New Anime: personal finance budgets

A survey released today by Javelin Strategy & Research, which serves financial institutions, found in August that nearly one in five Americans doesn't monitor or manage their personal finances. That rate is double what it was just a year ago. Despite the fact the recession has made it more important than ever to carefully track our money, when it comes to personal finances, 19% of Americans stuck their head in the sand. A year before, another survey had the figure at just 8%.

More anxiety-induced news: The percentage of Americans who say they sometimes log onto their checking account balances with their banks' websites dropped to 46%, down 13 points from 59% a year ago. Even those who track their money by pen and paper dropped, from 50% to 46%.

"It's a natural human reaction to stress: 'Maybe if I don't look at it, it will go away.'" explains the study's co-author, senior analyst Mark Schwanhausser. "I think you have fewer people checking their finances online because they don't like what they're seeing. 'I'm going to be a financial sleepwalker. I'm not going to look.'"

Schwanhausser's prescription for the problem involves convincing America's major financial institutions that they're doing a lousy job helping make it easier and less stressful for their customers to track their money. "It's not enough to tell you how to fix the toilet," he says. "You've got to have the wrench."

Yet despite the fact that most Americans' money resides at a bank, few banks are interested in furnishing financial planning tools. Right now, Schwanhausser argues, most people are required to log into a wide variety of websites to track their money. For example, 75% of Americans who have a credit card get it from somewhere other than their primary bank, meaning their finances are scattered across many websites, unreconciled.

When people do turn to their bank's websites, he argues, the financial planning tools are nearly non-existent despite the fact our society increasingly demands greater personal control through technology. "Today's online banking is like having avocado green appliances from the 1970s. It just doesn't cut it," says Schwanhausser.

Schwanhausser is using the survey to convince banks that it will actually endear customers to them if they put personal finance tools front and center on their sites, helping customers paint a clear picture of their own financial habits. He's pressing them to develop systems, both on the Web and through mobile apps, that can draw in customers' information from other sites, such as credit cards and mortgage lenders, so financial care-taking can be a one-stop process.

So far, banks and lenders have been slow to use existing technology to make money management a less daunting chore. Part of the issue is that many banks don't want to acknowledge competitors by drawing in account balances from elsewhere. Banks also stand to make money off poor financial planning through penalties and fees. Like a doctor who makes money off treating disease, promoting financial good health does not on the surface appear to be in a bank's best interest.

"You can't manage what you don't measure," says Schwanhausser. "And if the bank's not going to provide it for you, you have to go get it in other places."

He recommends existing aggregators such as Mint.com, which pulls your data from multiple sources and lays it out in spreadsheets and in spending plans, as a model for what all the banks should be doing for their customers.

He also notes that Bank of America's "My Portfolio" and Wells Fargo's "My Savings Plan" are two fledgling, if little-known, bank-created features that are slowly reaching toward the sort of comprehensive personal finance planning features he advocates.

As long as it remains difficult or scary, though, when it comes to their finances, Americans will remain more likely to use the Ostrich Method.
I've mentioned this piece a number of times now, from Roger Altman and Richard Haass, "The Consequences of Fiscal Irresponsibility." The introduction provides the background to America's massive fiscal overhang, and then this:

It is important to understand the impact of all this debt. As it grows, interest rates inevitably rise. As they do, the U.S. government's annual interest expense -- the cost of borrowing money -- will rise from one percent of GDP to four percent or more. At that point, interest expense would rival defense expenditures. And it would exceed all domestic discretionary spending, a category that includes spending on infrastructure, education, energy, and agriculture -- in effect, anything other than entitlements and national security. The U.S. Treasury would need to borrow a staggering $5 trillion every single year, both to finance deficits and to refinance maturing debt.

Yet the real outlook for deficits and debt is much worse than these forecasts. For one thing, the debt that the United States effectively guarantees but that is not included in official totals is almost equal to the Treasury Department's stated $9 trillion total. In particular, the debt of government-sponsored enterprises is another $8 trillion. The biggest of these are the essentially bankrupt housing finance agencies, Fannie Mae and Freddie Mac. They have been placed into federal conservatorship, and for all practical purposes, their debt is equivalent to U.S. Treasury debt. The American taxpayer stands fully behind it.

State and local governments also owe huge amounts, on the order of $3 trillion. And again, Washington indirectly stands behind much or all of it. This sector is deeply distressed, with the largest state, California, recently issuing IOUs. Moreover, many state and municipal pension systems use an antiquated pay-as-you-go funding approach, which has left them underfunded by another $1 trillion.

The post-2020 fiscal outlook is downright apocalyptic, for two reasons. First, the aging of the U.S. population will drive sharp increases in health care costs (and at the same time, more Americans will be retired). Second, federal interest expense will rise exponentially, as the Treasury's borrowing costs grow with the debt. The Congressional Budget Office projects that official federal debt (excluding government-sponsored enterprises) could hit 110 percent of GDP by 2025 and 180 percent by 2035. Adjusting these forecasts for the inevitably slower growth that would accompany such quickly rising debt levels means hitting those stratospheric ratios sooner.

Why is this scenario so dangerous? One reason is that a large amount of federal borrowing would eat up the stock of private capital that is available to finance investment. A higher and higher percentage of personal savings would be diverted to purchasing government debt and away from productivity-enhancing investments in equipment and technology. This would shrink the base of productive capital and flatten GDP and family incomes. As more and more debt piled up, growth would slow and Americans' standard of living would fall.

In addition, interest expense would become so large as to crowd out whole categories of federal spending. Budgets for research, education, and infrastructure, to name but three examples, would inevitably decline in inflation-adjusted terms. Washington's capacity to respond to domestic crises, such as the recent recession, would also fade. All of this would further undermine families' incomes.

More at the link.

My problem with this piece is that it's way too pessimistic, even for a problem of this magnitude. There's no discussion of how tax receipts rise dramatically during periods of robust economic growth. So should the administration agree to the extention of the Bush tax cuts from 2003, it's possible that a surge in GDP --- with a boom in individual and corporate profits --- could send a significant windfall of revenue to the treasury. This was indeed happening by the last couple of years of the Bush administration, and it's likely to happen over the next few years, now that the GOP has retaken the House. See the commentary at Wall Street Journal, "Liberal Tax Revolt."

And refer to my bullish comments from Saturday on the international aspects of coming growth domestically: "The World in China's Orbit?"

eric seiger do

Wednesday, December 1, 2010

personal finance budgets

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