Fed Should Tell Politicians What It Told Individuals

Here's what a Federal Reserve Governor recently had to say about the importance of sound financial planning and behavior:

"Financially sound individuals and families are important to the overall stability and growth of the U.S. economy, Federal Reserve Governor Elizabeth Duke said Saturday.

"The Federal Reserve has an inherent interest in the financial stability and strength of individual households, whose spending, saving, and investing significantly impact economic growth," Ms. Duke said in remarks prepared for a speech on financial planning in Virginia Beach, Va.

Ms. Duke encouraged consumers to create a financial plan, save money through automatic withdrawals for retirement, create an emergency fund, and manage debt.

Ms. Duke said that the financial health of U.S. households is a key factor in the sluggish recovery because Americans are still paying off debt that they acquired during the boom years.

Financially informed consumers contribute to community economic development which in turn helps the overall marketplace, she said.

"Financially secure households are the backbone of a strong domestic economy," Ms. Duke said."

I hope the Fed tells these same things to the White House, Congressional leaders, and state and city officials.

As the Fed Governor says, individuals are "still paying off debt that they acquired during the boom years," need to "create a financial plan" and "manage debt." At least people are taking action.

But not the politicians. They haven't yet moved beyond the talking stage on any of the above issues.

Regarding individuals, The Great Restoration paints an optimistic picture concerning the common sense reaction of individuals and families to the current financial debacle. It says in part:

"Quietly but decisively, Americans are trying to restore the moral norms that undergird our economic system.

The first norm is that you shouldn’t spend more than you take in. After an explosion of debt over the past few decades, Americans are now reacting strongly against the debt culture. According to the latest Allstate/National Journal Heartland Monitor poll, three-quarters of Americans said they’d be better off if they carried no debt whatsoever. Not long ago, most people saw debt as a useful tool for consumption and enjoyment. Now they see it as a seduction and an obstacle."

It goes on:

"Second, Americans are trying to re-establish the link between effort and reward. This was the link that was severed on Wall Street, where so many made so much for work that served no productive purpose. This was the link that was frayed by the bailouts, when people who broke the rules still got rewarded.

In sphere after sphere, strong majorities want to see a balance between what you produce and what you get. The bank bailouts worked and barely cost the government anything, but they are ferociously unpopular because the unjust got rewarded. The auto bailouts mostly worked, but they are unpopular even in the Midwestern states that directly benefited because those who failed in the market still got the gold. Public sector unions are unpopular because of the perception that benefit packages are out of balance. . . .

This values restoration is reshaping the way Americans see the world around them. Many economists say the cutback in consumption will hurt the economy in the short run. But, according to the Heartland Monitor poll, 61 percent of Americans said the decline in consumption would “help the economy as it would create more savings that could be invested to create or expand business.”

Some economists say the government should be spending more now to stimulate a recovery. Thirty-eight percent of Americans seem to agree with that. But 56 percent have said “government spending when the government is already running a deficit is the wrong approach during an economic downturn because it is only a temporary solution that increases long-term debt.”

These majorities are focused on the fundamentals. They say that repairing the economic moral fabric is the essential national task right now. They are suspicious of government action in general, saying that government often undermines this fabric."

My view is that the Fed official is talking to the wrong people. Individuals and families have received the message about the dangers of debt, deficits, temporary government stimulus programs, unfair treatment and the need for a clear long term focus. Thus, the Fed needn't worry about mainstream Americans.

On the other hand, government officials at all levels need to hear and heed the Fed's message. And they should listen carefully to the message being given by their fellow American citizens and families, too. Soon they will.

Thanks. Bob.