Government-Mandated Mutual Funds For Everyone! No Thanks.

There was a NYT op-ed last week, “Go On A Savings Spree,” suggesting that, as opposed to the tax-rebate stimulus, the best way to heal the economy is for the government to create universal mutual funds for every tax-payer. At one point, author Dalton Conley writes, “Some research suggests that asset-holders behave more responsibly and are more civic-minded than those without wealth. After all, they have a stake in the future of the economy and their community…Investing motivates people of all income levels to defer gratification and become knowledgeable about the economy and society.”

This is a misplacement of cause and effect. Giving a man an investment fund automatically makes him responsible and civic just as much as giving a man a fish teaches him to catch his dinner with rod and reel.

In both cases, it is going through the latter that leads to the former. Sure, a negative savings rate in an underpinning of the current financial crisis, but if we’re going to discuss fanciful alternative means of stimulating the economy, then I would rather donate my $600 to help pay for the cost of congressional hearings into scandalously exorbitant bank fees.

Now that everything is electronic, and especially since the passage of the Check Clearing for the 21st Century Act, overdraft fees are insanely high, and on the rise. There’s fees for having too little money. There’s courtesy overdraft fees which courteously let you spend more than you have and penalize you for it. Banks process checks largest to smallest instead of the order in which they arrive, which results in more of the checks being overdrafted. The policies are geared around maximizing the likelihood of incurring a fee. And since the supposed cost they’re recovering is so low, they amount to nearly pure profit.

Obviously you should never spend more money than you have, but the rules are stacked in favor of the house. The poor and financially disorganized get soaked. How are they supposed to get a positive savings rate when their bank account is a jack-in-the-box of fees, you never know when another one is going to pop up? No wonder the poor prefer to patronize check-cashing joints, at least then you know exactly how much you’re getting ripped off for right up front. Reining in the bank’s madcap fee spree would do more to immediately stimulate personal savings levels than sending a flood of our tax dollars to Washington-anointed money-managers.

Go on a Savings Spree [NYT]
(Photo: Getty)

Comments

Edit Your Comment

  1. Echomatrix says:

    not only that. who decides where the money goes. Awful idea. Just as the Govt planning for a surplus, Everyones going to fight tooth and nail for the money instead of spending it where it needs to be spent.

  2. IssaGoodDay says:

    The biggest load of BS to come through the banking system is the fact that most banks no longer offer the courtesy of automatically transferring money from savings to checking if you make a purchase that goes over the amount in your checking account. “Back in the day” they’d charge me $5 if I accidentally went over my bank balance. Now, they charge me $30 in addition to putting my checking account way in the hole.

    I can see how it sorta protects against theft, but I’d rather just be careful/conscious of where my debit card is.

  3. stanfrombrooklyn says:

    There are so many unrelated points in this article I don’t know where to begin. First off, it’s true the poor do get ripped off in many commercial services. But you also defend “the financially disorganized.” It’s hard to defend someone that knows the rules up front but is “disorganized.” Here’s an idea. Get organized. I’ve never paid a dime in fees to my bank for anything in 20 years. And this includes graduate school times when I’d have under $50 in my account.

    Somehow you’ve made the argument that people shouldn’t “own their assets” because the money would be better off investigating banks. Huh? What does one have to do with the other?

    Both economically and logically, when you give someone “ownership” of something – whether it be physical, financial, or even just mental – those persons always treat it better and perform more productive than when they don’t own it. All you have to do think how many times you’ve heard someone say, “Ah. Who cares? It’s just a rental.”

  4. Snarkysnake says:

    Hey ! This is just as stupid as…The last government scheme to force us to “save” for when we will need it – Social Security. That has had the effect of lowering the savings rate because when I turn 67,I will get that “trust fund” that Big Daddy has for me.Since everybody gets taken care of,nobody saves for retirement like they should. (Well,a few people do,but they are the exception,not the rule). Besides,you can create your own mutual fund scheme now,and there is no one in the government stopping you.And one final point- This would be a magnet for Wall Street types to rape and pillage.One way or the other,the Enron type people that
    always seem to be lurking around would not be able to resist a pool of money this big. Throw this idea back in the oven-it’s only half baked…

  5. Steve Trachsel, Ace says:

    How about they take that money and invest in mandatory consumer education…

    Before you get your drivers license you have to take a course on balancing your check book, credit card usage and taxes.

    Before you can take out a mortgage you must take a follow up class on credit usage and homebuying

    And at some point there should be a course required on IRA/401K, retirement investing, ect.

    It ridiculous that people can go through life without ever taking a second to learn this stuff

    (at 19-20 I really screwed up my credit, something that took years to correct and Im still feeling the fall out)

  6. JessiesMind says:

    This is a fantastic idea! Look at it this way: We give money to the government all the time and they’re financially responsible with it!

    Oh, wait. Yeah, nevermind.

  7. Ssscorpion says:

    “Some research suggests that asset-holders behave more responsibly and are more civic-minded than those without wealth.”

    “Some” research suggests that? SOME?? The NY Times actually knows of research that suggests otherwise?

  8. JiminyChristmas says:

    People commonly mistake Social Security for a retirement or savings plan. It’s neither. It’s more accurate to think of it as social insurance. It’s there to provide a subsistence level income if you become disabled, have inadequate savings/pension after your working years, or outlive your assets. That’s why it’s misguided to think of SS in terms of return on investment.

    That’s also why the idea of privatizing SS or partially supplanting it with private accounts is so damned foolish. What happens to the people who make bad investments, or just have the misfortune to hit retirement age during a bear market? Assuming we don’t let those people go homeless or starve, the money lost in the stock market is just pissed away.

  9. savvy999 says:

    Hmmmm… not your best work to date, Ben.

    In one paragraph calling the government out for being too involved in financial matters (creating universal mutual funds), then with the next asking for the government to be more involved in financial matters (banking fees) is a wee bit inconsistent.

    The mutual fund idea is unworkable, unless there is a hard, absolute line in the sand that the poor can NOT withdraw money until they are retirement age… which no Congress will write into law. Shit, Congress gives away $ that we don’t have already, does anyone think that they will withhold funds from the people that are ostensibly real and ‘ours’? It’s a nice dream by that perfesser, but it’s completely unrealistic.

    Better to attack bank fees by giving props (and business) on this very site to those institutions that have the best consumerist-oriented philosophies. True overdraft protection, the smallest fees, etc., while castigating the worst offenders. Government hearings into or micro-legislation about bank fees would be a huge waste of time and money.

  10. socalrob of the 24 and a half century says:

    I like the idea of the government looking into banking fees. I’d rather have that than some tax refund. I already have some money that was an inheritance from my grandfather in a money market and a mutual fund. I had it in the stocks that I inherited but the market took a dive, and the stocks went with them.

    While a long term (3+ years by my definition) mutual fund would be good for most I believe, that money will work even better by helping pay off peoples debts. If most people cant manage to own a credit card without looking at it as free money, I doubt having a mutual fund will do them any good.

    But banking, yes that would be nice. A fee to use someone elses ATM is lame being charged by anyone else other than the owner of that particular ATM for providing you the service. A fee to keep your money if you do not have direct deposit or 1k+ in your account (BofA) is really lame. You hold my money and charge me while you make interest off of it and then of course the profits from what you charge me.

    This world is corrupt when it comes to money. Anything can have a price put on it, even lives. Murder gets you less time than theft of money and or goods of some form. Like the government is going to do anything sane when it comes to money.

  11. bgrigson says:

    If bank fees in the US are so bad. Given that we are pretty much able to do our banking online, are there any banks that would fit outside this model? Perhaps an international/offshore bank? My current bank has no local branches and most deposits are electronic. Surely if people start moving their money out of the US banks will notice.

  12. cmdr.sass says:

    @chus3r: The simpler solution is the one that is mocked for being oft repeated – switch to a Credit Union. You’re a valued member rather than a pinata.

  13. yesteryear says:

    @Tracy Ham and Eggs: i concur. i work in economic development and we’ve been providing recommendations to the state and federal government for their foreclosure crisis response plan… believe it or not, one of the ‘proposed responses’ is “Provide funding for and encourage high school financial literacy programs”. so what the hell has been happening up until now? i think i remember spending two hours learning to balance a check book at some point in junior high, but in this age of everything being plastic the needs are different and much more complex.

    i take issue with the idea that all wealthy people are more responsible/contributing members of society. try growing up poor with zero financial education and no financial role models – money can be a very emotional topic when you’re broke.

  14. MeOhMy says:

    Perhaps not the best idea in the world, but it’s no worse than giving $600 to people as a reward for being financial dimwits.

  15. Rectilinear Propagation says:

    @cmdr.sass: It’s mocked for being too vague. A financial institution being a credit union is no guarantee that they won’t have ridiculous fees or few to zero branch locations.

    Saying “My credit union is awesome” is no more helpful than “My bank is awesome”. Name the credit union!

  16. Steve Trachsel, Ace says:

    @yesteryear: My alma mater actually brought me in the last three years to teach a “what to do with your money when you graduate” seminar for seniors. The brought me (former mortgage broker), a financial planner and a car salesman to talk about/answer questions about investing, buying cars, using debt, renting/buying a home and whatever else came up. The only rule was we couldnt solicit business while on campus (not a deal to me, the other guys just handed out cards). Out of a student body of 4000 or so I had maybe 40 people over two days, and most of them were the smarter kids who already knew their stuff.

    Sad…

  17. econobiker says:

    I want the same pension model that the goverment employees specifically politicians get. If they don’t invest in Social Security then why us…

    And yes on the bank fees. ATM’s were originally to be able to cut teller costs and were free within network. Now when the concept is universally adopted, fees start creeping in. That is bullsh*t.

  18. I think I would happily spend half of my rebate on providing financial education to all americans. The funny thing is, there are currently several government agencies tasked with that (Labor has Women’s Bureau, Commerce, SSA and others have their own initiatives). But, rather than having hearings on bank anti-consumer activities (skyrocketing fees in an era when their costs should be dropping, long holds on things when their hold time should be shorter, and the whole scam of billing larger items first, regardless of order), which are all worthy topics of discussion and worthy targets of legislation, I would LOVE to pay for a broader base of financial education and consumer savvy.

    Government has some answers (banking legislation would be a great and non-complicated answer), but smart consumers, investors and borrowers would have done a lot to avoid a negative savings rate, the dot.com bubble and the housing bubble.

    I would also give half of my tax rebate to hold a hearing on Treason charges for Roni Deutch and her entire industry of tax weaseling lawsuits.

  19. yesteryear says:

    @Tracy Ham and Eggs: that’s really great that the school offered that – is it a private school? i didn’t know anything about car loans until i ended up buying one and finding out i had agreed to 16% interest (i was 18 at the time).

    @Rectilinear Propagation: no one’s naming their credit unions because they are typically local and it would be irrelevant on a blog that’s read around the world such as this one. but for the record (i’ve already named them, but i’ll do it again) i have savings and loans with Sea West Federal Coast Guard Credit Union and my checking account with 1st United Services and they are both awesome!! also – they don’t have many branches, true – but they have a network of other credit unions that allow you to use their ATMs, so i’m never far from one – oh, and they don’t charge me to use another bank’s ATMs.

  20. MrMold says:

    Had a bank account at a branch not two blocks from my apt. After the bank assessed fees that zeroed the account just before payday, I was a wee stressed. Thank the evil Socialist Menace for PSECU (PA employee credit union). No stupid fees, reasonable rates, and decent customer service. Why would anybody deal with the banks again?

  21. Steve Trachsel, Ace says:

    @yesteryear – Nope, small state school. Head of the Business Department organized it, and called in some favors to get us to volunteer.

  22. GearheadGeek says:

    I’ll join the chorus calling out this article as being somewhat internally inconsistent. I do think that banking fees are ridiculous, but like the finance nerd that I am, I just see that as all the more reason to manage my accounts well. My bank (a large national chain) has ugly fees for insufficient funds, but a $5 automatic transfer from savings to cover it, so I’d have to go deeper over than my savings balance to hit the big fees. I keep some money in that savings account basically just as insurance for that eventuality that I haven’t experienced in many years, so they win by having an extra few hundred in deposits that never gets withdrawn and I satisfy my risk aversion.

    If you can’t manage a bank account, live with cash for a while… if going hungry when you drink your grocery money and hassling with paying everything in person doesn’t encourage you to learn to manage your money responsibly, you’re hopeless.

    Disclaimer: I’m talking about middle-class and above here. All of this breaks down when you’re looking at the situation of poor people. When you truly barely make enough to survive frugally (or even less) it becomes a huge challenge to avoid fee pitfalls at the same time that those fees represent a bigger risk. If I wanted to be lazy about my balances, I could afford a few $39/transaction fees for NSF charges… people who are living paycheck-to-paycheck because rent, food and transportation eat all their net income can’t afford even one.

  23. We shouldn’t let the government manage money – because banks charge their customers fees in their checking accounts.

    Didn’t you open this argument accusing someone else of having difficulty connecting causality? You’re either for regulation or against it.

  24. johnva says:

    @yesteryear: There are also commercial banks and even brokerages that don’t charge for using other banks’ ATMs and even pay you back for transaction fees charged by the banks that own the ATMs. None of these features (including good service) are unique to the credit union model. Meanwhile, credit unions often do NOT offer useful products that the commercial banks do, like credit cards that offer good rewards programs. Most credit union credit cards I’ve seen are the low-interest, low rewards type. That’s great if you’re the type who carries a balance, but not as good if you pay your card off in full every month and want to maximize cash back or whatever.

  25. Mr. Gunn says:

    DNRTFA, but are they calling for the govt to FUND the mutual funds, or just set them up and watch over them so they’re not preyed upon?

    The basic premise, that people with savings accounts or some kind of stake in the economy tend to be more responsible is pretty good, but I tend to agree that a massive govt program like this would have too much overhead.

    Can we stop jumping to conclusions, though, my commenting brethren and sistern?

  26. rjhiggins says:

    Ben: Consumers have proven that you can screw them with fees day and night and they still won’t change their habits. Your contention that congressional hearings are the solution is almost laughable, and is totally irrelevant to the author’s proposal.

    Investing everyone’s $600, rather than suggesting they spend it on more consumer goods (when overspending is already a national epidemic), is an idea worth investigating. To those who say it’s too risky, remember that there are plenty of low-risk mutual funds out there. You can invest in government bonds, for example, or a index funds, or spread your investment around and minimize risk. And if down the line the government partially matched each dollar contributed it would open people’s eyes to the value of investing.

    It would be a bold step, but with potentially huge returns. Cutting bank fees, while a noble cause, will have a marginal impact at best.

  27. disavow says:

    54% of people cash out their 401(k)s when changing jobs. We can assume this would have a comparable attrition rate.

    If someone wants to spend it, they’ll find a way to spend it. A plan like this would just allow financial service companies to take a little off the top.

  28. GearheadGeek says:

    @disavow: Wow… that’s a really depressing statistic. No wonder we have a negative savings rate… people will actually pay the penalties to cash out their 401k when changing jobs? Or does this include people who roll from 401 to IRA?

  29. disavow says:

    @GearheadGeek: Straight-up cashouts, as far as I can tell. Looks like I may have transposed the numbers, 45% vs. 54%. At least according to this two-year-old article that’s the only one I could find in one minute:
    [www.marketwatch.com]

    But yeah, it’s really kinda scary IMO, since so many people will never have pensions or annuities. Makes it that much more important to have Social Security reform…yeah.

  30. Thorny says:

    Why don’t we focus more on teaching people math instead of trying to hold their hands with every financial decision?

    To me, all these mortgage issues and irresponsible spending and credit card debt and negative savings rates have to do with a lack of basic math skills combined with a “must have now” mentality.

    I guess it’s just easier to teach percentages.

  31. rjhiggins says:

    @disavow: I believe your percentage is off; I’m quite sure fewer than half do so, but I don’t have time right now to get the statistics. (Either way, it is an appalling number.)

    However, it wouldn’t be hard to write the legislation to make the penalties more severe, or to prohibit cashing it out except for retirement, buying a house, paying for college, etc. I don’t think yourse is a good enough reason not to explore this creative idea.

  32. yesteryear says:

    @johnva: i only brought up the reimbursement of ATM fees because many people are put off by the fact that credit unions are small and don’t have ATMs on every corner like wells fargo does. the fee reimbursement makes up for this.

    from what i know, CUs do offer competitive interest rates on their credit cards, but you might be right about the rewards programs – i don’t use credit so my knowledge in this area is limited. but i don’t know what credit cards really have to do with credit unions anyway because you aren’t limited to your own bank in terms of getting a credit card – you can always get an american express card or something similar.

  33. johnva says:

    @yesteryear: You didn’t really mention that you meant only for checking or savings or whatever. I’m just saying that credit unions are good for some things and not good for other things. In general, they are good for things like face-to-face local service, sometimes interest rates (though not always), and sometimes mortgages. They are weak for ATM locations (yes, some of them offer reimbursements. What about depositing checks at an ATM?), and weak for things that are “promotional products” like credit card rewards and such. Some are weak with online banking, though that has changed a lot. If this set of strengths and weaknesses appeals to you, go for a credit union by all means.

    For someone like me, I don’t care about the local service much because I NEVER talk to a human teller unless I have to. I just don’t have any reason to. And I like to take advantage of promotional products like rewards programs and special savings rates because they make me extra money and I am capable of keeping track of all that.

    Credit unions are good for some, but not for everyone.

  34. derobert says:

    Ben, I must congratulate you, you have found an exceptionally profitable business opportunity. Go start your own bank. Charge “scandalously exorbitant” fees, but not quite as much as your competitors. So, maybe $30 for an overdraft instead of $35. You’d quickly take all their customers, then you’d be making $30 “nearly pure profit”.

    You’d even get to work banker’s hours. What isn’t to like about this plan? Get rich quick!

    There is, of course, another possibility. There have got to be 20 different banks and credit unions within several miles of me as well as a plethora of online banks. Yet, despite all that competition, the fees keep rising. Maybe, just maybe, those customers cost money - more than the fees bring in.

  35. mac-phisto says:

    i think the negative savings rate has less to do with bank fees & more to do with the fact that we are all losing ground. perhaps no one wants to talk about that. the gov’t can say that inflation is not an issue, but that’s tripe. overdraft fees, payday loans, lack of savings, high credit card debt – these are all symptoms.

    my electric bill has doubled in the past 4 years. i pay twice as much for gas as i did 2 years ago. milk costs more, vegetables cost more, meat costs more. healthcare has become unattainable for many. & in some areas of the country, the migration of high-paying jobs are devastating entire regions of workers.

    sure, there are many among us that mismanage their money, but i think there’s a much more serious storm brewing.

  36. johnva says:

    @mac-phisto: Yep. Our standard of living in this country is not sustainable, especially with the trade imbalances we have been running for quite some time. The fact is, our country is losing wealth. The wealthy have been gaming the political system to ensure that it’s mostly the middle class that takes the hit.