PREVENTING THE NEXT CRISIS
Facts are stubborn things.
My experience at the SEC strengthened my belief in the U.S. markets and financial system as an unprecedented engine for wealth creation for American citizens, particularly as we suffer through slow economic growth since the Great Recession.
During my time, we improved the SEC’s capacity to serve the taxpayer and investor by restructuring the IM division to be faster and more responsive, getting important new reforms off the shelf, bringing the SEC’s expertise where it was needed to deter the Fed and FSOC, and engaging top management at the major investment houses and brokerages. While these are significant changes, much more remains to be done at the SEC and other regulatory agencies to make them transparent to taxpayers and to the hundreds of professionals who work diligently within the ranks.
Major private-sector unions such as the United Auto Workers and the United Steelworkers have compromised to some degree with management to restructure work rules and benefits that had gone too far in reducing competitiveness and productivity. They made the existential choice to keep their industries and jobs and potentially their children’s and grandchildren’s jobs in their communities. The leaders of those unions know that the consequence of a company failing in the private sector is no more jobs. The issue in the government context is that there is no such consequence, as the government never goes out of business. I urge that the new president empanel a bipartisan group of elected officials and labor and management representatives to tackle the work rules and well-meaning practices that have mutated into disasters such as the use of unlimited telework, the rampant anonymous notes from supposed “whistle-blowers,” and the guarantee of lifetime employment. These dysfunctions wear down even the hardest-charging new employees and create the cracks that financial scandals can fall through.
No, I’m not saying my former colleagues should lose their pay, retirement, or health benefits. I’m saying let’s look at the facts and economics of the rest of our U.S. economy and run the SEC and other agencies in a more productive manner so they can afford to do more and do better.
I know I’ve been fortunate in my life to have gone to good schools and built a career as a successful lawyer. I know things could have turned out differently without the support of my uncle, my wife, my friend Rod Krause, and many mentors and friends through the years. I was able to join the SEC knowing I could return to the financial services sector and had a strong safety net for my family if things went wrong. My career in the private sector trained me in using the right tools to cut through red tape and get things done. Even with these advantages, it was brutally difficult for me to solve problems because the SEC’s culture lacked accountability and discouraged open collaboration across silos, much less across separate agencies.
But as I’ve written here, I had many, many colleagues in government who are smart, serious, and passionate about their jobs. They depend on their positions for their family’s security and also want to make a difference as career public servants. I admire their dedication, but we need better processes at the SEC and other agencies to reward new ideas, smart risk taking, and innovation. The quality professionals in our federal agencies deserve a system that rewards their initiative rather than smothering it.
These thoughts occupied my mind as I transitioned out of the SEC in early 2015. I began to deliberate about what would strengthen our government, our financial system, and the personal financial security of everyday households in the United States. How could we prepare to avoid such a catastrophe in the future? And how can we all change our personal and political relationship with money?
Free, deep, and transparent markets are the best path to restore growth in the United States as we endure the slowest recession recovery in post–World War II history. Whether you are on the left, right, or in between, more U.S. economic growth means more opportunities and jobs. Full stop.
I’ve read about recent marine archaeology work that shows that at certain spots the bottom of the Mediterranean is virtually carpeted with amphorae that once contained wine or olive oil being shipped between North Africa and Europe and were lost during storms and disasters at sea.1 There were undoubtedly pricing and hedging strategies used by those long-ago traders to account for the potential loss of cargo on the seas. The “risk premium” in the prices charged for those goods enabled the traders to use the profits from the high percentage of ships that got through to offset the lost revenue from the ships that sank. (Keep in mind that a modern shipment of grain from the United States to China has almost no chance of sinking but still needs a similar hedge against loss, this time more likely in a derivative that pays the shipper in the event of grain price moves that would make the shipment unprofitable.) If the ancient traders hadn’t accepted the risk, they would have not opened new markets and earned more to reinvest in their olive groves and vineyards. It may have taken decades or even centuries more before other cultures enjoyed the glories of the Mediterranean harvest and other fruits of global trade. Those amphora jars are the relics of a long-ago time of vibrant global trade and bold entrepreneurship. If we promote that spirit of free market entrepreneurialism symbolized by those jars, we can preserve the United States as the financial capital of the world. Not coincidentally, our nation was founded by men and women with a strong self-reliant and entrepreneurial spirit.
But too many politicians and pundits have villainized the entrepreneurial, risk-taking spirit of American capitalism—with troubling consequences. Some political leaders have found it convenient to foster this pernicious myth rather than admit the crash was the result of specific bad judgments on the part of specific members of Congress and housing regulators as well as certain specific financial services institutions. If current trends continue, the archaeologists of tomorrow may find artifacts of our age that are far more disturbing than amphorae. They may find the remains of entrenched deepening poverty and a failed financial system: communities with vast tracts of abandoned houses, boarded-up Main Street shops, shuttered banks, burned-out buildings. Future recessions could easily break the back of fragile communities that have just barely recovered from the crash of 2008 and must have functioning markets and sources of credit to rebuild.
We have been having documented financial bubbles certainly since the Dutch tulip boom in the 1600s and undoubtedly much farther back. Yes, we can survive future setbacks if they are few and if we are smart. But to do that, we need to undertake a number of policy changes that would help the United States better prepare for the inevitable next crisis. Consider these four pillars of commonsense reform.
1. Change FSOC to a coordinating board that is only activated by severe economic crises.
I don’t have a large problem with the Fed monitoring traditional banks, which have federally insured deposits. The charters of the FDIC and the Fed require these regulators to examine banks and to keep consumers’ deposits safe and sound.2 The mindsets of the banking regulators were formed by the Crash of 1929 when ordinary people suffered the financial nightmare of having their banks run out of money to pay their deposits, leaving millions destitute. Bank regulators are trained to derisk banking, and to some extent the federal oversight of banks makes sense in that context. Those deposits are insured, and as I’ve written, your standard bank is a kind of public utility for safe money storage.
But we don’t live in the 1930s. The repeal of Glass-Steagall, the rise of derivatives, and the redesignation of global investing companies as banks in the 2008 crisis have made regulating these firms much more complex and dangerous. The regulators at the Fed and FSOC are viewing the financial landscape through the wrong end of the telescope. They view these complex financial institutions managing billions of investors’ dollars through a narrow lens of traditional banking behavior.
I watched with some amusement during the 2016 presidential campaign, as many Americans—not only in the Bernie Sanders camp but across the political spectrum—denounced federal lawmakers for being too soft on “big banks.” None of the presidential contenders either wanted to talk to voters about or knew enough to talk about the great irony behind these headlines. Under Dodd-Frank, any U.S. bank holding company with more than $50 billion in assets is automatically subject to stricter rules, and FSOC “designated” four nonbank companies as systemically significant—that is, subject to government control: AIG, Prudential Financial, MetLife, and GE Capital, the financing arm of General Electric Co. However, a federal judge threw out the MetLife designation on March 30, 2016, because FSOC failed to make the case, although the order is sealed.3 Later in 2016 GE Capital got out from under designation by selling significant financial services businesses.4
Dodd-Frank is also changing the character of community banks and credit unions. Members of Congress are very familiar with the frustration of community banks over the burdens of Dodd-Frank. Community banks remain a vital source of credit in thousands of communities, particularly those far from our sophisticated cities. “Community banks are a fixture across the nation. Many have served their communities for decades. They are particularly important in rural areas,” Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University (and 2015 Republican nominee for SEC commissioner), noted in congressional testimony. She continued:
They are also key providers of small business loans. By one measure, $1 out of every $2 lent to small businesses comes from community banks.
Community banks are known for offering personalized service and meeting the needs of the local residents and businesses in ways that a larger, nonlocal bank, which does not know the unique characteristics of the community, cannot.5
Dodd-Frank threatens the role of small banks by adding to their compliance costs and staff, raising concerns about legal vulnerabilities, forcing more stringent capital and mortgage-lending requirements (which sounds good but ignores the unique character of small banks), and introducing regulatory uncertainties. As one community banker testified in 2013, “The business of banking can’t just be an exercise in meeting regulatory requirements.”6
We also know FSOC continued in 2016 to seek designation powers over not only banks, but money managers as well—and as an end in itself, not as a response to a temporary emergency. Many folks believe they’re protecting taxpayers, I know that. But I was in those rooms long enough to know this: their decisions amount to a war of attrition against the ability of banks and investment companies to perform their duties for account holders and investors and still survive.
FSOC was created by a Democratic president and Congress during the financial crisis and leveraged its emergency powers to grow and consolidate power. But as recently as April 2016, FSOC released another report challenging the independence of the asset management and broker-dealer industries. It raised purported red flags about asset managers having sufficient liquidity to pay investors if there’s a massive run on a particular fund. It questioned complex uses of hedge fund leverage.7 The report worried me because FSOC’s stated concerns have been repeatedly addressed since 2008. Yet FSOC keeps coming back for more bites at the apple. Even if the Trump administration keeps FSOC out of the asset management area, FSOC’s ambitions could re-emerge in a future administration.
The asset management industry already meets tough disclosure and reporting requirements. Hedge funds are going to use leverage. Mutual funds’ holdings vary in how liquid they are, in order to provide investors with good returns. That’s the nature of financial markets. FSOC is failing at its duty by trying to regulate every conceivable risk out of investing, which by its nature means cyclic and variable returns.
I understand that in times of economic crisis, forcing financial agencies to sit in the same room and make decisions may be necessary. But the Federal Emergency Management Agency doesn’t go around the country handing out funds or calling in the National Guard in case an emergency occurs someday. It does its job when needed and returns to the status quo. Congress needs to repeal the Dodd-Frank provisions creating FSOC or, at the least, amend Dodd-Frank to get FSOC out of the “designation” game except in circumstances of severe crisis. If it is repealed, I would support creating a coordinating committee of the top federal financial regulators but not one with the power to “designate” firms and activities.
2. Force government to look at the facts underlying proposed policies and analyze the consequences before instituting new regulation.
We must adopt a more fact-based approach to policy to reduce government interference in the economy. This means that when legislatures or agencies propose a new policy or law, they are required to provide outside, objective evidence supporting the benefits of the proposal. The research must be performed by credentialed experts without vested interests in the result. Some call this “evidence-based policy making” an extension of the practice of evidence-based medicine. Evidence-based policy is about making the process of lawmaking less ideological through the use of economically rigorous studies to identify programs and practices capable of improving outcomes.
This is what we did in the SEC, what governments have done in Britain and Australia, and what many state legislatures are doing successfully in the United States. A study by the liberal-leaning Pew Charitable Trusts and the MacArthur Foundation documented that 100 state laws across 42 states that were passed between 2004 and 2014 supported the use of evidence-based programs and practices. Between 2008 and 2011, 29 states reported using cost-benefit analysis to inform policy or budget decisions.8 I like how states are experimenting successfully in this area, but the innovative spirit hasn’t caught on in Washington.
Witness the roller-coaster effects of federal housing laws since the early 2000s. Washington decision makers cannot resist the seductive economic boost of artificially lowered interest rates for first-time and marginally creditworthy homebuyers.9 The government policy of encouraging homeownership sprang from a well-meaning notion that homeownership was good for Americans, particularly low-income and underserved families. On the surface that might sound like an appealing policy goal. But it would be tough to find many people who lost their homes to foreclosure in 2009 and after who would look favorably on the benefits of those decisions to make mortgages as easy to get as a high-interest credit card.
The Obama administration’s reckless 2014 decision to resume guaranteeing home mortgages with down payments as low as 3 percent is a return to the policies that created the housing bubble and distorts the economy toward the housing sector.10 We have to start learning from policy failures instead of repeating them.
This is the kind of boring but enlightened change that can bring more reason and reality to our policy making. Policy makers acting on their own view of what sounds like a good idea rarely get it right. I see cities starting to ban plastic shopping bags, and I wonder if households that use plastic shopping bags for trash bags (like mine does) will simply buy more plastic garbage bags and defeat the supposed purpose of the ban. In the meantime, a ban could hurt sales at brick-and-mortar stores as consumers buy online because they don’t want to carry a reusable shopping bag around with them. Policy makers should be forced to take a look at available studies and evidence before acting in ways that harm the economy.
3. Reduce the number of regulators of financial services by merging the two securities regulators, the SEC and the CFTC. We also need to merge the OCC into the Federal Reserve so only one agency grants bank charters.
We do not need all this alphabet soup of agencies or the resulting gaps that occur between them. The strongest lever for making government more responsive, accountable, and cost effective is to merge agencies serving the same “customers” and stop creating new agencies, divisions, and special offices with every new management team or change in political party. We merged offices at the SEC under my leadership and improved not only our efficiency but our morale. Congress has attempted agency mergers in the past. Some have passed such as the creation of the Department of Homeland Security, and many have failed. They’re not a panacea. But Americans should expect better results considering how much is at stake. For all the cynics among us, both parties have proposed ideas for mergers for more than 20 years.
In 1995 Congressman Ron Wyden of Oregon (now a senator) called for the SEC-CFTC merger in the Markets and Trading Reorganization and Reform Act. When I read the following expert testimony given from James L. Bothwell, the director of Financial Institutions and Markets Issues at the nonpartisan U.S. General Accounting Office—well it was déjà vu all over again:
The current U.S. regulatory system, however, is a patchwork quilt of federal and state agencies that has not kept pace with the dramatic and rapid changes that are occurring in domestic and global financial markets. The principal components of our regulatory system date from the 1930s. Today, we have 10 different federal financial regulators, not including the Treasury Department or the various self-regulatory organizations, such as the stock and futures exchanges. . . . [We] support the merging of some of these regulators and functions to improve the effectiveness and efficiency of the financial regulatory system.11
And that statement was more than 20 years ago!
The 2008 crash also raised calls for a merger of the SEC and CFTC from many in Congress and on Wall Street. In late 2012, liberal lion Barney Frank made one last push for a new merger before his retirement. Frank’s politics are way left of mine, but I always enjoyed policy discussions with him because he is smart and engaged. When Frank and Democrat Michael Capuano introduced a bill for the merger that was also backed by many Republican House members, Frank noted that a merger would have helped avoid regulatory blindspots and gaps that contributed to the scandal at MF Global. “The existence of a separate SEC and CFTC is the single largest structural defect in our regulatory system,” Frank said in a statement. Frank said he wanted the merger in Dodd-Frank but postponed it because the provision would have killed the overall bill.12 I fear that if the 2008 crisis couldn’t motivate this simple reform, nothing will.
Then as recently as 2015, Paul Volcker’s think tank issued a report calling for an SEC-CFTC merger as part of a financial regulatory overhaul. The Volcker Alliance suggested bridging the jurisdictional divide by giving both the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services joint oversight of the merged super agency. The Volcker think tank proposed that the merged agency be funded solely through fees and assessments, a great idea I support because it solves the problem of wildly unpredictable congressional budgets preventing technology planning.13 Volcker also called for dissolving the OCC and absorbing it into the Fed, another good idea. But in the big picture Volcker called for combining most of the agencies under the Fed and further empowering FSOC, both of which, for the reasons discussed in these pages, already have far too much power.
Historically, merger proposals failed for three other reasons. One, the CFTC as the much smaller agency had the most to lose. “Many at the CFTC have maintained a ‘hell no we won’t go’ stance with regard to merger, for some good and sound reasons,” CFTC commissioner Bart Chilton testified in October 2008. “Merging a smaller agency like the CFTC with a larger one like the SEC normally means only one thing—the smaller agency ends up in the other’s basement and the issues of the smaller agency (in this case, the one with responsibility for oversight of futures) become less of a priority.”
But even as a commissioner defending his agency, Chilton agreed that “the issue of merger should [not] be off the table. Things have changed since the last time the issue was debated. We have an ongoing economic meltdown, particularly in the credit markets, and the SEC has been one of the key targets of those who say lax regulation is one of the primary culprits of the financial fiasco.”14
Two, as noted above, different committees have jurisdiction over the agencies: Agriculture has jurisdiction over the CFTC, and the House Financial Services Committee and the Senate Banking Committee oversee the SEC. The Agricultural Committees fiercely resist losing the CFTC, and many of their farming constituents agree.
Three, the GAO and other independent analyses did not find great cost savings in the various proposals put forth over the years.15 I disagree because a merger would mean one general counsel for the new agency instead of two, one inspector general instead of two, and so on. While this makes the merger a harder sell around the Hill, the economic and productivity benefits for the industry and the taxpayer are what matter.
Proposals to merge OCC into the Fed have failed similarly because the smaller agency feared being the junior partner, and stopping change in Washington is always easier than starting it.
Whether conservative or liberal, American citizens can find a lot to like in merging financial regulatory agencies. If you’re concerned about the reckless risk taking—ahem—of the big banks and asset management firms, virtually every management expert will testify that eliminating duplication and improving coordination and accountability by combining agencies will mean they will do a better job of focusing on their regulated industries and enforcing violations. If you want transparent rules and accountable regulators, and some cost savings to boot, mergers will move in this direction if for no other reason than that the crucible of change management during merger activity forces managers to make tough decisions.
These commonsense principles point to the wisdom of restoring the Glass-Steagall Act to separate traditional insured banking activities from risk-taking activities. While a Glass-Steagall world likely would not have stopped Lehman Brothers from going bankrupt, other disastrous losses would have been more contained to the risk-taking sector. Most important, Glass-Steagall would reduce the federal government’s control of the financial industry and make agency consolidation easier, faster, cheaper, and less political. Instead of parsing through the almost 1,000-page Volcker Rule and its myriad provisions, Wall Street firms and banks could return to a solution that worked well for decades. If a firm wants to play in the brokerage and asset management sandboxes, it’s not a bank, it’s not federally insured, and the Fed and Treasury won’t be involved. The SEC and CFTC would be able to do what they do best.
Ultimately under a Glass-Steagall regime, the asset management sector would never be too big to fail. If a firm is undisciplined, unwise, or unlucky enough to sustain lethal losses, it won’t be bailed out.
4. Eliminate government sponsorship of lotteries and casinos that cost Americans billions in lost savings with minimal chance of reward. Use the money currently dedicated to lottery advertising to encourage savings and financial literacy.
If there’s a Hall of Shame for government, I nominate the role of state and federal laws in sponsoring and profiting from lotteries and casinos. This development boggles the conscious mind. In the early years of the republic, the federal government ran various lottery games until they were revealed to be corrupt. As noted in the final report issued by the National Gambling Impact Study Commission formed by President Bill Clinton in 1997, “Most gambling, and all lotteries, were outlawed by several states beginning in the 1870s, following massive scandals in the Louisiana lottery”—a state lottery that operated nationally—that included extensive bribery of state and federal officials. “The federal government outlawed use of the mail for lotteries in 1890, and in 1895 the government invoked the Commerce Clause to forbid shipments of lottery tickets or advertisements across state lines, effectively ending all lotteries in the United States.”16
No government body touched a lottery game until Puerto Rico in 1934 and New Hampshire in 1964 (which lacking a state income tax stood in need of revenue). New York State followed New Hampshire in 1966. New Jersey introduced its lottery in 1970 and was followed by 10 other states by 1975. Currently, 44 states, Puerto Rico, the U.S. Virgin Islands, and the District of Columbia have operating lotteries, the Gambling Impact Study and other studies note.
Since the beginning of the modern lottery, lawmakers have dedicated lottery net revenue to social and educational programs. By “doing good,” lotteries have maintained sufficient public support while becoming one of the leading sources of revenue for governments—an invisible tax paid voluntarily by their citizens. According to the National Gambling Impact Study, in virtually every state, “the introduction of lotteries has followed remarkably uniform patterns: the arguments for and against adoption, the structure of the resulting state lottery, and the evolution of the lottery’s operations all demonstrate considerable uniformity.” The report goes on to say, “The principal argument used in every state to promote the adoption of a lottery has focused on its value as a source of ‘painless’ revenue: players voluntarily spending their money (as opposed to the general public being taxed) for the benefit of the public good.”17
What’s really upside-down about all this? Lottery dollars at least in part are replacing tax dollars, not adding to them. The states are selling the PR appeal, not the reality of lottery dollars doing good.
Since the Clinton Gambling Impact Study, many skeptics and studies have exposed the role of lotteries in gambling addiction, revealing that lotteries are disproportionately purchased by poor and low-income residents, that states vary widely in the accountability of how they spend lottery revenues, and that state advertising does a terrible job of making the poor odds of winning transparent (more on that in a moment).
The brilliant Pulitzer Prize–winning tax reporter and analyst David Cay Johnston wrote in 2009: “Because gambling is voluntary, there is little organized opposition to levies on gambling winnings. Contrast that with the ferocious, well-organized and well-financed opposition to income taxes, especially corporate income taxes. In 11 states, lotteries provided more revenue than the state corporate income tax in 2009, Tax Foundation data show.”
As Johnston argues, that tax rate on lottery tickets is far higher than any other state tax: “Overall, lotteries pay out only about 62 percent of their revenue as winnings, an implicit 38 percent tax rate on lottery tickets. On top of that, people who win $600 or more . . . must pay income taxes of up to 45 percent on their windfalls.”18
In New York State, taxpayers in the lowest quintile of earners pay more for the lottery on average (about $1,000) per year than any other form of taxation, according to analysis by data experts Jeff Desjardins and Max Galka.19 Galka highlights that playing the lottery is voluntary—yes—but what we pay for the pleasure is not: “Choosing to play the lottery is voluntary. But much like sales taxes, the inflated price of lottery tickets is not. It is illegal for anyone but the state to run a lottery. So unlike casinos, which face competition from other casinos, lotteries operate as a monopoly, so they can set their pricing artificially high, or equivalently, their payout rates artificially low.”20
Another heavily quoted study found that poor folks—households earning under $13,000 per year—spend about a tenth of all their income on lottery tickets.21 Lottery gaming also depends for a disproportionate share of sales on people with gambling addictions. A closer look reveals the most corrupt aspect of all: the states’ saturation advertising and marketing campaigns.
If you’ve wondered as I have for years why lottery advertising says less about the odds of actually winning money than you hear about in other ads, here are a few reasons why:
• Lotteries are not bound by the Federal Trade Commission’s truth-in-advertising laws. Instead, the states are self-regulating, allowing lotteries to get away with misleading and predatory advertising far beyond what private businesses are allowed.22
• Lottery campaigns are outsourced to top marketing and communications firms with state-of-the-art tools for manipulating consumer behavior.23
• As the novelty of lottery games wears off after they are introduced—and the drain on our wallets becomes clear—states constantly invent new games and new marketing strategies, thereby driving up costs as well as artificially stimulating demand in ways that remind me of penny stock brokers hard-selling from a boiler room.
Lotteries are not only a way we’re all paying more taxes and our low-income citizens are being exploited. They’re siphoning millions of dollars we could be saving or investing wisely. They’re undermining the already notoriously poor savings rates of Americans, leaving us exposed when the next economic crisis hits to tighter budgets, bankruptcy, foreclosures, and poverty. What starker individual lesson could we have from the 2008 crash? We can’t exert control over the global economy, Wall Street, or Washington—nor have we ever—but we can control how we use our own dollars. We can have a stronger financial safety net and retirement plan. We can empower ourselves to understand how money works and how to make it work for us, not against us.
That’s one of the most powerful changes we could make as a society. Let’s use lotteries and other mass media and social media tools to teach financial literacy in early working years after high school or college to prepare Americans for the current system where they will be expected to handle their own retirement savings through 401(k)s and IRAs.
I don’t expect lotteries to be repealed. But let’s ask our state and federal lawmakers to impose commonsense changes such as reducing the number of new games introduced each year, holding state lottery advertising campaigns accountable to federal truth-in-advertising laws, improving disclosure of risks and odds, and best of all forcing state lotteries to set aside a share of their marketing dollars for savings and financial literacy promotion (and no gaming the rules!).
It’s tragic how little is understood about the tax advantages of IRAs, 401(k)s, and similar tax-advantaged investment accounts. Let’s ask our brilliant marketers and advertising agencies to raise awareness and engagement with the opportunities that tax-free retirement savings accounts provide. Not only are these one of the few ways the government supports investing activities through the tax code, but the government allows you to tap your IRAs and 401(k)s for first-time homeownership and college savings.
I love the success of prize-linked savings accounts (PLSAs), an innovative program that combines the appeal of playing the lottery with incentives to begin and continue saving that never risks the principal or earned interest in these accounts. A few U.S. states have seen good early results. PLSAs seem to have no enemies except state lotteries!
Michigan’s program is the oldest and most established. Eight Michigan credit unions launched PLSAs in 2009 and expanded quickly to 36 in 2010. The participating credit unions rewarded savers with cash and raffle prizes tied to a savings account they titled “Save to Win.”
The results? Nearly 6 in 10 Michigan participants had never opened a savings account before. Savers with median incomes below $40,000 maintained an average account balance of $634 the first year. By 2014, 34 credit unions in 10 states were participating. Nearly 11,000 account holders had saved over $15 million, with an average account balance of more than $3,000. Half of Save to Win account holders in 2014 were nonsavers or financially vulnerable.24 Similar programs have demonstrated results in Great Britain, Sweden, and the Middle East.25 States benefit when their citizens carry less debt. They save more, strengthening local banks. They pay their bills to local and state vendors. And they enjoy higher confidence and self-esteem. Plus, their savings will provide them with a financial cushion for the next downturn.
Commonwealth (formerly the Doorways to Dreams Fund) and other groups are working to great effect with Congress and state legislatures to pave the legal way for Save to Win and other initiatives such as mobile game apps for savings and Save Your Refund.26 The IRS now offers federal tax refund filers Form 8888. This allows taxpayers to split their refund into two parts, one for spending, one for savings. They can be entered into various raffles and contests.27
Much of the credit for this movement goes to then Harvard (now Oxford) Business School professor Peter Tufano who conducted early research on the topic along with the then Doorways to Dreams Fund (where Tufano is a director), the Filene Research Institute, and the Michigan Credit Union League.28
I also admire the work of Professor William Birdthistle of Chicago-Kent College of Law. Professor Birdthistle has produced his own financial and legal literacy video series for his law students and posted the videos on YouTube. William plays himself as well as a less-informed but curious millennial in a hoodie and sunglasses. Check out his videos such as “What Are Taxes? Financial Aid with Professor Birdthistle,” https://www.youtube.com/watch?v=MYp5gWkDIGI.
In every speech I’ve given, I’ve talked about how investment management is rooted in the daily lives of people, from their rainy day funds to college savings to retirement needs.
If we, the people, are better educated, we’ll handle risk in better ways. We’ll be a better-educated populace and just a little harder to deceive or swindle. I know from my experience going public that even our smartest lawyers and regulators have blind spots. I remember in one FSOC meeting a Fed regulator exclaimed, “Well, Norm, what if Vanguard sells all its holdings at once! The economy will tank!” Most any citizen with even the scantest knowledge about a mutual fund knows this will never happen. It simply goes against everything that has ever been known about markets. Yet it was far from the only time I heard similar comments from the best and brightest.
While it was Alexander Hamilton who became the patron saint of a national banking system, we are wise to keep Thomas Jefferson’s skepticism in mind, as well. In Jefferson’s letter to Albert Yancey of January 6, 1816, he wrote about the risks inherent in a market economy. He told us not to kid ourselves. There will always be bubbles and crashes, and he saw the threat to democracy:
The American mind is now in that state of fever which the world has so often seen in the history of other nations. We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble, and as every nation is liable to be, under whatever bubble, design, or delusion may puff up in moments when off their guard. We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth.
Jefferson hated that the paper currency of the time was undermined by debt and could collapse at any time. Indeed, 200 years ago, Mr. Jefferson feared that the banks might be too big to fail:
The thing to be aimed at is, that the excesses of their emissions should be withdrawn as gradually, but as speedily, too, as is practicable, without so much alarm as to bring on the crisis dreaded. Some banks are said to be calling in their paper. But ought we to let this depend on their discretion? Is it not the duty of the legislature to avert from their constituents such a catastrophe as the extinguishment of two hundred millions of paper in their hands? The difficulty is indeed great: and the greater, because the patient revolts against all medicine. I am far from presuming to say that any plan can be relied on with certainty, because the bubble may burst from one moment to another; but if it fails, we shall be but where we should have been without any effort to save ourselves.
But he believed as he always had that we could only be directed by the people and their elected representatives:
If the legislature would add to that a perpetual tax of a cent a head on the population of the State, it would set agoing at once, and forever maintain, a system of primary or ward schools, and an university where might be taught, in its highest degree, every branch of science useful in our time and country; and it would rescue us from the tax of toryism, fanaticism, and indifferentism to their own State, which we now send our youth to bring from those of New England.
If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be.29
The United States has been and can continue to be the financial capital of the world, but that status, as Jefferson says, cannot be preserved if we think we can be ignorant and free. The steps outlined above will reduce the amount of government interference in our economy and empower individuals to take control of their own economic futures. I hope if this book has shown anything, it is that government does not generally allocate resources efficiently. The more we educate our citizens to manage their own financial affairs, the better off those citizens and the nation will be.