The Ladder

In the midst of all the market turmoil, one innovative program to deal with the underlying housing and mortgage issues is moving ahead smartly.  You will recall that, fast upon the heels of its takeover of IndyMac, the FDIC announced an aggressive program to modify loans owned or serviced by IndyMac to prevent avoidable foreclosures.  Initially, the FDIC wrote almost 5,000 borrowers and proposed to modify their loans and reduce their payments-all they needed to do was send back a check in the new payment amount, sign a modification agreement, and grant permission to check the borrower's tax return. (Where the tax return information does not conform to information in IndyMac's files, the FDIC requires further verification of borrower income.)  One of the best aspects of the program for borrowers is that the letter they received included a specific new payment amount, not just an invitation to call their servicer.

On the horizon of this year's Clinton Global Initiative, I saw the next frontier for pioneers of the global asset-building field.  At past CGIs, microfinance (and microcredit in particular) has been centrally celebrated and largely heralded as a panacea to global poverty.  However, this year, there seemed to be an undercurrent of recognition the microfinance field, in its current construction, simply can't do it all.  More specifically, there are two very important poor populations that microfinance simply doesn't reach - those in extreme poverty whose needs are too small for average microloans, and those who own small and medium-sized businesses too large for the average microloan but too small to access finance from formal banks.  A big players are lining up to fill the void.

Our New America colleague Michael Lind suggests a novel way to revive America's savings culture in today's New York Times. He proposes that we bring back one of the old ways that people saved, which was through a postal savings bank.

Congress created such a system in 1910 and it thrived for decades as a place where small savers could store up their cash. The advent of FDIC insurance shored up the instability of the banking system and postal accounts fell out of favor and then out of commssion. But Lind argues that it is time we rekindle this flame. Small savers remain unpopular among most banks and millions of Americans do not own a basic transaction account, which means they have to pay more for everyday financial services.

Given the financial crisis, we know that we will need to realign our consumption habits to save more. We will need to do so for small and middle-sized savers alike. What we lack now is the infrastructure to support a savings revival. Perhaps the post office, still a ubiquitous presence in communities throughout the country, can be part of the solution.

Friday morning, October 3, 2008, the New America Foundation held an informal meeting of staff and interested others who listened to a presentation by Ellen Seidman, Financial Policy Services Director in the Asset Building Program. Ellen took about 25 minutes to shed a great deal of light on the roots of the current financial crisis; a historical perspective on the nation's current predicament; the strengths and weaknesses of the "rescue plan" passed today by Congress and signed into law by President Bush.

Ellen was also kind enough to take some questions from the audience and to allow the entire affair to be recorded for posterity. Since not everyone could be there, we wanted to take this opportunity to share some highlights of Ellen's presentation. Later, we'll post the entire event, but for now, here are some key segments.

First, Ellen talked about the roots of the current crisis. One of the most interesting items here is Ellen's perspective that the United States is currently facing three economic crises--one in the general state of the economy, one in liquidity, and the third in the credit markets.

Last week I participated in a fascinating discussion about some of the big and bold policy changes that will be necessary to successfully navigate the country through the post-financial crisis economic landscape. In particular, it focused on Lisa Margonelli’s Energy Security for American Families Initiative and similar proposals that would use green initiatives to lower energy costs for American families, create more good paying green collar jobs in the United States, combat global climate change and reduce our dependence on foreign oil. Naturally the conversation quickly turned to the role of savings under this new economic reality. Overall, savings will be more important than ever to American families as our national economy slows and credit markets become tighter (to exactly what extent remains to be seen). However, those same factors—plus rising costs of fuel and energy—will make saving more difficult. This made me recall another period in American history when we endured difficult economic times and saving played a crucial role: World War II. The Greatest Generation helped end the Great Depression and save the world from fascism and one key part of this effort was War Bonds. War Bonds were a type of savings bond that the government issued in order to gain funding for the war effort. Despite difficult economic times, Americans stepped up to the challenge and bought War Bonds to fund the war effort and the eventual path to victory.

If you’re like me, you have no interest in foolishly looking at the dwindling numbers in your retirement plan. Luckily, I’m decades away from retirement and can afford occasional market volatility. My initial concern during this crunch, however, wasn't the fluctuating values in our nest eggs. Instead, my worry was that employers might draw back from automatic enrollment programs, and that new employees might consider opting out of plans more frequently. Not so, according to people smarter than myself. According to a recent Chicago Tribune article, not only has the number of companies automatically enrolling employees in retirement plans doubled, but there shouldn’t be much cause for concern that, despite what looks like prolonged doom and gloom for our economy, companies may find auto-enrollment less attractive.

For behavioral economists (and their many fans), this probably comes as no surprise—default options work. What the article argues and suggests by its title, however, is that automatic enrollment (despite its increasing popularity) is insufficient in creating a robust nest egg at current match rates. Likely true, though the Tribune makes it seem as though auto-enrollment is a static business decision by saying that it “may create a false sense of security and discourage workers from putting more away.” A false sense of security is an issue, of course, but I would argue that a balance of $0.00 in an employer-sponsored plan is far, far riskier.

The real fix lies in automatic escalation—the next generation of automatic enrollment.

The Clinton Global Initiative is coming to a close and as I sit here listening to Gordon Brown talk about the importance of the global economy and the gap between the rich and poor, I find myself also thinking about the images of Drew Barrymore, Matt Damon, Muhammad Yunus, Bono, Bill Gates, Wylclef Jean and Bill Clinton on my camera, and last nights performances of James Taylor and Yousoo Ndour's.  Waking up from my day dream, I realize that this conference could have easily succumbed to three days of a star-studded, papparazzi-riddled social affair.  And perhaps in some ways it is.  

But as I go through the notes I've taken over the last three days, I am quite pleasantly surprised by the amount of substance and the breadth of issues and innovations covered over the last three days. Indeed, I'm so impressed that I find myself at the end of this conference in 30 minutes unwilling to end my blogging on its sessions and commitments.  Over the next week, I plan to continue providing commentary on CGI sessions, issue areas and commitments. Here is a sampling of topics I plan to cover:

• Asset Building Beyond Microfinance? The Forgotten Bottom and the Missing Middle
• Rural Finance: a New Frontier for Global Asset Building?
• Technology, Information and the New Age of Access
• Energy, Climate Change and Sustainable Development: An Opportunity for Microfinance?
• Food Prices Shifting Microfinance Focus?
• CGI Commitments:  My Top 10 List

As Congress moves toward passing an enormous bailout package to solve the current credit crisis, we’ve been thinking about what this means for the savings and asset policy.   It’s impossible to predict all of the outcomes from this kind of action.  Some pundits aren’t even sure that the bailout will have its desired effect, and no one is certain about the unintended consequences.

One thing that is certain, however, is that this should not and can not be a “one-fell swoop” approach to dealing with the credit crisis.  Clearly, this bailout should just be the first step in a series of actions to revamp our financial system and restore faith and confidence in our economy and financial industry.

This major step is going to need to be accompanied by a number of small, but critical, steps; some to help provide reliable, low-risk options for savers, and all aimed at restoring a sense of faith and credibility in the economy and, in many ways, the government.

Smart, low-cost policy proposals which would enhance individual savings opportunities already exist–such as rebuilding the U.S. Savings Bond Program. Savings Bonds have been a key support for the federal government and a reliable, safe investment for American families for almost a hundred years.

At this morning's opening plenary, members of the CGI searched for open seats while the the press groaned about the lack of space, sat on the floor, weaseled their way onto members-only tables and the national press complained about the lack of exclusive press pools just for their reporters and cameras.  Needless to say, there was a lot of nervous energy in the room, waiting to hear form presidential candidates John McCain and Barack Obama provides the opening and closing remarks to a panel on Integrated Solution to water, food and energy crises.  Or maybe just to hear them talk. But I figured that with all the commotion surrounding their appearance here, I would be remiss not to cover their remarks on the Ladder, despite (sadly) the lack of any direct comment on asset building. 

All day yesterday, I capitalized on the opportunity to unabashedly promote the asset building framework by putting a spotlight on its prominence in poverty alleviation discussions and commitments here at CGI.  And I actually barely skimmed the surface of some of the specific asset-focused activities coming out of these sessions (Habitat, others).  As much as I relished it, I also want to acknowledge that asset building and financial services for the poor are one piece of poverty alleviation in a complex global environment.  The specific commitments are great, but what about the larger perspective?

Yesterday's afternoon CGI held a plenary on profits, jobs and equitable growth.  The stifling of poverty alleviation around the world is not simply due to lack of access to effective financial services, but also to lack of access to property, to opportunity, to education and to healthcare.  Exclusion from any combination of these often results market inefficiencies, slack productivity, an inability for an individual to live to their full human potential.  Hernando de Soto called for property rights and legal empowerment of the poor to give them the tools they need to achieve their version of the American Dream.