January 22, 2009 – The Baseline Scenario

Yesterday, Tim Geithner stated clearly – and reassuringly – that the Obama Administration will present a comprehensive and detailed economic recovery plan within a few weeks.

We know this plan involves a large fiscal stimulus, and it is reasonably clear there will be around $100bn for housing refinance/mortgage mitigation (out of TARP II funding), and probably some other symbolically important pieces intended to help consumers directly.

The big question is: what will be done about the total mess that our banking system has become? On this key dimension, we know little about the Administration’s specific thinking, but we can already see with considerable clarity the constraints that will bind as their thinking becomes concrete policy proposals.

There are three major political constraints. Continue reading “Constraints On The Comprehensive Obama Plan” →

My earlier post on basic financial education got a fair amount of attention, so I wanted to point out one source for more information on the topic. Zvi Bodie, Dennis McLeavey, and Laurence B. Siegel hosted a conference in 2006 on “The Future of Life-Cycle Saving and Investing,” and the most of the presentations and comments can be downloaded as a PDF from this site. Some of the general themes of the conference were: people don’t save enough for retirement; people have to make important financial decisions on their own; but people tend to make suboptimal financial decisions (like not rolling over retirement accounts), so giving them more “choice” leads to bad results; and the financial advice they are getting is not necessarily helpful.

Bodie, in his concluding remarks on investor education (pp. 169-71), provides this diagnosis:

We need institutional innovation to address the problem of investor education. Most people have honorable intentions, but we all want to make a living. In that respect, we are all salesmen to some extent. The trick, therefore, is getting people to serve the public interest while they are serving their own interests. . . .

[T]he U.S. Securities and Exchange Commission (SEC) is part of the problem. The educational materials distributed by financial services firms and by the SEC are often misleading and biased in favor of products that may not be suitable for large numbers of consumers. . . .

Therefore, universities and professional associations should cooperate in designing, producing, and disseminating objective financial education that is genuinely trustworthy. In doing so, we have to distinguish between marketing materials and bona fide education.

But there is lots more interesting stuff throughout the book. Laurence Kotlikoff (pp. 55-71) analyzes the problems with the conventional method of estimating target retirement savings, and shows that small mistakes can lead to unhappy outcomes. And the sessions are full of frightening information, especially Alicia Munnell’s session; for example, in 2004 the average 401(k)/IRA balance for a head of household age 55-64 was only $60,000. The outlook for retirement security looks pretty grim. And all of this was written at the peak of the boom.