Thrift

Microwaves as Luxury, and a Tangled Safety Net: Thoughts from the Weekend NY Times

Leila Seradj — Tue, 12 May 2009 17:43:00 -0400

The recession has undoubtedly shifted a lot of paradigms lately, and I think all would agree that it's gotten Americans to sit up and take notice-- both individually (challenging their own habits of consumption and saving) and societally (coping with cracks in the safety net system). The New York Times has taken notice, as well-- two articles in this weekend's Times merit mention.

The first (Shift From Spending to Saving May Be Downturn's Lasting Impact) highlights the re-emergence of a culture of thrift-- and indicates that, unlike past recessions, it's here to stay for a while:

Consumers have lost a huge chunk of their net worth, in the housing bust and the stock market, and to resuscitate their retirement accounts or children's college funds they will have to channel more of their paychecks toward saving-- unless those asset markets soar again.

But it likewise signals a shift in attitude, one that is increasingly wary of a culture of consumption that has spun out of control. An April Pew Research Center survey, for example, revealed that more Americans were beginning to consider seeming necessities-- like microwave ovens-- as luxury items. (This culture shift was called for by Ray Boshara and Phil Longman in their book The Next Progressive Era, published last month.)

The second (For Victims of Recession, Patchwork State Aid) profiles the devastatingly complex and disconnected welfare system in the U.S. that covers some and neglects others, for reasons of chance or geography, characterizing it as:

...a hit-or-miss system of relief, never designed to grapple with the pain of a recession so sudden and deep. Aid seekers often find the rules opaque and arbitrary. And officials often struggle to make policy through a system so complex and Balkanized.

While untangling the government aid system will take years of work, one step in the right direction would be removing asset limits that penalizes welfare recipients for saving and asset ownership. The Asset Building Program has long encouraged asset limit reform, especially those that discourage benefits recipients from saving and owning assets. (See our 2008 and 2007 Assets Agendas for more on our approach to asset limit reform.)

The Next Mortal Combat Match-Up: Thrift vs. Debt?

Jamie Zimmerman — Tue, 09 Dec 2008 19:56:00 -0500

Ohio State University's Devfinance listserv, an email network for students, practitioners and researchers of development finance and economics, is one of my go-to lists for fresh debates and hot-off-the-press publications and research on all sorts of microfinance issues. Every once in a while it's also surprisingly entertaining. Take, for example, last week's pro-thirft/anti-debt post announcing a new competition to develop a thrift-focused video game (re-posted here with permission from Jane, the original author):

It's not as cool as buying a beneficent bank in Bali or doing an IPO or private placement, nonetheless it is a counterpoint to the current credit mania.

The Peter G. Peterson Foundation is sponsoring a campaign to encourage personal and governmental frugality in the U.S. One element of this is issuing what they call an INDEBTED $10,000 Challenge. It is aimed at college students and will award $10,000 to the student(s) who develop the most effective video game about the U.S. fiscal mess. I suspect they would like to see the video game promote saving.

On the one hand, the Peterson Foundation joins the Templeton Foundation in suggesting that thrift, after all, might not be such a bad idea. On the other hand, a gaggle of other foundations, government organizations, and disaster relief agencies are pushing debt as the next best thing to ice cream. Besides being highly profitable for a few -- both in low-income countries and on Wall Street -- the finance industry can also be extremely entertaining to watch!

Will the microfinance industry counter the Peterson Foundation heresy by promoting a competing video program whose end point is getting all of the poor women in the world in debt? Perhaps the prize could be a $10,000 loan (at say, a 100% interest rate) for the college student(s) who develop(s) the best debt-extolling video.

For all her sassy sarcasm, Jane reveals here a growing trend within the financial services field, not only in the United States but in developing countries around the world: a disillusion with unchecked debt as an economic empowerment or poverty reduction strategy (i.e., microcredit abroad or credit-fueled consumer spending here in the U.S.). However, the credit crisis in the US (and subsequent global financial meltdown) has also prompted microfinance and financial services practitioners to think about, and in this case, advocate for the reemergence of a once-heralded yet long-abandoned concept: thrift.

The Debate over Negative Returns on Savings

Jamie Zimmerman — Mon, 23 Jun 2008 19:36:00 -0400

Our newly released report on thrift in the United States has gotten some good play in the media but has also sparked internal and external debate, domestically and internationally, on the importance of savings and thrift relative to credit and consumption. The report advocates a culture of thrift and a renewed focus on savings (as opposed to our current focus on credit and culture of indebtedness). As a team, the Asset Building program promotes these goals and others heavily in our domestic work as well as internationally through the Global Assets Project.

In recent weeks we've received a lot of feedback (from within our organization and among practitioners and policymakers in microfinance and related fields) wondering if, in a time of higher inflation, we're advocating irrational behavior among our target populations. For instance, Sherle Schwenninger, the director of the Global Economic Growth program here at New America, challenged the asset building team's focus on pushing people to save when typical interest rates on savings accounts are lower than the rate of inflation. That basically means that people are losing money on their savings, instead of gaining interest over the long run on their deferred consumption. On popular microfinance listservs like MicroFinancePractice and DevFinance, the report sparked similar debates over encouraging thrift in developing or emerging economies, which are typically less stable than advanced economies. In India, many savers are earning 1% interest or less on their savings in an 8% inflation climate. In Zimbabwe's hyper-inflation, money not used today is tomorrow's fire kindling. But that is an extreme example. Essentially, the argument is that, in the absence of better products, we are irrationally encouraging people to save up, but to nothing.

Or so it seems, if you don't look at the bigger picture:

Yes, the poor, low and moderate income populations, particularly those traditionally excluded from low-cost, appropriate and mainstream financial services do indeed need and deserve access to more attractive savings and investment options, one's that do not deteriorate their financial assets, but protect and build them.
However, in the U.S. but most especially in many parts of the developing world, the poor lack access to a safe place to put away their savings in the first place. Experience in the micro-savings field has shown that the poor are quite often willing to pay a fee to have someone or some institution safely hold their savings, as it's a much safer prospect than stashing the money under the mattress. They are much less concerned with making a return on their savings than the prospect of loss or mismanagement that comes with not having it safely locked away until needed. Where these options don't exist, you face a potentially tumultuous and threatening environment where even small lump sums are not safe. This isn't just a problem in the developing world. Here in the United States, unbanked Latino immigrants are increasingly targeted for robbery, as because of their undocumented status, they are often paid in cash and lack access to a bank account to store their money.
And for those among this population who do have access to basic savings products, the fact of the matter is that the vast majority are not saving with the intent to make a return on those savings. They need lump sums to pay for certain expenditures like marriage, education, property and even funerals; they need a nest egg to protect them against economic and environmental shocks to which they are disproportionately more vulnerable.

Losing money on savings is very much a bad thing and seems an irrational choice. But then again we must consider all the options from which certain populations get to choose. I mentioned negative return on savings in India, a sad case that turns ever sadder when considering that over 50% of India's population has absolutely no access to formal savings products in the first place, something the government in India is aggressively trying to change.

While designing and offering short and medium-term higher-yield savings products for the poor and underserved around the world is important work and an ultimate goal, it will be of little value until we 1) can provide effective access to banking services and 2) increase understanding of the value of savings and thrift for long-term financial growth and asset building for those populations who have for too-long gone underserved and excluded.

I'm glad that this new report on thrift is forcing us to acknowledge these realities and to think more deeply on how to get people not only into, but benefiting from, formal financial systems.

The New Thrift

Reid Cramer — Tue, 13 May 2008 16:50:00 -0400

In true blogger fashion, I've brought my laptop along to a conference we are co-hosting today on Confronting the Debt Culture.

It is a pretty compelling gathering for a couple of reasons. First off, the idea behind the conference is to raise the profile of the concept of thrift and all of the anti-thrift institutions that now prevade our culture. Secondly, the conference is sponsored by a really diverse set of organizations. It has been spreaheaded by the Institute for American Values, a group lead by David Blackenhorn which has mainly been known for its work promoting marriage. In recent years David has become a champion of thrift and has teamed up with other groups such as Demos, Consumer Federation of America, Public Agenda, and others.

It is being filmed and I supsect the keynotes will be posted. I highly recommend the presentation of Christopher Peterson, a law professor at the University of Utah who has focused his research on usury laws. It turns out that it is an ancient concept. Chris showed a slide of the babalonian stone that stated a 33% cap on loans of grain. He went on to describe the legal framework which governs payday lending across the country today and the wide range of abusive practices that are completely legal in many states. Recently, Congress capped payday loans at 36% APR but in many places it can exceed 450%! This is an area that needs alot more sunlight. He had a couple of great charts which showed how the proliferation of payday lending stores has vastly outpaced Starbucks shops and McDonalds Restaurants. And they dont add value, they strip assets from households that can not afford the hit.