Sunday, April 22, 2007

A missing piece of Savings

I'm reading through the works of Gene Sperling, and he keeps talking about providing incentives for lower income workers to save, either through a Universal 401K, or tax code changes, or whatever. It all sounds great, but it's missing an important element.

We can't, through changes in law, require individual savings. It's not that we couldn't pass a law requiring people to save some money, it's just that a law like that would cause a lot of ugly political consequences. Who wants to be the candidate for reelection who says "I voted for the bill that took 10% of your money away from you."

That doesn't work, and there's a better way.

While we can't have direct effect on the behavior of individuals, we can pass laws that affect how our government works. There has been a Balanced Budget Amendment introduced in Congress for years, if not decades. It's an idea that makes sense, and the last several years of the Clinton Administration shows what a budget written in balance can do. We were on track not just to pay down the National Debt, currently 8.9 Trillion Dollars, but to pay it off. This is a debt that exploded under Reagan and Bush I, and Bush II has reversed the positive direction that we had started to move.

So, why is a balanced budget so important? Because we owe money to other countries, and we have to pay interest on that money every year, regardless of anything else. Add that interest to the fixed expenses of Social Security, Medicare, and all the other promises that the Government has made, and we're heading towards a downward spiral that we won't be able to get out of.

Here's my spin. I don't think Balanced Budgets are the answer. They're not enough. We didn't pay down the Debt under Clinton by having Balanced Budgets, we paid it down by having a Budget Surplus. That's the key.

If we could require a 1-10% budget surplus at the Federal level every year, we would be able to start to pay down the debt that we have, and after a few years (or decades since we're so far in the hole), we would start having extra money. Before people start crying for tax cuts, I have a different idea. Wouldn't it be better to put that money to use in our overall economy?

Here's an even larger picture. If every level of government, from Federal down through States, Counties and Cities, were required to have a 1-10% budget surplus, all of them could start to pay down their debts and start putting money aside. For my own city of Seattle, the extra revenue could be put into local banks, and made available to businesses and home buyers as low interest and fixed rate loans. The interest earned from those loans would be made available to the city in the next budget cycle as part of the general fund, and that extra money would justify a reduction in taxes.

There are 50 states. Washington has 39 counties. Each county has several dozen cities. We're talking big bucks, and it's time we started using that money to help ourselves and rebuild our infrastructure. Building our civilization on a foundation of Debt is destroying us a little at a time. Building on a foundation of wealth has long term positive consequences for us and our children's future. I think it's a better course.

Monday, April 16, 2007

Sallie Mae buyout

Sallie Mae agrees to $25B takeover

I found this really troublesome. It says that we won't see changes in how the loans are handled or paid, but how do we know that will stay true? If you're a shareholder in Sallie Mae, I would vote against this deal. It's not about the money, it's about keeping institutions like this out of the hands of private sector people that only care about the money. Which is more important, after all? Are we only out to make a buck, or do we actually care about how much debt we are putting on our kids?

Disclaimer, I am paying off a student loan to Sallie Mae, so I have a personal stake in this. Do I own Sallie Mae stock? No. I can't own everything.

Thursday, April 12, 2007

Tuesday, April 10, 2007

Capitalism is sooo 20th Century

http://kuow.org/programs/theconversation.asp?Archive=04-10

Scroll to the 45:00 mark and listen to my talk with Ross from KUOW.

Saturday, April 07, 2007

City of Seattle Micro Bonds

I made an inquiry of Seattle City Councilmember Tom Rasmussen about the possibility of having the city offer municipal bonds at lower denominations than $5,000. He sent the question to Dwight Dively, the city's Director of Finance.


Tom, we tried this about 12 years ago. Several other nearby jurisdictions had issued what are called "minibonds" in denominations of $500 or $1000, so we tried it with a City Light issue. The theory was that citizens and employees would want to buy these bonds. It turned out that there was almost no interest in these bonds. Further, they require a significant administrative expense because they aren't managed through the usual municipal bond process, which is administered through the Bank of New York. City Light incurred substantial administrative costs for a relatively small amount of bonds. So, our experience suggests this just isn't worth it. Please let me know if you have other thoughts. Thanks.


Here is my response:


Thanks for the voice of experience. I pretty much expected that the administrative costs of such an enterprise would limit the effectiveness. The problem is that just like almost nobody has $5,000 to put into an investment, not many more people have $1,000 or even $500. $1,000 is a mortgage payment. $500 is a car payment. $100 is groceries for a week. $50 is a dinner out. $25 is an amount that people can spare. Until we can figure out a way to enable people to put down as little as $25 for a community investment, the interest won't be there from the general public.

What we did not have 12 years ago was the Internet. We didn't have online banking institutions like PayPal and Sharebuilder, each of which have $25 minimum investments. We didn't have Citigroup or Bank of America having market capitalizations above $200 Billion. And we didn't have a negative national savings rate. We were just starting to launch the Internet, and everyone was after 10% returns. It makes sense that the administrative costs at that point were prohibitive for micro-bonds.

But new ideas are the only way that we are going to dig our way out of the mess that we are in. If it's not worth the investment for the Bank of New York, maybe it would be something that Google.org would look at. The online financial services are trying to figure out a way to enable efficient transactions of $25 or less. How many of them would jump at the chance to create an investment vehicle for people to put in $25 or more? All I can do is ask, and hope that I can find someone who shares my vision. I'm tired of watching my city and my country build a foundation of debt. I'd rather watch, and help, as we build a foundation of wealth instead.


I don't know if that sounds too much like a soapbox article or not, but I have real concerns that we're headed towards a financial meltdown at a global level, and that the only way to stem the tide is to start saving money at an individual level.

I've started to work on a presentation that outlines the issue and what I think the solution is. I guess I was inspired by Al Gore. And now that I have a laptop, I can work on it at any time.

PS, is anyone watching this blog? Please let me know. Dialoge is always better than an echo chamber.