Asset Building

A new book has arrived in my mailbox that deserves some attention. It's called Child Poverty and Inequality and is written by Duncan Lindsey.  Duncan is a professor at the UCLA School of Public Affairs and for years has been one of the country's leading voices on child welfare . He is not only a notable historian of the evolution of family policy in the U.S., but has particularly focused on the plight faced by vulnerable children, such as those growing up in foster care and poor families. What also distinguishes Duncan's approach and what comes through in this book is his ongoing search for policy ideas that have the potential to transform what is for many children a pretty bleak landscape.

Before he gets there, he reviews the data on inequality in its various manifestations and recounts the experience since welfare reform was enacted in the mid-1990s. One of the highlights here is how declining case loads are somewhat offset by rises in food assistance. The bottom line result has been rising child poverty since the early years of the decade despite being a time of modest economic expansion.

In the United States and many developed nations, banks offering savings to children as a means of social and economic inclusion and empowerment may seem tired tradition of the thrift era that has long passed.  Gone are the days of widespread school banking programs once so common in the US. And in the very few developed nations where efforts to provide children social and/or economic opportunity through financial inclusion exist, they typically come in the form of social policy (UK's Child Trust Fund, Singapore's Baby Bonus, USA's ASPIRE Act).  In developing nations, however, we're witnessing a wholly different phenomenon: financial institutions are, out of their own volition and with no push from the government, choosing to target the child market segment.   

Add Evansville, Indiana to the list of communities adopting services for the unbanked. City leaders, in collaboration with a number of financial institutions, have set up a program called "Bank on Evansville." Similar to the "Bank on San Francisco" program currently up-and-running, this program will attempt to keep unbanked families from paying excessive check-cashing fees, which can total nearly $900 annually for some, according to the city.

Though details have yet to be finalized on the program (set to launch in 2009), many banks and credit unions are already offering accounts that require no minimum balance, as well as second-chance accounts for those who have lost one.

To be eligible for these accounts, the city is offering and requiring those who enroll to take a financial education course. Details of the course have yet to be finalized.

Partners include: Old National Bank, the Federal Reserve Bank of St. Louis, the United Way of Southwestern Indiana, Integra Bank, Fifth Third Bank, the Bank of Evansville, Farmers State Bank, Evansville Commerce Bank, Heritage Federal Credit Union and the Evansville Teachers Federal Credit Union.

These programs provide much-needed financial education to those who need it most while providing many with a first-time opportunity to save and build up their asset base.

Holman Jenkins ends his opinion piece about Fannnie Mae and Freddie Mac in Wednesday's Wall Street Journal with the memorable line: ". . .and (if we really feel more subsidy to homeowning is needed) insisting that Congress do it the fiscally honest way, through the tax code."  Come on, Mr. Jenkins, if we want to be fiscally honest, we should do it through appropriations.  Or at least through a capped, income-phased-out, refundable tax credit, which somehow I doubt was what he meant (although I'd be pleased to learn otherwise).

The standard tax code technique, an uncapped deduction, ends up subsidizing those who don't need it and neglecting those who do. The fiscal 2009 budget projects tax expenditures of over $100 billion for the home mortgage interest deduction.  Honest budgeting would recognize that much of this goes to people who don't need it and artificially props up house prices.  If we want to subsidize homeownership honestly, we'd get rid of the tax deduction and appropriate money to be directed to those who would not be homeowners without the subidy.  But then, of course, we'd have to get serious about making the Department of Housing and Urban Development work. 

This afternoon FDIC Chairman Sheila Bair and her team took the next important step in making good on their promise to treat borrowers whose loans are held or serviced by IndyMac as the Chairman has urged other banks to treat their borrowers. Simply put, the FDIC announced a blanket loan modification program, under which the loans of borrowers in default or having trouble making their mortgage payments will be automatically modified into fixed rate loans whose terms will be set so that housing debt consumes no more than 38% of the borrower's income.

A recent article in the Chicago Tribune raised important questions about the effectiveness of financial education and challenged the appropriateness of its offering to consumers operating in an increasingly complex financial industry.  Author Greg Burns is right to draw attention to the lack of evidence on the impact of financial literacy, but policymakers should not abandon the pursuit of quality financial education just yet.

Financial education should be a complement to, not a substitute for other consumer protections.

For middle and lower income individuals who have fewer financial resources to begin with, learning the warning signs to trouble and the resources to seek support is unquestionably valuable.

It looks as though, prior to their summer vacation (read: fundraisers), our good friends in the U.S. House of Representatives have snuck in a subtle yet important piece of legislation for Federal employees. The House passed HR 1108 last week, which, while mostly about Tobacco regulation, contains changes to the Federal Thrift Savings Plan and makes it automatic for all Fed employees.

Under the bill, new Federal employees will be automatically enrolled into the TSP at a default rate of 3% of base pay unless they decide to opt-out or make changes. Read more here.

This being my maiden voyage onto the Ladder, I would like to stipulate that any time the words "automatic" and "enrollment" come in the same sentence as "retirement plan," I will give my full-throated support. These are the types of subtle changes that have broad implications on how lower and middle income folks save. And lest we forget, the TSP's participation extends to our men and women in uniform.

Last month, I argued that USAID inaptly named a three-day virtual conference on savings as "The Forgotten Half of Microfinance." Instead, I posited:

"As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions."

Looks like I got this one right.

Yesterday Senator Menendez of New Jersey introduced a bill around an idea I've been pushing to give targeted families a larger tax refund if they commit to savings. I wrote about it here in a piece that ran in the American Prospect in April on tax day.

The Senator's bill is called the Saver's Bonus Act of 2008 and it proposes that savings contributed to eligible savings products could be matched on a dollar-for-dollar, up to $500.  Eligible savings products inlcude individual retirement accounts, educational savings plans, or interestingly U.S. Savings Bonds. Savings bonds are noteworthy because you dont have to own a bank account to have one. Familiy would qualify for the bonus if they also receive the Earned Income Tax Credit (EITC) and the bonus will be delivered through the tax filing and tax refund process.

Here is what the Senator has to say about his bill.

A few weeks ago I blogged about a curious op-ed which ran in the Washington Post by Charles Steele, Jr, President of Southern Christain Leadership Conference (SCLC). The op-ed sought to trash a piece of legislation which is taking shape in Congress designed to curb abusive credit card practices.

I'm sure there are some provisions that need to be refined a bit, but it looks like Rep. Carolyn Maloney (D-NY) is off to a good start. Having the leader of a "civil rights" organization take up the fight on behalf of credit card companies seemed a bit odd, especially when SCLC has entered into a partnership with a firm (CompuCredit) that was recently sued by the federal government for preadatory practices. I noted this connection in my blog post.

Well, the Washington Post issued a clarification.

"The June 23 op-ed by Southern Christian Leadership Conference chief executive Charles Steele Jr., on inequalities in access to credit, should have noted that the SCLC has a partnership with CompuCredit Corp. that includes plans to issue SCLC-branded credit cards that are marketed by CompuCredit."