What’s The Message, Exactly?

But what is their message, exactly? I’m not entirely sure, other than the general consensus among protesters that “enough is enough.” That’s great and all, but you aren’t going to persuade anybody to come around to your point of view if you can’t even collectively define what exactly that point of view is. Thus far, I’ve see a pretty wide range of “demands” put forth by by protesters ranging from the absurd (you do realize eliminating free trade but then opening your borders are completely contradictory ideas, right?) to the reasonable, from the overly-generic to the specific.

Since nobody can seem to agree, I’ll do my best to try to synthesize the most common demands I personally have heard to the best of my ability.

• Reinstate the Glass-Steagall Act – This is one I can definitely get behind. The Glass-Steagall separated investment banks (which took risks with investors’ capital in the financial markets) from commercial banks (which accepted deposits from consumers). The 1999 repeal of this act made it legal for investment banks to essentially use deposits to gamble in the market. This clearly violates one of the key tenants of free trade capitalism: that is, the parties involved in a financial transaction should bear the full brunt of any negative potential consequences of said transaction. Unfortunately, in the current system consumers themselves bear the brunt of any disasters, not the banks. A deregulated banking system is clearly contrary to the ideals of free-trade capitalism. Thus, free trade should be restored by way of intelligent bank regulations. And to those of you who believe free trade means no regulations, please go read an economics textbook.
• Punish the “criminals” – This one is both stupid and childish. For the most part, what bank executives did was not illegal. If you want to make it illegal and enforce it going forward fine, but prosecuting executives who acted in good faith (or even not-so-good faith) is counter-productive.
• End free trade – I do not think ending “free trade” is an intelligent response to the current economic climate. I could write dozens of posts about why ending free trade isn’t a good idea (and I probably will in the near future), but all I’ll say here is that I believe tariffs on principle should be as low as they reasonably can be and that we should demand transparency and fair dealing from our trading partners. Selective tariffs can absolutely be used to force trading partners to do what we want them to do, but for the most part I think that’s a bad idea.
• Open Borders - Yes, this idea does completely contradict the one above. Whether you’re locating manufacturing facilities in cheaper countries or allowing anybody to immigrate to the United States, you’re going to get the exact same economic result: lower productivity, lower wages, and social turmoil. If you want to be protectionist, you have to close your borders. Similarly, if you want free trade, you’ve got to open your borders. Why both Republicans and Democrats can’t understand this simple fact is beyond me. You can’t have both!
• Guaranteed living wage – I have no idea what this means. Guaranteed no matter what? What about people who just don’t want to work? I agree there should be some sort of social safety net, but this demand is just stupid. You have no moral right to receive compensation higher than the value you provide.
• Universal healthcare – I would love to see a public option. I don’t think that means you need to completely do away with the private system, though.
• Immediate debt forgiveness for everyone – I have actually heard this from several different sources and the fact that anybody could possibly think this is a good idea quite frankly disturbs me. The financial crisis was a result of a very small percentage of individuals, businesses, and governments who couldn’t afford to pay back what they owed. What do you think would happen if EVERYBODY stopped paying off their debt? Silly.
• Limit the ability of corporations to contribute to political candidates – Amen. In fact, this limit should be extended to rich individuals as well. No man, woman, or company should be allowed to exert undue influence on the political process. Then again, even if protesters get their way on this point, companies will figure out another way to accomplish the same thing, so the point is probably moot.
• Eliminate corporate personhood – I think this one stems from a common misconception that the law recognizes corporations as “people.” It doesn’t and never has. What it does do is recognize corporations as independent legal entities, meaning passive investors can’t be held legally responsible for corporate actions beyond that represented by their ownership stake in the corporation. Think about it: if it wasn’t for corporate personhood, if a company you owned through a mutual fund in your 401k did something illegal, the FBI could seize your home and private assets even though you had nothing to do with the illegal acts committed. That’s an extreme example, but the point is that eliminating corporate personhood would make saving for retirement practically impossible for most Americans of modest means because the financial markets just wouldn’t work all that well. And since corporate officers can still be held personally liable for illegal acts committed in the service of a corporation, I see no real need to bother with this at all. It’s a straw man issue.

They also increase their profits by making sudden and non-disclosed raises on cardholder’s interest rates. These interest rate increases can be applied to customer’s accounts retroactively. So when you signed up for a contract with a specific credit card company, you agreed to pay 10% interest on any purchases you made, but 6 months later the company suddenly tells you that you will now be paying 20% interest.

Credit card companies also make larger profits by targeting sub-prime, low credit limit customers and younger cardholders with deceptive and unfair practises. In order to combat these manoeuvres by the credit card companies, the United States government signed new regulations laws into effect in 2009.

Regulations Under The New Act

These new government regulations will have a number of effects on how credit card companies can operate. Most of these will be very beneficial to the average credit card holder. It is estimated that Americans have spent over $15 billion in credit card penalties. The new laws will focus on providing credit card consumers with more protection from certain practises. It will not remove the credit card company’s ability to charge interest rates, penalties and fees, but it will help to make sure that customers fully understand how these fees and penalties will be applied. It will also get rid of a bunch of unfair rules enforced by credit card issuers.

The new laws hope to make credit card users feel more comfortable with the rules imposed by credit card companies. In the past companies that issue credit cards have made finding out information about how penalties and fees will be charged difficult. From now on these companies will have to disclose information about their regulations in a more straightforward and easy to understand way. Credit card contracts will be re-written to contain clearer language and these contracts will now be available online for people to view anytime. This will also make it easier for government regulators to keep track of how credit card companies are operating. Card issuers will also have to make sure that customers understand the responsibilities of using the card. They will have to clearly show how long it will take to pay off a debt at a certain interest rate.

Another way that card companies cheat their customers is to suddenly raise interest rates and then charge these rate increases to accounts retroactively. From now on card issuers will not be able to raise your rates unless they give you 45 days notice. They will also not be able to charge rate increases retroactively to you unless you are 60 days overdue on payment. They will also have to start giving you more time to make payments, so they will have to start sending out bills at least 21 days before payment is due.

Credit card companies will also have to allow you to opt-in to going over your spending limit, so that they can’t charge you with hidden fees for over-drawing the account. Also, any extra payments you make will have to go to higher interest balance first now. Before card companies would charge payments to lower interest balances first and leave higher interest balances sitting.

Other new regulations that the government will be enforcing on credit card companies include reduced fees for sub-prime and low credit limit cards, no more inactivity’s fees for gift cards or store credit cards, unless the account is inactive for at least 12 months and people under 21 will now require a co-signer or proof of independent income to sign up for credit cards. This will keep companies from taking advantage of college students and younger customers.

More Accountability

Credit card companies will also now be under more scrutiny from the government. Government regulators will be keeping a much closer eye on how credit card issuers are working. These government regulators will be required to observe card companies to ensure they are following the new rules and will have to report to Congress once a year to ensure they are staying up to date on the situation. Credit card companies will also now be issued much higher fines for breaking these new laws.

Costs Associated With The New Laws

Because these new regulations will eliminate many of the ways that credit card issuers earn money from customers, the results will be higher costs associated with other aspects of credit cards. An example of this will be higher interest rates for new cardholders and older accounts. Older accounts will not be charged these higher interest rates retroactively but after 45 days notice they could be charged more. There will also most likely be no more annual fee free cards because companies need to make up that revenue. Other costs will include no more interest grace periods for new cardholders, tighter holds on credit limits being offered and trimming of rewards and bonus offers made by credit card companies. Overall, the results of these new regulations will be cost increases associated with every aspect of credit cards.

While these new government imposed regulations will make it cost more to use credit cards, these rises in price should not have too much affect on the responsible credit card holder. These regulations will help to prevent people from getting into credit card debt, but they will not stop it from occurring. It is still up to the card-holder to understand how credit works and to use their credit cards responsibly. In order to prevent problems with your credit card you should always pay off your monthly balance on time, pay more than the minimum amount due and do not use more than 1% of your credit limit.

Timothy Ng lives, breathes, and sleeps personal finance! Check out his in-depth guide to doing a balance transfer where he answers everything you need to know to help reduce your credit card debt.

Having just experienced the Global Financial Crisis, the challenges of that time are still fresh in people’s minds. Australia managed to weather this crisis better than many countries, partly due to circumstance rather than good management. It is worth reflecting on Australia’s experience during the Great Depression of the 1930s, for any modern day lessons. Australians’ personal debt levels remain very high by world standards, with any deterioration increasing the chances of debt collection being required.

Dependence On Exports

In the 1920s it was wool and wheat. Now it is coal, iron ore and other resources. Australia’s economy is largely dependent on the export of primary resources. When demand for Australian exports faltered following strong demand during the wartime years, Australia’s balance of payments was affected. While Australia’s economy is now much more diversified, demand for natural resources still has a major bearing on Australia’s prosperity. Further diversification is needed to reduce this reliance.
Dependence On Limited Trading Partners
Australia had traditionally exported a majority of produce and resources to Great Britain. It was Britain’s lethargic economy, in the post World War One slump that reduced demand for Australian goods. It is now China that is becoming increasingly important to Australia. Australia escaped the worst of the Global Financial crisis (such as the high unemployment seen in some countries) partly thanks to China’s resilient demand for Australia’s natural resources. While this is fortunate, it is also a cause for concern, should China’s rapid development somehow be impeded.

Government Spending and Debt

Government spending on several major projects, having been delayed by World War One, began in the 1920s. These included building the Sydney Harbour Bridge. This temporarily masked issues surrounding reduced demand for Australian exports, but when these issues came to the fore (in higher unemployment, labour unrest) and needed to be dealt with, the government of the day was saddled with high debt from these infrastructure projects, and therefore restricted in what it could do.

To combat economic contraction during the Global Financial Crisis, the Federal Government started spending as part of their A$40 billion stimulus package. While it is arguable as to how effectively this money was targeted, it certainly had some positive effect on the local economy. This needs to be weighed up against the deficit the government has incurred in doing this, and, like in the 1930s, how much this will restrict future government spending when required.

Unemployment

Australia’s unemployment rate was around 30% at its worst, during the Great Depression. With so many people out of work, major hardship and poverty faced many Australians. There is no comparison with an unemployment rate peaking around 6% in Australia during the Global Financial Crisis.

Debt levels in Australia are high. If inflation gets out of control and interest rates necessarily need to rise to curb demand, many Australians could be vulnerable to defaulting on their debt obligations, requiring debt recovery. If this becomes widespread, high numbers of defaults could affect the economy, and eventually jobs. The experience of the Great Depression has shown what is possible when the economy falters. It is vitally important for Australians to keep their debts in check, lest this be a trigger for an economic downturn.

It makes sense, too.  Emerging markets lack the regulatory oversight, deep capital markets, and robust private property rights of most developed nations.  All of these things add to the risk inherent in investing in the developing world.  But that may be changing.  As it turns out, emerging markets as a whole are far less indebted than their developed nation counterparts, according to a recent report.

A Look At The Numbers

It’s no secret developed markets have too much debt.  What’s surprising is just how much debt they have relative to “risky” emerging markets.  For instance, the world’s top 24 economies (including the United States, Germany, Japan, etc) comprise about 41% of the world’s Gross Domestic Product (GDP) yet owe approximately 90% of the world’s nearly $2 trillion in debt.  The United States, in particular, makes up 14% of the world’s GDP but owes about 25% of the world’s debt.  Japan is in even worse shape, owing 29% of the world’s debt even though it only makes up about 4% of the world’s economy.

Emerging markets, meanwhile, comprise around 43% of the world’s GDP yet owe only 10.5% of the world’s debt.  Are you surprised?  I am.    Like most people, I often associate emerging markets with financial and political instability, crushing debt loads, and high risk.  Yet these numbers indicate the tide may be turning.

What’s The Explanation?

Let’s not sugarcoat this:  if the developed world (including the U.S. and western Europe) doesn’t get its debt load under control, it will soon be supplanted.  Brazil, Russia, China, India, and the other currently emerging nations will become tomorrow’s developed nations.  Low sovereign debt loads give emerging markets a flexibility not enjoyed by debt-burdened developed-nation governments.

There is one plausible explanation:  since developed nations have access to deeper and more sophisticated capital markets, have more stable economies, and much broader tax bases they can safely afford to carry a higher debt load.  There is certainly some truth to this theory.  The more stable your income (tax revenue, in this case), the more you can afford to borrow.  For example, a steadily-employed office worker making $50,000 per year can probably afford to borrow $100,000 for a house.  A self-employed worker whose income fluctuates wildly but that averages $50,000 per year is probably taking on a lot more risk borrowing the same amount of money.

But that doesn’t come close to accounting for the sheer amount of debt developed nations face today. Without some serious cost-cutting, I think we’re headed for a serious economic crisis.  I do not think raising taxes too much higher than their current levels is a long-term solution to the problem, either.  What do you think we should do to combat our high debt loads?

Now it’s important to note I’m not talking about banks of the too-big-to-fail variety here.  Many of the largest banks that took the most reckless risks with their derivatives portfolios probably deserved to die.  Then again, some that did die probably didn’t deserve it, but I digress…

In the context of this article, I’m talking about the little guys.  The community banks, credit unions, small regional banks and other bit players.  They didn’t take leverage their balance sheets 50 to 1, retained a large portion of the mortgages they underwrote, and extended credit to local businesses like the good little community members they are.  Or were, if you believe the current rhetoric.

But, But, But, The Banks Aren’t Lending…!

Shut up, yes they are.  As well as they are able.

If you frequent mainstream financial websites like I do (CNN Money, Yahoo! Finance, etc) you undoubtedly know what I’m talking about:  some reasonable, balanced, well-researched article will point out that hey, perhaps the media’s chosen villain (the banks) aren’t completely responsible for the mess we’re in.  Maybe there’s something else going on here.  Maybe, just maybe, that savings and loan across the street from grandma’s house doesn’t wield supreme economic power (only Obama, OPEC, and Mel Gibson possess that power).

Sounds reasonable, right?  It is.  But then you get to the comments section of the article.  Now I don’t know what it is about mainstream websites, but the average commenter on these types of articles have the IQ of a lobotomized french poodle.  Perhaps it’s that the mainstream appeal of the site serves to lower the average IQ of its readers.  Sure, intelligent people still read it, but they tend not to comment.  Comments on smaller sites such as this blog tend to garner far more intelligent comments. Anyway, the most comment on article such as these goes something like this:

“The ekonimy is dun bad bcuz the greedy banks rnt lending any $$$! Insted of lending $$$ to lcal bizness to cre8te jobs, they are hording all tha profits fer themselves!”

Words cannot describe the idiocy of the above argument.  And I’m not exaggerating, either.  I’ve heard the above argument almost verbatim at least a few dozens times over the past year.  People really do believe this, somehow.

Look, banks are businesses.  Businesses are in business to make money.  What is a bank’s business?  Lending money!  If a bank can’t make loans, it eventually shrivels up and dies.  And I use the word “eventually” very generously, since a non-lending bank would be lucky to last 6 months.  So let’s walk through this:  if bank’s need to make loans to survive, you can be damn sure they are probably going to make as many loans as they are reasonably able.  If there are so many credit-worthy borrowers out there (like Ben Bernanke claims), why aren’t the banks lending to them?  As it turns out, that’s a stupid question.  Of course banks would be lending to any credit-worthy borrower they could find!  They’re desperate to make loans!  If banks aren’t lending, it’s not because they are greedy, it’s that there are so few businesses worth lending money to.  I mean, if you just lost half your value in a killer recession, would you loan to a marginal business?  Of course not!

So give the banks a break, man.  Banks are people too.

It is likely that many people have forgotten how bad everything was just a bit over a year ago and it is reasonable to assume the market has recovered too fast. Any new investor trying to learn how to buy stocks online for the first time in all probability does have any idea of all the punishment folks took in their 401k’s and IRA’s. People lost a lot of money and many of them have not come close to recouping their losses.

Investors log onto the Web all the time trying to find what are the best stocks to buy right now. They may not take into consideration the overall well being of the market and the bad state of the U.S. economy. After all, in a giant down market, even a potentially hot stock will probably not go up. With all the political unrest, companies struggling to keep workers, the foreclosure crises, and jobs being lacking everywhere, it is difficult to imagine how this market can continue to go up.

One of many components that helps the stock market is the fact that interest rates are so low. If you have money and need to get some type of a good return, you really can’t put it in a bank certificate of deposit or in Treasuries because they pay next to nothing. Placing your cash in stocks is about the only place you may have at least some possibility of a return. If you do put new money into stocks though, you should be prepared to see the market go down if things in the U.S. economy don’t start to turn around soon.

However, because the actual profits on a per trade basis are pretty miniscule (e.g. 1/10 of a cent per share), high frequency traders have to pump significant volume into the markets, day in and day out, to realize their profit objectives.

So what will happen to these HFT money-making machines if a new securities transaction tax is introduced? Yes, you guessed it, the goose will be stuffed!

Proposals have been put forward in US Congress by Rep. Peter DeFazio (D-OR) to introduce a transaction tax of 7.5c per share. At 75 times the current profit margin of the high frequency traders, this transaction tax if passed will kill their business stone dead.

Sen. Tom Harkin (D-IA) has proposed something similar in the US Senate, and both proposals are gaining support, even among many traditional long-only investors, who believe that HFT is bad for business and bad for the US equities markets in general.

It remains to be seen whether these bills will be passed and if so, in what form. One thing that the regulators will need to be careful of is that they don’t throw out the baby with the bathwater. Currently, HFT accounts for about 70% of total US equity trading volume. If it’s killed off, volumes are likely to suffer significantly and who knows what effect this will have on the US economy.

So it is a fine line that will have to be walked, between doing what is right for the market as a whole and taking things too far. Of course, even if these bills are passed, the big HFT firms might just take their business elsewhere, to Canada or the UK for example.

Also, according to the High Frequency Trading Review, HFT brings not just volume but also much needed liquidity to the markets. If this liquidity dries up, then all market participants are affected, not just the HFT firms.

Waldfogel’s argument is simple and hearkens back to the days of classical laissez -faire capitalist thought.  Economies tend to operate most efficiently when they are composed of self-organizing markets.  Simply put, individuals tend to do a pretty good job, in aggregate, of efficiently organizing the use of scarce resources in accordance with the broad goals of society.  If the citizenry values environmentalism over consumerism, the economy will tend to organize itself towards preserving the environment.  If society values cheap plastic trinkets, the economy will tend to organize itself towards manufacturing plastic trinkets as cheaply and efficiently as possible.  When individuals are free to make their own purchasing decisions in accordance with their own wants, needs, and values, the economy will tend to optimize itself to produce what society as a whole deems most valuable, or so the theory goes.

How Christmas Harms The Economy

“How could Christmas possibly harm the economy?”  you might ask.  The money spent during the month in December alone is enough to keep many retailers in business and many workers employed.  Without Christmas, there would be fewer jobs and less wealth to go around, right?  Wrong.

The problem is that most people don’t do a very good job of buying gifts for other people.  How often have you received a gift you hated, or at least a gift you didn’t particularly care for and probably wouldn’t have bought on your own?  I’d be willing to bet the majority of the gifts you’ll receive this year fall into one of those two categories.  According to Waldfogel,

“…people value the items they receive as gifts 20 percent less per dollar spent than the items they purchase for themselves. These are items that are not well-suited for their tastes…”

and

“…the way we celebrate Christmas around the developed world is with an orgy of value destruction that vaporizes $25 billion per year…”

All these unwanted gifts distort the economy in completely unpredictable ways.  Nobody really likes fruitcakes and would never buy one for themselves, but they are popular gifts at Christmas time.  Hence, an entire fruitcake-making industry has sprung up which diverts resources away from activities actually valued by society, such as ninja training camps, towards something nobody wants, such as fruit cakes.  In an ideal world, there would be more ninjas and fewer fruitcakes.  But since Christmas gift-giving rewards fruitcake makers, fruitcakes will continue being made.  If Christmas didn’t exist, the world would have more ninjas and fewer fruitcakes because there would be no incentive to produce goods nobody wanted.

In aggregate, Christmas lowers total economic output and leads to fewer total jobs.  You can read the complete article on Bloomberg.

Accounting Wasn’t The Problem

Anytime a rare or random event happens (and yes, sometimes events truly are random), the media rushes to assign a cause.  The interesting thing about it is that if the event is truly random, then by definition there is no readily-assignable cause.  We humans live in a world dominated by unpredictability in which the most innocuous of coincidences can cascade into toward disaster, or astounding success, at the blink of an eye.  Simply put, often times there’s nothing you can do to predict or prevent it.  Needless to say, this fact doesn’t sit well with people in general or journalists in particular, who are paid to see patterns where none exist.

As I sit typing this, a market recap on Yahoo Finance reads

“The stock market started the session with a loss…as several major foreign markets were knocked lower by profit takers.“

The question you should immediately ask on reading this, of course, is “what makes you so sure it was profit takers?”  The market could have been lower for any of tens of thousands (if not millions) of reasons, or even for no reason at all.  A 0.7% loss is well within a standard deviation of the average daily volatility.  It is entirely possible, if not outright probable, the 0.7% drop was due to nothing more than statistical noise and therefore doesn’t require any explanation at all.  Even were the drop to have some deeper meaning, it’s unlikely the uncoordinated buying and selling of tens of thousands of market players all over the world would magically result in a single over-arching purpose:  profit taking.  A 0.7% move requires no explanation.  A 10% more is a different story…

My purpose is merely to point out that that the financial crisis and subsequent recession could have been nobody’s fault.  It could have been nothing but pure bad luck:  a black swan.  Remember, an event with one in a trillion chance has to happen sometime, and there’s a first time for everything.  It flies contrary to human nature to admit there was nothing we could do to prevent the most recent recession, but you can’t rule out the possibility.  To do so would be illogical.

Back To Accounting

Am I implying by the above paragraphs I think the accounting and financial reporting systems in this nation are perfect?  Not at all, I’m merely saying I don’t think they were a significant contributer to our current situation.  Here’s why.

In his article, Norris quotes Robert H. Herz, the chairman of the Financial Accounting Standards Board as saying

“There were important aspects of our entire financial system that were operating like a Wild West show, huge unregulated opaque markets.”

Herz may be correct in stating the markets were unregulated, but they were certainly not opaque.  Investors knew exactly what was going on, or at the very least could have found out with a bit of due diligence.  Even the layman knew bad mortgages were being packaged as AAA-rated securities well before the crash (If you don’t believe me, check out the Craigslist money and Morningstar forums before the crash.  There is ample evidence of a priori knowledge.).  There was no big secret.  That these securities carried a much-higher risk of default was well-known even among smaller, less-sophisticated investors well in advance.

Investors knew what was going on.  Many were in on it.  But they all thought they could make a quick buck and get out just before the crash.  That’s how all bubbles work, after all.  Savvy investors almost always know the crash is coming but feel confident in their ability to get out before the music stops.  Some of them do.  Many don’t, but that doesn’t imply they didn’t understand the nature of the risks they were exposed to.  Psychology tells us that the rarer the event, the more we tend to underestimate its frequency (probability of happening).  That is, an event that happens half the time is pretty easy to predict whereas an event that happens only once out of a thousand is prone to being written off as impossible.  Oops.

Market Value Does NOT Always Equal Fair Value

Norris then goes on to make a statement that clearly shows his ignorance of the nature of assets, lambasting the banks for their fight against mark-to-market accounting by saying

“The banks have argued that market values can be misleading, and that their own estimates of the eventual cash flow from assets are more realistic than what…others…will now pay for those assets. The rules already allowed them to ignore so called “distress sales” in assessing fair value.“

The banks, of course, are precisely correct both from a logical and accounting perspective.  That Norris implies otherwise troubles me.  By definition, distressed sales should logically be ignored when assessing fair value because distress sales fail the requirements of a mutually-informed, arms-length, unmotivated market transaction.  In order for a transaction to be “fair” and thus indicative of an asset’s true value, both sides of the transaction must be well-informed, unmotivated (that is, they have no pressing need to sell in order to meet some other obligation), and arms-length (i.e. not selling to your nephew).  A distress sale, of course, utterly fails this requirement since the selling party has no choice but to sell at any price.  Since it is not a fair market transaction, it cannot be used to discern fair value.  This is Economics 101, something Norris doesn’t appear to be all that knowledgeable on.

In a period of mass distress selling such as happened in mid-2008, it is entirely correct and logical to assume that current market values do not reflect true asset values (again, since they aren’t fair market transactions they can’t logically count) and that educated estimates of eventual future cash flows are a much better estimate of a security’s true intrinsic value.  It’s not perfect, but it’s likely to be a better estimate than market value.  Remember, markets can only be expected to set prices accurately when the vast majority of transactions meet the criteria for fair market value transactions.  When they don’t (and they didn’t during the crash), the market’s price-setting mechanism breaks and usually becomes wildly volatile.

To reiterate, accounting didn’t fail us.  The goal of accounting is to provide an objective measure of a firm’s current economic situation, which is quite different from providing a realistic measure.  Since any accounting system will have to make arbitrary distinctions and over-simply complex economic situations for the benefit of distilling them down to a number, realism in accounting figures is impossible.  Furthermore, I believe attempting to make accounting numbers is a flat-out bad idea and makes them far less useful to the trained analyst.  It is not the accountant’s job to make his financial statements realistic, only to report the numbers objectively under some internally consistent and logical set of rules.  Leave the interpretation to me, please.

Had Americans purchased 50% fewer lottery tickets, our national savings crisis would be be non-existent!  Unfortunately, it seems most people choose to take the all-or-nothing approach to saving for retirement (gambling) rather than the slow-and-steady-but-reliable method (good ol’ fashioned saving).  Harvard Business School professor Peter Tufano has a plan to change that.

Introducing The “Save To Win” Program

As implemented in several pilot programs in Michigan,  “Save To Win“  is a cross between a CD and a raffle ticket.  Basically, residents who put $25 or more into a “Save To Win” CD are entered into a monthly drawing for prizes worth up to $400 as well as a yearly drawing for a $100,000 jackpot.  Obviously, such a silly idea could never work, especially since it would have to pay significantly below-average interest rates to fund all the prize giveaways, right?  Wrong!  So far, the program has attracted over $3 million in deposits.

I think it’s great that programs like this actually encourage people to save money, but I can’t help thinking how pathetic it is that we as a nation have to be induced to save by stupid psychological tricks.  I mean come on, it’s $25 bucks.  If you can afford a few cups of coffee and a lottery ticket, you can afford to save.  I think we ought to spend more effort educating consumers about the benefits of saving and investing and less trying to trick them into doing something they don’t want to do.

What about you?  Do you think the “Save To Win” program is a brilliant idea or a waste of time?

Tired of making excuses?  Want to finally start saving some money?  HSBC Direct is currently paying 1.45% on their high-yield online savings account (accurate 8-20-2009).