Thursday, December 13, 2012

“It's a Wonderful Life” and It's Good Financial Advice.

Wisdom for the season.

Back on March 30, 2010, this blog posted “WallStreet doesn’t run the world.”  It discussed an important point.  It stated, “Consumers and investors, as in the general public, have an immense advantage over many institutional investors….”  The subtitle of the posting, “Time, liquidity and control,” pretty much summarized the reasons.  The posting went on to discuss how the chatter and behavior of Wall Street created advantages for the individual investor.  This posting focuses on how the chatter from Washington creates advantages for individual investors.
The chatter out of Washington is often very right for Washington, but can actually spell disaster for the general public.  More often than not, the chatter contains or implies terrible financial advice. At this time of year, one need go no further than the classic Christmas movie “It's a Wonderful Life” for much better sources for financial education. 

It's good to start with the basics.  In that regard, it's worth noting the financial behavior of the customers of Bailey Building and Loan.  It's a stark contrast with the chatter from Washington.  The customers of Bailey Building and Loan all have a savings account.  As one customer says, all of their money is in the savings account.  The emphasis should be on “all.”  Their first venture into finance is to set up a rainy day fund, a reserve, or whatever you want to call it.  The point isn't that you should have a savings account at a savings bank.  The point is you should have a reserve.  It could be with the savings bank, a regular bank, a brokerage firm, money market fund, a short-term bond fund, or just some money in a safe deposit box.
Contrast that to the Washington chatter reported in the WALL STREET JOURNAL in a report entitled “Bank of America Backs Down On NewFees.”  The new fees referenced in the title are “the fees that were under consideration for year's end would have applied to the bank's base of 50 million customers, but most of them would have been able to avoid additional charges because of their higher average balances and use of other products.”  So, customers who had set up a rainy day fund or a reserve at Bank of America wouldn't be charged a fee.

Let's consider the absurd response to the very consideration of the fees.  The article reports “the fees are unpopular with customers, regulators and many legislators…. Levying new charges opens banks up to criticism that they are punishing lower-income customers with policies that encourage users to hold larger balances and use multiple products.”  One might logically ask: “How in the world can it be considered “punishing” customers to encourage them to have a rainy day fund in the form of “larger balances?”  It would be far more logical to argue that Bank of America is only encouraging them to avoid financial practices that are characteristic of many peoples’ financial mismanagement.
Most financial planners, and certainly any financial planner worth listening to, would emphasize that setting up a rainy day fund is the first step in financial management.  That's true across a range from the simplest plans designed to help those with no financial planning experience to the most sophisticated financial management discussions.  So, the Washington chatter clearly encourages poor financial management.

Unfortunately, a substantial number of people haven't realized how stupid the posture out of Washington is. Most Americans lack a sufficient cushion.  Almost half of Americans lack a three-month stash of cash to cover emergencies, according to a survey conducted in June by  However, perhaps people are starting to wise up: the current figure is an improvement from 2006, when a similar poll found that 61% of Americans lacked such a cushion.  Nevertheless, it still shows that not enough Americans are prepared for the unexpected.
So, right out of the gate, Washington is encouraging financial mismanagement among consumers.  Now, let's look at it from Bank of America’s perspective.  Remember, they were not just encouraging the consumer to have a rainy day fund.  They were also willing to waive the fee if the consumer used other Bank of America services.

Again, let's look at the experience from “It's a Wonderful Life.”  Keep in mind that the customers of Bailey Building and Loan are not just customers for savings accounts.  George Bailey makes explicit reference to the fact that some of those customers, perhaps all, have mortgages with Bailey Building and Loan. 
Bailey Building and Loan, as those familiar with the story may recall, survives the depression and the associated bank runs.  So perhaps, the better advice from Washington would be for banks to encourage customers to develop multiple relations with the banks.  It certainly would make for a more stable financial system.  It's not a stretch to argue that a substantial amount of the financial crisis was due to lending to individuals without having adequate familiarity with the customer.

It is not just Bailey Building and Loan that benefits from the practice of having multiple relationships with a customer.  No one outside of the ownership of Bailey Building and Loan bails out Bailey Building and Loan.  No one loses their deposits, and the run does not necessitate massive foreclosures.  The wizards in Wall Street and Washington could learn something from this simple parable.  Perhaps, Bank of America did.
So, let's inventory.  There is advice there for you and me as consumers: start with a rainy day fund.  There is advice there for you and me as borrowers: deal the financial institution that takes a holistic view of your finances.  There's advice there for banks: taking a holistic view of consumers will result in financial stability.  There is advice there for bank regulators: recognize the stability of financial institutions with multiple relationships to their customers and reward them. 

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