Teaching Consumers Finance

The recently passed Dodd-Frank , or Wall Street Reform and Consumer Protection Act law covers consumer protection.

Much of the law has yet to go into effect; many parts that involve consumers are not yet clearly set so it isn’t yet clear how the consumer will benefit.

Consumer education was a major consideration but the question is still how Dodd-Frank will do this. There are about 150 pages of the Act that explains the creation of the Consumer Finance Protection Board (CFPB).

The board's chief function involves financial educational programs, and collecting, investigating and responding to consumer complaints. It’s to research consumer financial markets that affect consumers.

Also included is the mortgage disclosure form from a combination of suggestions from the Real Estate Settlement Procedures Act and the Truth in Lending Act, and existing laws.

True, consumers need help. From my experience, too many consumers are ignorant of basic finance, including the role of interest costs.

But I cannot see how this can be accomplished by consumer-oriented documents alone. It can be taught in schools early on.

Creating more informed consumers cannot be practically accomplished by regulators.

Stimulus Action and Recessions.

Why hasn’t the government’s stimulus program worked? We know it has not produced needed jobs.

It has also done havoc to interest rates because of meddling. When left alone, interest rates usually adjust to supply and demand forces and adjust economic events. However, when government imposes stimulus proposals to raise credit and lift the economy, the system is disturbed and distorted.

This unbalances the economy and does the exact opposite of what has been intended.

Ludwig von Mises wrote fully about the phenomenon in the 1920s. However, the fashionable economist during the 1930s recession was John Maynard Keynes. He became the poster child of that recovery movement.

The Keynes government pump-priming thesis that employed prolonged stimuli actually deepened, and helped induce the Great Depression. Nevertheless, it is the premise of the Obama administration’s failed current policy.

Politics and Bank Credit

Banks are not making sufficient loans to small business, even when they have the ability to do so. They make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

Also, there is political meddling and too strict bank supervision adding to the bank lending confused picture.

Some banking groups are now complaining that they have the money to lend, but with few takers because of the recession.

Yes, commerce is in a slump. But many viable, thriving businesses, especially commercial real estate operations, are genuinely seeking loans from banks who have funds.

Yet, too many lenders are hesitant about extending loans they once more readily made.

Why Rely on the Federal Reserve?

We make a habit of using Federal Reserve actions as responsible, even though they are often proven wrong. This has been proven by the decisions we have gotten in the past couple of years.

We have to remember that economists are fallible, even when they direct the Federal Reserve.

In the more distant past as well, those in the Fed worried we may have deflation and therefore inflated the economy, and added too much currency. In fact the Fed, almost automatically, has been on the side of abetting inflation, in an attempt to prevent deflation.

Thus, the Fed has been the chief culprit causing the bubbles which invariably lead to busts and eventual recessions.

Bank Credit Shortages

Many smaller banks don’t have the sound loans on their books as bank examiners would like to see. They are, therefore, under constant pressure to clean up their financials and/or add to basic capital.

Unfortunately, politicians in their area are putting pressure on bank examiners to allow these banks with questionable standing to make loans which ordinarily should not be made.

Unfortunately, banks are not making sufficient loans to small business even if they have the ability to do so, The truth is, they make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

So, there is a constant small business credit shortage.

This unhealthy environment is perfect for the likes of meddling politicians in Washington whose influence is being made in the wrong place, in the wrong manner.

One solution: Supervise banks gingerly but independently of politics. Secondly, permit banks to make riskier small business loans and restrict their tendency to borrow cheaply and invest in government bonds.

It is also time to raise the cost of Fed money to banks, so the latter do what they are in business to do.

Financial Herd Instincts

Avoid the financial community’s herd instincts that override common sense and logic, Be aware of what is often referred to as the Bandwagon Effect, the propensity of professional and then following average investors to pursue the same line of investment thinking.

I would like to have my readers follow up the importance of the work done by the 19th century French economist Frederic Bastiat, who said people see benefits but never the hidden costs. It is one of his lessons that goes beyond politics into the realm of investing.

Buying Annuities

Annuity salesmen often compare the benefits of their product with investing risks of stocks and bonds. They mention the hazards of securities markets and possibilities of market loss. But annuity salesmen often overlook the downside of what they offer.

Annuities do have negatives. They are not for everyone. They have an insurance factor which may not be required. And if not required, why pay for it?

Then there are annuity management fees, contrary to some sales pitches and early termination charges. Moreover, the strength of the company is always important to consider.

The choice of fixed or variable annuities further complicates the picture. Fixed annuities have set returns which means the buyer has no protection from any future inflation. Variable annuities tie into securities markets but not as directly as you may want.