Government MyRA Account Debuts For Beginning Investors

The US government-sponsored "MyRA" is the newest kid on the block in the universe of retirement savings accounts.  It doesn't appear to be all that impressive at first glance, but it might make a difference for people who otherwise would have nothing.  We only have media coverage of the basics at the moment, so the government should explain its full details on an official website.

The MyRA is certainly not some kind of attempt at confiscation.  Sovereign Man's "Simon Black" and other fringe finance sources pushing this line need to calm down.  It does not direct existing IRAs of 401(k)s to reinvest assets exclusively in government bonds.  It does not even appear to be mandatory.  The MyRA is a new mechanism independent of those accounts.

Account minimums tell us everything about the target market.  A MyRA account minimum of $25 and monthly paycheck contributions of $5 are barely condiments on a nothing-burger.  Putting five bucks a month into an account seeded with $25 gives an investor $85 at the end of the year.  Setting the maximum size for the MyRA at $15,000 is hilarious.  Someone saving $60 per year is not going to accumulate $15K over a lifetime with interest rates on new Treasury bond issues in the low single digits.  The power of compounding that Warren Buffet likes works best when you have significant amounts to compound.  If you don't believe me, do the math yourself.  I used the SEC's compound interest calculator at Investor.gov to figure this out.  I typed in $25 for the current principal, $5 for the monthly addition, 30 years to grow, and assumed a more normal interest rate of 5% compounding at one time per year.  I got an ending value of $4,094.38.  That's what I think a MyRA investor can reasonably expect from no-fee government bonds.  It's not much to those of us who won the intellect lottery at birth but to your average burger-flipper it must look like a king's ransom.  Try living off a four-figure sum in retirement.  The MyRA won't be enough to bring retirement security on its own, even for investors putting in enough to get the compounded amount to $15K in their lifetimes.

The product available to MyRA investors is likely to be the G-Fund from the Thrift Savings Plan.  The amounts investors may contribute are too small to buy a whole bond outright, even if the bonds are packaged as "R-bonds" designed specifically for retirement accounts.  There's nothing wrong with using an existing product as an expedient way to get Americans to plan for retirement.  It is consistent with the adoption of low-cost superannuation-type funds as the preferred approach for retirement reform in America.  The biggest risk for investors in a concentrated government bond position is of course inflation but the MyRA target audience won't understand this risk.  Americans who bought war bonds during World War II experienced sustained postwar inflation that severely harmed the value of those investments.  That worked out fine for the Federal Reserve as it helped the US government reduce its debt repayment burden by sustaining inflation.  MyRA's G-Fund investors will not be sufficiently diversified to endure future inflation unless they also have conventional IRAs invested in equities or hard assets.  Good luck getting that message out, Uncle Sam.

Any education effort aimed at MyRA's target audience of investors will probably be a waste.  People will forget they have these accounts because the amounts are so small.  The concept of retirement savings is an abstraction for people living paycheck to paycheck.  It's the same problem I identified when I recently discussed the unbanked population.  I would prefer to see the MyRA somehow joined to a public option bank in each state.  I suspect that the target demographic of MyRA investors is the same audience heavily dependent on unemployment benefits and other forms of public assistance.  Collecting all of these transactions under one roof in a public option bank provides a platform for the delivery of financial literacy training.  Low-income, low-information people won't pay attention to education without incentives.  "Come get your EBT card recharged at the public bank, and don't forget to start your MyRA payroll deduction."  

This new approach is aimed at low-information voters who are probably incapable of understanding the concepts of dollar-cost averaging, portfolio diversification, and full contributions that trigger employer matching in 401(k)s.  Any American worker who isn't covered by an employer's 401(k) at work has always been free to set up an IRA at any brokerage or bank.  That lesson is lost on Americans who earn little and don't understand finance.  The government should play a role in helping that population become self-sufficient and MyRA is a good try at a solution.  It's like an IRA with training wheels for beginning investors who need habituation to deferred gratification before they can graduate to more complex IRAs.  Uncle Sam needs to put me in charge of this thing so I can graft it onto public banks.  

Banking On the Unbanked With A Public Option Bank

The Center for Financial Services Innovation (CFSI) does really good work on theoretical banking solutions for unbanked people.  I call it theory because we won't know whether these ideas work until society tries them on a large scale.  I suspect many of the market-based approaches to reaching the unbanked population will fail for reasons that have little to do with market size or product scalability.  They may fail because of the quality of the people involved.

Smartphone adoption is very high among the same low-income demographic common to the unbanked population.  The problem is that they are unable to harness the full effects of mobile technology because they can't afford or don't understand the monthly data plans they must also purchase to download apps and use them in commerce.  This indicates to me that the unbanked are terminally parochial and even stupid.  I can understand a reluctance to buy something unaffordable for lack of financial resources.  Hey, I've been there myself and I still can't afford a yacht or private jet.  I just cannot understand paying hundreds of dollars for a fancy smartphone knowing that the full data package needed to use its apps is unaffordable.  I think many unbanked people just make impulse purchases for shiny things.  The cargo cult mentality dictates that the outward trappings of technology are sufficient to generate a high-tech lifestyle.  This translates to the unbanked crowd as "get smartphone, look like rich person."  Marketing cheap banking solutions using mobile tech simply won't reach the unbanked who have to stop paying for cable TV and landlines just to afford food!

Startups who think they can change human nature while salivating over the size of the unbanked market must read a copy of The Unheavenly City Revisited several times.  Most of the poor will stay poor because they are at the dumb end of the bell curve and lack impulse control.  They are constitutionally incapable of using a high-tech solution.  Banks learned hard lessons in the last decade by pushing stored value cards and other prepaid solutions to the unbanked.  The poor forgot that they had dormant accounts, or never learned how to use them, or forgot how to use them once they learned the steps, or never accepted digital deposits as real money because they couldn't hold the digits in their hands like hard cash.  That cargo cult never left the beach, if you know what I mean.  Don't even get me started on Bitcoin as a solution; those transactions can't be reversed and the unbanked are too immature to safeguard their part of the encryption key.  Pushing mobile apps and other tech solutions to the poor is like feeding sushi to a goat.  They just can't acquire the taste.

The unbanked do use some rudimentary financial services, specifically those that use low-tech interfaces.  Migrant labor from emerging economies to developed nations creates a huge market for money remittances.  I've blogged before about how Google Wallet gives users the ability to literally email money as an attachment.  Such a simple technology attains full value as more than a remittance mechanism.  It may be a way to store multiple currencies in a single account as a hedge against hyperinflation in a single country.  It may even be a way to avoid capital controls because it doesn't transmit via monitored wire transfer architectures.  That's all too advanced for our unbanked friends, but I had to throw it out there.

I have a humane solution to the problem of the unbanked population lacking access to real banking solutions.  I want every state in the United States to charter its own public option bank.  The public banks would be much like the Bank of North Dakota.  They would offer no-cost checking and savings accounts and low-interest loans.  They will not offer advanced merchant services, commercial banking, capital markets trading, or wealth management because a public bank cannot replace the private sector.  The public bank fills a gap in financial services that is mostly unreachable.  It can even enable poor people to establish credit histories through microlending, along the lines of Grameen Bank.  Once the banks are stable with a large client base, they represent a contract opportunity for cheap "white label" insurance plans.

A public bank account can also be a conduit for deposits from social service payments:  unemployment payments, workers' compensation insurance, SNAP/EBT, and other such programs.  Mandating these deposits for a public bank account helps monitor their use.  Payments can be conditioned on completion of financial literacy classes, parole obligations, and other duties that public assistance recipients owe the taxpayer.

The private sector is well aware of the high cost of customer acquisition for unbanked customers, given their technological illiteracy and low profitability.  A public option bank can reach its customers in channels where they spend much of their day.  Street teams are a well-developed marketing tactic for generating word-of-mouth buzz among early adopters.  Let's adapt this concept for the bottom quintile.  I would have the public bank hire its best customers to run street team patrols at county welfare offices, unemployment offices, day labor pickup sites, courtrooms that try petty offenses, drug treatment centers, halfway houses, and DMV offices.  The street teams can partner with social workers and parole officers to increase their chances of contacting the unbanked.

The parts of the unbanked population that hail from countries where the rule of law is weak are naturally reluctant to trust big, impersonal institutions like private banks.  That makes personal contact through trusted channels all the more imperative for the public bank.  I'm not being facetious at all.  The next US financial crisis will once again weaken private banks and private payment mechanisms, and whatever outreach they made to the unbanked prior to that crisis will have been for naught.

I maintain that the public option bank is the best solution a capitalistic society can offer its least financially able participants.  It is part deus-ex-machina governing humans too inept to govern their own affairs.  It is part social control mechanism for a permanent underclass that is otherwise a source of pre-revolutionary instability.  Forget about pushing high-tech unbanking solutions through hackathons and competitions like FinCapDev.  Those won't work until the unbanked underclass is herded out of the underground economy and into a nanny state solution like a public bank.  The poor must at least go through the motions of capitalism until they are habituated to responsible decision making, or at least a reasonable facsimile.  I would not fund a startup pitching financial services to the unbanked unless it allows for adoption by a state's public bank.  Entrepreneurs need to spend some time at inner-city convenience stores watching the unbanked "invest" in lottery tickets and malt liquor before they try a high-tech solution to poverty.  People are hard to change, but give them a public bank as their new cargo cult and they'll at least adopt the proper rituals.  

Public Banking for the Unbanked in BDDs

I've blogged before about how public banking combined with crowdfunding can be a powerful wealth generator.  I now think there is an excellent opportunity for public banks to serve the unbanked and help low-income Americans build wealth.

The biggest national initiative to serve the unbanked that I've found so far is Bank On.  The program focuses on lobbying local bank branches to offer no-cost services to the unbanked and was pioneered right here in my town with Bank on San Francisco.  The national rollout of EARN's Bank on USA is supposed to be a federally funded initiative but I can't find any federal government site describing this program's implementation.  The FDIC's Economic Inclusion initiative has data from several pilot programs and financial education curricula, but serving the unbanked needs a permanent effort.

I've got the all-in-one solution.  Let's go back to my earlier blog article (linked up top, folks) about a public bank in every state that also runs a crowdfunding platform.  This public bank should offer no-cost checking and savings accounts to low-income individuals and should be the sponsoring institution for Individual Development Accounts (IDA).  Almost all of its transactions can be done online, but local branches of the public bank can be a nucleus for developing a Banking Development District (BDD).  The whole point of a BDD is to attract bank branches into underserved neighborhoods.  I see no reason why a public bank can't be the first to jump in to a BDD.  The New America Foundation's BDD concept works in New York.  Check out NY's state BDD program and NYC's BDD program.

I spin up these kinds of ideas all the time.  It's all part of my job as an aspiring big-shot in finance.  Now I just need to get policymakers to listen to me.  Stay tuned to this blog for more financial innovation from Alfidi Capital.  

Crowdfunding for Decentralized Wealth

I attended a Commonwealth Club lecture today by Gar Alperovitz, author of What Then Must We Do?  I won't spoil the book for you, but he contends that the concentration of the control of wealth among a small elite and a handful of corporations make America's systemic problems unsolvable.  Labor unions are no longer powerful enough to serve as a countervailing power to corporate control of wealth and state socialism is an unsatisfactory alternative to free markets.  His solution lies in democratic, decentralized ownership of wealth.  I think he'd really like the concept of resilient communities but he touched on older concepts that already work.  He mentioned some models; I'll mention others.

The Democracy Collaborative's Community Wealth project is a clearinghouse for models that share access to capital.  The National Cooperative Business Association is a home for co-ops that have been around forever.  The Bank of North Dakota is the only state-owned bank in America and it's been successful for almost a century in providing capital to private enterprise.  Many of us have seen NCUA's credit unions in our communities.  Entrepreneurs who sell their companies to their workers' own ESOPs can reap very attractive tax benefits.  Real estate investors can use land trusts to limit liability and expand their options.  The Mondragon Corporation is an example of how a cooperative ownership structure can adapt to a complex enterprise.  The University of Wisconsin Center for Cooperatives studies, well, what else but co-ops.  The Hub is a global network-cum-movement for microenterprises with a Bay Area presence.  B-corporations are not-for-profit corporations that are chartered to serve a public interest.  CiviCRM is an open-source platform for fundraising and contact management; I regret that I missed CiviCon 2013.  I also regret that I'm missing the Public Banking Institute's  Public Banking 2013 conference this weekend, but I've already got plenty to do.

Some of these models may seem a bit touchy-feely and environmentally green for die-hard free market fans but I hope they get over that knee-jerk reaction.  I'd like to see an ecosystem of these types of grass-roots financing and organizing tools grow up as alternatives to the unstable model of TBTF megabanks that are wrecking the economy.  There's enough room for profit in these enterprise structures for conservatives to like.  The New America Foundation's Asset Building Program sure looks a lot like George W. Bush's call for an "ownership society."

The hodge-podge list of tools above begs a return to the author's question about what we must do now.  I got a chance to ask a question of my own when I asked Mr. Alperovitz how the crowdfunding phenomenon can contribute to the growth of these concepts.  He was optimistic about the potential of crowdfunding but didn't have specific data on hand.  There's my window of entrepreneurial opportunity.  I'll get specific right now.

B-corps are already using crowdfunding platforms like Kickstarter and Indiegogo to raise donations.  Once FINRA finally completes its SEC-mandated certification of crowdfunding portals for JOBS Act compliance, they can raise equity capital.  I think public banks operating in each of the fifty states could operate their own crowdfunding portals.  Anyone who wants to start a co-op or credit union could step on up and launch fundraising from the public bank's portal.  Companies that sponsor ESOPs could borrow directly from the public banks so the ESOP can buy the company's shares.  REITs that organize as land trusts could use the public bank for 1031 exchanges and trust services.  Makers, here's your chance to grow new organizations making brand new things.

The ecosystem I just described above will probably require legal changes that will enable public banks and crowdfunding portals to work together in the ways I've imagined.  State governments can perform their traditional role as public policy laboratories by experimenting with different forms of governance for this co-op ecosystem.  Resilient communities will need a myriad of management structures and funding mechanisms. Entrepreneurs should educate policymakers on how to make this happen.  That is what we must do, answering the question above.