In recent months we have witnessed the precipitous drop in consumer confidence. Investor confidence is rattled by the dramatic drop in the stock market and investors are flocking to security. U.S. Treasury bills and notes now in some cases actually have negative returns to investors. Even so, many feel that this is a better alternative to the stock market and to our financial institutions. In addition, millions of Americans have been laid off. Unfortunately, most economists and Congress have turned a deaf ear to the concerns of individuals, choosing instead to reward those who contributed to the financial mess. They have ignored the plight of Americans who played by the rules, worked hard and saved for retirement.
The continued scandals about executive pay, bonuses, airplanes, etc., show that bailing out corporations leaves no one accountable. Banks have not been forthcoming in lending out funds but instead in repairing their balance sheets.
I believe it is the shaky financial picture for many Americans that is at the heart of our crisis of confidence. Congress can quickly address this confidence crisis by bolstering the financial picture of moderate- and medium-income households and those nearing and in retirement. Let us efficiently target government expenditures to reward those who played by the rules and our confidence in our systems will recover. At the same time, we can create transparent regulations that allow everyone to truly see the net worth of our financial institutions and corporations and thereby make proper investment decisions. In doing so, we will invest in ordinary Americans who are ultimately responsible for the innovation, the spirit and the success of our economy.
As part of the bailout, coverage under the Federal Deposit Insurance Corporation (FDIC) was increased to $250,000 from $100,000 for bank deposits to encourage people to retain large savings in banks, but up to now, at least, very few banks have failed. Instead what has happened is that millions of Americans have lost tons of investments over the past year in the stock market. Much of this is money in retirement accounts, college savings plans, etc. Given the size of these losses for an individual household, many people are wondering how they can help their child through college, questioning how and when they can now retire, and not feeling comfortable spending any money on major durable goods — HD televisions, cars, etc.
Provide coverage, with limit on losses covered
We can solve this. Let’s evaluate what we can do to repair the budgets of these households. People invested in our economy and had faith in our regulatory systems. Our government failed them as a watchdog. So let’s create a one-time Federal Investment Insurance Coverage (FIIC). As with FDIC coverage, there would be a limit to the losses that could be covered. We can specify up to $250,000 in losses per household or per individual for insurance. For many wealthy Americans this would only be a drop in a bucket. However, for many middle-class Americans, this would do wonders to restore confidence in our government and reward good behaviors. Now, I don’t have numbers on the cost of this “reward” for saving and investing. However, just take a highly hypothetical number of Americans — 10 million (I am exaggerating here) who lost $250,000 each. The cost of restoring all of their losses would be $250 billion — considerably less than the $700 billion allocated for the original bail out. Indeed, this much money is still left in the original $700 billion approved by Congress last October.
What is unique and good about this approach to the original bailout money is that the government is not playing God and intervening to rescue certain banks or insurance companies and not others. Every investor with losses is treated the same. Then individual Americans can decide how they want to use their insurance check. Perhaps they replace that car after all. Or they go ahead and retire. Maybe their son or daughter can continue to go to college this fall rather than having to try to work for a year or two to go to the school they had their heart set on. Or maybe they choose to reinvest it again, knowing the risk involved and that there will be no additional insurance should their investments tank.
This approach rewards hard-working people for saving for their needs and their retirement. It restores fairness to a system that has lost it. It stops rewarding those who created the crisis with money to continue their misguided ways.
This is not the sole solution. Obviously, other steps still would need to be taken to help individuals ride out this tumultuous time. It is time for Congress to stop the spin control about “Main Street” and “Wall Street.” This significant first step would do more than any rhetoric to win over hearts and minds and emphasize the importance of Americans and their families.
Dan Hoxworth works with for-profit and nonprofit organizations and government on strategic planning and positioning, organizational and brand development, and community and public relations. He was the creator and developer of the Paul and Sheila Wellstone Center for Community Building in St. Paul.