research (NBER) study on the subject.

From a nation of diligent savers where a reasonable return could be earned on risk-free investments and everyone worked toward paying off their mortgage, we’ve gradually turned into a nation of credit junkies who fall into two investment camps – increasingly destitute, risk-averse savers and speculators reaching for a higher return, many of whom will end up destitute as well.

Here's the text Tim quoted from the NBER—

The findings reported in this work paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt.

In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees.

Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years.

The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans.

When I read this initially a few weeks back, I was too angry to post about it. I've calmed down a bit, so let's deconstruct this pernicious nonsense. Even now it is hard to do.

• the majority of Americans do not plan for predictable events such as retirement or children's college education — Under what rule have Americans, who are routinely referred to as "consumers" in the corporate-run media, operated over the last 30 years?

  Don't Think, Spend Money

  And now it is a surprise that Americans do not know how to save money and plan for future events?

• To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt — 77% of Americans live paycheck-to-paycheck. Can someone please tell me what "debt management" is?

• Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees  — So if you're late on your interest payment, the bank jacks up your interest rate, and further rapes you by charging an exorbitant late fee. All because you didn't have enough money that month to pay the bill on time. What money you did have went to pay for food, gasoline and the electric bill. Now we understand what "debt management" is.

• more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years — Yes, I can see the NBER's point. Rather than get a payday loan, which only makes matters worse, you can choose to become homeless instead of making the futile effort to maintain a household.

• people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans — Why aren't Americans knowledgeable about the contractual terms of their debt? Something Tim Iacono said seems apropos here.

  "... it seems clear that the too-big-to-fail banks have millions of Americans right where they want them — dumb and in debt — and even Elizabeth Warren might not be able to save them."

  I should note that the Republicans in the Congress are doing everything humanly possible to make sure the Consumer Protection Agency becomes a non-starter. Unlike Democrats, Republicans are never confused about what their job is—serving the powerful interests who enabled their election.

Tim Iacono also cited a MarketWatch report that shows that Americans are poor investors. I will postpone that deconstruction until later in the week. When the American economy became financialized, and the rent-seeking, parasitic banks took over the joint, Americans were thrown to the wolves. They were forced to swim with the sharks. And then the whole house of cards fell apart in 2008. You could become a risk-averse saver and take a beating, or likely lose your shirt gambling in the phony markets.

Let us quote from Fed governor Elizabeth Duke's presentation Research, Policy, and the Future of Financial Education.

Also troubling is research showing that many consumers who should be saving for retirement instead have been forced to take hardship withdrawals from their 401(k) plans. According to an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and 2010. Other types of withdrawals increased by 56 percent.

The increasing use of retirement savings for other purposes is particularly troubling given that the responsibility for saving for retirement has shifted away from employers to individual employees. Having a secure retirement is a high priority and a significant long-term goal for many Americans, so it is especially important that they have an understanding of what level of resources they will need in retirement and the investment options available to them...

The recession has clearly disrupted the future expectations and financial plans of millions of Americans, but even in the best of circumstances, effectively managing one's longevity risk requires a level of financial knowledge well beyond that required of any previous generation...

Financial products have also become more complex, adding a significant degree of difficulty to the important task of managing one's own retirement savings. Consumers need information and education to understand their saving and investment options, to make the best choices for themselves and their families, and to help them implement and monitor these choices over time.

How can someone worry that Americans can not negotiate a financial system which has been increasingly rigged against them for the past 30 years? And do so with a straight face?

Not since the Great Depression have Americans been squeezed financially like they're being wrung today. As if being called "consumers" weren't bad enough, it is insulting for the NBER (and the Fed) to whine about Americans being poor financial managers when the more fundamental truth is that the vast majority of them have no assets to manage.

Comments

[sharonsj]

These "experts" are missing one vital point: you can't spend what you don't have.