Treasury Department to Help Under-Banked Citizens at Tax Time
Published on - September 23rd, 2010 (by J.D. Roth) Every week, I’m bombarded by press releases from companies and publications wanting me to share their products and stories. I’d love to be able to pass this info on to you — at least the stuff that’s both relevant and good (actual subject line from one irrelevant press release this morning: “Rev. Jesse Jackson holds Automotive Summit in Detroit Sept. 30 – Oct. 1″ … spam!) — but doing so would be a full-time job. (No joke!) But every now and then, somebody sends me a press release that piques my interest.
Recently, somebody from the U.S. Treasury sent me a press release about a new program the federal government intends to implement this tax season. Here’s a run-down:
The U.S. Department of the Treasury announced that it will launch a new pilot program to help capitalize on tax refund season as an opportunity to provide unbanked and underbanked Americans with access to safe, low-cost financial accounts. This pilot will deliver targeted offers to certain low and moderate income individuals to sign up for new accounts with debit card access at tax time in order to receive their refunds through direct deposit. It will also test offering accounts that can be used year-round in the future to deposit other sources of income, store money safely, make purchases, pay bills, withdraw cash, and build savings.
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The use of safe and appropriate financial services and products can help households maintain financial stability. Unbanked and underbanked individuals often face difficulties saving and planning for their financial futures, making them more vulnerable to medical or employment emergencies and threatening their ability to invest in continuing education, purchase a home, or send their children to college. The unbanked are disproportionally low and moderate income. According to the FDIC’s 2009 National Survey, a person making $30,000 or less is more than 7 times as likely to be unbanked as someone making $50,000 or more.
As of yet, this program has no name and no website. All it has is a press release. That’s okay, though, because I like the idea, and I look forward to hearing more about it in the future. Meanwhile, I wanted to share it with you folks so that you could start planning if it’s something that makes sense for you and your situation.
Details on this are vague right now, and the program may not prove to be worthwhile. But I’m hopeful. It sounds like it could be a win for everyone involved.
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At the very least this should help people avoid getting ripped off by 3rd party check cashing schemes.
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How are check cashing outfits ripping off people? And if you’re not a serial check bouncer, or illegal alien, or without fixed address, how hard is it to get a bank account? Not trying to be particularly insensitive, just trying to understand.
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Andrew,
Most check cashing outfits charge a fee (usually a percentage of the check amount) for the service. Impoverished people may not have a phone number or a permanent address or a photo ID and therefore cannot open a bank account; they may have no choice but to pay the fee. I have seen fees as high at 15% in some neighborhoods in Baltimore.
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I am always amazed at the number of parents of students who do not have a bank account. Is it fear? Have they been ripped off or denied an account? I know my local bank DOES charge to have a regular checking account if you don’t have enough activity.
Maybe they are afraid of the math. A number of my parents start to shake when asked to do simple addition or subtraction. Somewhere/sometime someone told them they were bad at math- probably in the third grade- and that was IT!
I really like this idea. I am tired of Walmart making off with an extra $30 from a poor family that cannot afford or does not want a bank account.
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I agree this sounds like a great idea on the surface. But I am cynical, and so I wonder if this is actually going to be a good deal. I am just waiting for the scandal that comes about when such and such a senator pressures Treasury to favor banks in his/her state.
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Very nifty. This sector of the current administration has been very quietly implementing a lot of Nudge policies from behavioral and public finance economists. Simplifying the FAFSA is another example (as is putting credit card info on the bills, and allowing tax refunds in savings bonds). It is just amazing to me to see things I’ve seen research papers on actually be turned into policies within a year or two. All these little suggestions that can have big effects. I am very excited to see what they do with 401(k) defaults.
And to answer #4– most of the unbanked have had a bank account previously but got hit by too many fees or weren’t able to keep a minimum. The literature in this area is fascinating. There’s a great book called Insufficient Funds that I would recommend anybody interested in the topic of the unbanked read.
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Steve, if 15% sounds high, consider some of the silly credit card offers that many folks get in the mail: 20% interest rates on cash advances, high yearly fees, etc. Loaning money to the impoverished, however charitable we may feel, is a high-risk proposition that carries a matching premium. In any case, personally not a big fan of banks big or small. We recently fired BofA for hiking some of their fees by 45%.
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@Nicole #6:
Interesting perspective– are you an economist, sociologist, or something like that? Regardless– great post.
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This sounds a lot like sub-prime mortage requirements from Congress a decade ago – we all know how that went. There’s a reason a bank will not extend credit to these individuals. I wish we could remember the lessons of a mess from which we are not yet recovered.
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Rob, I’m not sure I understand your comment. Nobody’s suggesting that banks extend credit to people. They’re trying to encourage people to open savings accounts (which is, in essence, lending money to banks!). How can somebody with bad credit cause problems by opening a savings account?
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I spent many years as one of the “great financially unwashed” so I am an expert. I could not afford the $5 monthly service charge for the regular checking account, I needed that $5 to feed my family. I had no extra money to let sit in an account, and couldn’t afford to drive to the bank every time I needed cash. Banks used to charge you a dime for every check you wrote, it was just as cheap to get a money order at the grocery store, to pay the few bills I couldn’t pay in person, somewhere in town. And you are correct, the math is very intimidating for some people. Its much easier to look at that cash in your hand, and say, I’ve only got $10 left to spend. I worked retail for a couple of years, at a dollar store, and it was a regular occurance to have someone come to the register with a basket full of stuff and say “I’ve only got X dollars, we need to add this up as we go along”. So they would pull out the items they needed the most, and you would subtotal the sale after every item, until you reached their limit. Having access to banking services is a fine goal, but a big danger zone for many with low incomes.
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@ Andrew – The check cashing outfits aren’t taking any risk like credit lenders do. The money is there in the check and they aren’t extending credit. Instead the check cashing outfits are just skimming 15% off of the top as a service fee.
It would be like your bank charging you 15% use an ATM to access money you have in you account. You bank isn’t exposing itself to a risk, but rather would be charging an outrageous service fee.
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Sewingirl’s comment pretty much hit the nail on the head. The banks do not want competition from payday loans stores, Walmart Money Centers, etc. Banks want their cut from the low to moderate income people.
When my bank started offering me checking account advances a.k.a. payday loans, I was quite offended, but opened my eyes to how evil banks can be doling out credit like heroin.
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#12 Tyler, some risks could be cashing paychecks from an employer with bad cash flow which could be returned for insufficient funds, or another could be the checks might have been stolen and then forged. It appears that the usual fees normally charged these days for check cashing are 2 to 6 percent, although not saying that higher fees don’t occur. Even 6 percent would be high, although as I’ve commented above not as high as the interest rate charged by credit card companies.
Back in my my, err, more irresponsible youth, I used to cash checks at the liquor store next to the store where I worked. They charged a few bucks for this, with the tacit understanding that we spend some amount of the cash in the store.
Payday loans, now there’s a risky proposition.
As for credit lenders having higher risks, in some ways I respectfully beg to differ. Large financial institutions and banks borrow money from the Fed or from each other at near-zero, and lend it out at criminally higher rates.
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OK. The government has no business in opening checking accounts,period!
As far as people not having $5 to put in an account to feed their family? Come on man,people will do what they want with money till they get the whole mindset that either they don’t make enough(need a second job), or cut spending.
As far as Walmart ripping people off!
What about the State Lottery?
The fact is more low income play the lottery than any other group,and the state makes a whopping 50% off each ticket.
Personal choice and accountability should out way goverment intervention,period
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Another example of big government stepping in where they don’t need to. I know at least 5 local banks that offer free checking accounts. If you can’t (or won’t) get yourself a bank account, you deserve whatever hardship befalls you (whether it be 3 dollar check cashing or 5 dollar money orders). Maybe if the government would stop coddling us, people would learn some responsibility and actually help themselves.
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Everyone is saying checking accounts are free – SOME kinds of checking accounts are free, usually, the ones that bar you from using teller services. If you need to use a bank the way most poor use a bank – ie, deposit a check at the counter and receive cash – I don’t know of any banks that let you do this for free anymore. What they let you do for free is deposit the check in the atm and MAYBE get some of the check amount in cash. If you deposit a 2,000 check, the atm might make $200 of it “immediately available.” If you need the money right then (and why wouldn’t you, its a paycheck and you need to buy food and pay bills) you have to go to a check cashing place.
And as someone else pointed out, lots of times poor folks are cashing checks from employers and such that don’t always make their payroll. Check cashing services spread the risk of bad checks by charging all their customers the crazy service fees. Banks usually put a hold on a check before one can access the funds because they will lose money if they cash a check that later turns out to be bad. If you’re poor, you don’t have a cushion and can’t wait for the bank to clear a check.
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RE: the Walmart Comments:
WMT is far less expensive than traditional check cashing services, they sell very inexpensive money orders, and will cash their employee’s paychecks for free. They’re an unbanked broke person’s best friend.
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@snowballer #18. A bank is an unbanked persons best friend. But yes, Walmart is considerably cheaper than other check cashing/bill pay establishments.
@lawyerette #17. Have you been to many banks? I know of at least 5 local banks that give FREE FULL CHECKING to anyone. Yes I suppose they will hold your check for a day or two, like anyone else, and they don’t generate interest, but they are available.
It’s unfortunate that some people are disadvantaged, but again, it boils down to personal responsibility. If people are in this desperate of a situation, it’s probably their fault. I suppose the program will be helpful, but is this really what we want our government to be concerned about? Should they have to waste time trying to coddle us like children?
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No one else is concerned that the Federal government is getting involved in personal lives?
I understand this is important and potentially of great utility, but the Feds have a vested interest in you depositing into these bank accounts (banks own a lot of Federal debt).
I think TurboTax or H&R Block should be doing programs like this instead of their gift card purchase programs.
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re: Free checking accounts, as it says in Insufficient Funds (this was new to me too), free checking accounts are available to people with minimum balances and/or who have never had any problems bouncing checks etc. They DON’T give free full checking to anyone.
We just have never been denied a free checking account so it would never occur to us that that could happen.
The unbanked I’ve talked with like it best when they can cash the check you give them at the bank you bank at. Apparently that’s free.
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@nicole. 1st Tennesse just started charging $5 to cash our payroll checks from a small construction company many of us have pleaded with my boss to put us on diect deposit. His answer”Well to many of the employees sometimes need their check early because they run out of money!” These are the same emplotees who have no bank account. As far as setting up accounts for Tax Refunds,you should be maxing your deductions to give the Govt. The least amount of an interest free loan!
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I’m with Mike, Erik, Al, and Rob on this one. The Federal Government shouldn’t be getting into the private sector on this one. They’re supposed to regulate it, not take over the industry (aka Fannie and Freddie Mac, Student Loans, Flood Insurance, and soon, your Health Insurance.) They step in because of “abuse” of a particular industry, drive everybody else out of the market, then revert to to same old “abuses” that the old guys did (usually because they hired them). Then, you’re stuck with the same thing, except these guys don’t have to earn a profit, and techically you the taxpayer are left holding the bill.
When will people learn that the government does evil things in the name of “helping” us?
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@16 Erik + @20 Mike
Yeah, like private sector banking is doing so many favors for us.
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I just read about a company called Mango in Austin TX (in Fast Company mag) that is doing a similar thing for “unbanked” folks. Seems like a terrific idea.
http://www.fastcompany.com/magazine/147/next-money-americas-first-unbanked-bank.html
It amazes me how many people do not have bank accounts. It seems so inconvenient not to have one. I would hate to have to drive somewhere to cash my paycheck, get money orders or whatever to pay bills, etc, etc.
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Let’s face it. The government is interested in these folks for two reasons:
1. Because sending a “paper” refund check is more expensive to the government than electronic deposit.
2. Because having that extra money in the banking system allows for more bank lending to others, which helps stimulate the economy.
The government doesn’t care about helping the underbanked for the benefit of the individuals. It’s all about the bottom line.
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What better way for the government to confiscate money when the collapse happens.
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@#26 Mike, you’re forgetting something: banks can already borrow from the government for nothing right now. Banks have access to all of the money they need, and yet they still are as critical as ever about lending.
This will not bring any significant amount of cash into the system. The unbanked poor are unbanked and poor for a reason. What this will do is stop our most vulnerable citizens from being economically exploited.
I’d also argue that assisting the unbanked masses is far more expensive than issuing paper refunds.
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#22 Al: you’re right! The gov’t wants these people to continue getting “free money” from the IRS and putting into savings accounts instead of adjusting their witholding properly.
Additionally, I find direct deposit better than a real paycheck. Imagine getting off work with a paycheck at 5PM on Friday. How will you get it into a bank to pay your mortgage on Monday?
With direct deposit, my money is in the account first thing in the morning on pay day!
Maybe the illegals prefer checks that can be cashed at any bank. Another reason that direct deposit should become the only option in the future.
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#27 steve:
I think you’re forgetting that the Gov’t borrows from those banks. The T-bills are held by private banks (which are in turn bailed out by the gov’t through t-bills/debt).
At what point do we require individuals to be held responsible for their decisions? If your kids keep their money in their pockets and spend it as soon as they enter the first store, do you take the money and refuse to let them use it as they want or do you let them feel the repricusions?
I think personal finance should be taught in high school and then people left to fend for themselves!
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This sounds like a good idea. I took a class in college about providing housing and housing systems in the developing world. It was interesting to learn about some of the problems inherent in doing this. One of the issues was that many people who are the very, very poorest have the hardest time saving.
But, in one case we learned of, aid workers prompted extremely poor laborers to deposit funds into bank accounts immediately upon receiving their pay. The laborers were able to do a little saving, when it was done right as soon as their pay came in. At other times, they could not do it. And, those savings in turn helped them when they needed it, especially to get out of the cycle of borrowing and interest — I’m sure everyone here knows why an emergency fund can be so critical.
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Wow, some people are feeling mean today.
This seems like precisely the kind of program that governments are set up for: to provide services that the private sector cannot or will not. It’s basically infrastructure.
I don’t know that it would be successful, however, because my sense (which may be completely off, this isn’t my area of expertise) is, the “unbanked” are often unbanked because they are paranoid about government. The last thing they would want is a government-facilitated savings and payment account.
Nicole probably knows the most about the realities of this issue, I would love to heard a detailed response from her to the anti-help comments.
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I’m *always* cynnical when the federal government suggests something. Lol. Perhaps I’m a bit paranoid, but there’s little the government loves more than knowing every detail about its citizens — especially when it comes to their money. After all, Uncle Sam doesn’t wan to miss out on getting his share.
Thanks to the PATRIOT Act, the federal government can take a peek at the personal account information of everyone who banks at what the government defines a “financial institution.” This includes banks, investment banks, mortgage lenders, and some insurance companies. If you’re one of the few individuals who doesn’t have a bank account, Uncle Sam can’t peek at your finances.
To me, this sounds like a money-grab and a crackdown on undocumented residents, and a crackdown on the recent recessionist move to pay employees in cash.
Just because a person doesn’t have a bank account doesn’t mean that person isn’t earning or saving. With interest rates on savings accounts as abysmal as they are, and with inflation rates as high as they are, there’s little incentive to keeping your money in a traditional bank account.
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We want people to be banked because it means they’re less likely to need public services and they’re more likely to feed their kids. (And we want them to feed their kids because healthy kids grow up to produce for society rather than drain it.)
Do we care about the well-being of the adults themselves? Maybe a little, but only to the extent that they get a minimum level of services (food, shelter, safety… there’s some disagreement about medical care). If they can get that minimum level of services on their own and making it easier for them to have bank accounts facilitates that, then it’s a good use of the government to do so. It’s a pilot study, so they’ll know whether or not it pays for itself before doing any expansion.
Some small-scale pilots on getting people banked have been done, but they often use expensive techniques like matching grants or education that just don’t work as well as one would hope. Making it easier for people to bank their tax refunds rather than having the refunds get spent right away is a little nudge that might have long-term implications. It’s like a shorter term version of the savings bond refunds they implemented last year.
I am pretty darn sure that it’s public and behavioral finance economists (I believe Sendhil Mullainathan in particular has done some government work recently) who are the impetuous for all these nudges. Not some evil big brother or corporation or what have you. Just regular very smart academics that care a lot about policy. The entire movement is called libertarian paternalism– making it easy for people to make good choices, but giving them free reign to make bad ones instead.
In the book Nudge, the first example given is that of putting apples at eye level in the school cafeteria and chips on a lower shelf. The chips are still there and still easy to get, it’s just a nudge to get the apple instead. These are the exact opposite of big brother activities.
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@34 Nicole, who said “I think there are some fundamental misunderstandings about what the role of government is and why government does some of the things it does.”
I wouldn’t call them misunderstandings. They are disagreements. The role of government cannot be statically defined, because it is an opinion. My view is that the role of government is to provide for infrastructure and a national defense, and that is all. Others would disagree.
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I can see it now. These people will open a bank account with their welfare (earned income credit) and within no time at all they will be having overdrafts and the fees that come with it. Sounds like a government (run amok) program to put more money in the hands of banks.
I grew up with a father that was illiterate. He was a janitor and very good with money. When he got paid, he took his check to the grocery store and cashed it, purchased money orders for all his bills and I would address the envelopes for the bills. He also had a savings account at a bank where he would save on a regular basis even though money was tight. I learned more about money management from him than from anywhere else.
Government run programs are not the answer.
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@35 I think there’s a fundamental misunderstanding with what you’re saying too.
What you’re saying, but don’t realize you’re saying is that you believe that the only role for government is public goods provision. You probably also think the government should provide jails and police, which is another example of a public good.
Other roles for government are:
-fixing adverse selection problems (mandated workers compensation is an example of this– companies and workers are happier that everyone has it, and workers in risky occupations are willing to pay for it in terms of lower wages)
-fixing moral hazard problems (bank regulation might be an example of this)
-discouraging negative externalities and encouraging positive externalities (setting property rights is an example of this, so are libraries)
-preventing monopoly (this is why utilities in small towns are government provided, but in cities are often private)
These all come under the heading: Market failure. The role of government is to prevent market failure, or to step in when markets fail. When the government fixes a market failure, everybody is better off. The degree to which any tradeoffs are made with the above five points is a point of disagreement, but those are legitimate roles for government. When the free market breaks down, there is a role for government to step in.
Some people also believe that there’s a role for paternalism (that basic minimum needs is an example of that, though you could argue that corpses rotting in the streets is a negative externality) or redistribution. But that may or may not be a role for government based on morals and ethics.
If you want to know more about the role for government, I strongly recommend Public Finance and Public Policy by Jon Gruber.
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Thank you, Nicole – it is a pleasure to see an educated mind at work!
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No one has mentioned the huge underground economy as a reason for people to be “unbanked” (what a word).
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This (Treasury) idea has been around for awhile. I’ve been an IRS volunteer income tax preparer through a local NFP for 5 years. We handle returns for folks who qualify for EITC. In my first couple of years, our site partnered with a local bank to open accounts for clients while we worked on their returns. Based on feedback from my clients, they tended to shun bank accounts because they (generally) don’t trust the bank to leave their money intact. A couple years ago, our site began offering refunds on debit cards. I am happy to report that this program seems to be more widely accepted by the tax center clients. Let’s hope that it grows in popularity.
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@ Norman 36 who said “Government run programs are not the answer.”
Guess what– tax refunds ARE a government program. It’s the way the government gives you back the taxes you overpaid. If you don’t want the money back you can say so in your tax return.
The article boils down to this: fast refunds with a debit card are better than a printed check for taxpayers with a bank account.
By opposing this program, you are actually saying that unbanked taxpayers should receive LESS of their own hard-earned money. Doesn’t that contradict your own anti-government rhetoric?
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I understand the problems of the UnBanked.
I have a BIG Question: What the heck is UNDER-Banked???
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@37 Nicole,
Just what is it that the Government should not fix Nicole? Lets see the phase ” too Big To Fail” comes to mind!
We let them fix GM and Chrysler, or should I say bail out their pension funds.
Although i see you have a compassionate heart for others, this is a free market society,ya know Capitalism!
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As a back office banker, I see a lot of fraud regarding all Treasury checks. A debit card will be introduced, date unknown to me, for all those receiving tax refunds, Social Security, SSI, VA benefits, etc., with no bank accounts will receive debit cards to replace the physical checks. Those that have bank accounts, will receive direct deposits.
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@mike said: “I wouldn’t call them misunderstandings. They are disagreements. The role of government cannot be statically defined, because it is an opinion.”
Quite to the contrary, the role of our government is statically defined by constitutions. The federal and state governments have constitutions which define which powers we grant to them, and the limits of those powers.
@nicole said: “-fixing moral hazard problems (bank regulation might be an example of this)”
Banking regulation is the opposite of moral hazard. The FDIC is the very definition of moral hazard, because it insures banks against their own failures.
They pay into the fund, and if they run their bank into the ground, they get paid out. All other regulation is to stifle competition and allow the core central banks to dominate the industry, and to motivate their partners in government to bail them out to prevent “market failure.”
This gives them the moral hazard to do run their companies as rough-shod as they wish without fear of competition or market forces forcing them out of business.
@nicole also said: “These all come under the heading: Market failure. The role of government is to prevent market failure, or to step in when markets fail. When the government fixes a market failure, everybody is better off.”
I’ll have to disagree with you there. The only people who are better off are the recipients of the bailouts. Everyone else pays to keep the failures in business.
In addition, you are succumbing to the fallacy of what is seen vs what is not seen.
You do not see the superior or more efficient markets or companies that could arise and replace the failures, because the replacements are kept out of the market and the failures are kept in the market by lobbyist-led government forces.
And even more importantly, nowhere in the Constitution did we delegate to the federal government the authority to “prevent market failure.”
If you’d really like to learn more about the proper role of government, a much better book than Gruber’s is The Law, by Frederic Bastiat. It is quite short, and you can read it online for free!
http://www.constitution.org/law/bastiat.htm
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Social Security already offers a debit card for those who prefer it to physical checks or direct deposit.
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“If you can’t (or won’t) get yourself a bank account, you deserve whatever hardship befalls you (whether it be 3 dollar check cashing or 5 dollar money orders).”
Wow. Have some compassion.
I have a relative who got knocked up by her boyfriend and is a now a single mom, struggling to make ends meet. A friend challenged her on some choices she had made, which have resulted in these struggles, and my relative’s response was “ok, but what am I supposed to do NOW?” She can’t take it back. She’s paying for it, working hard to make her own way in the world.
Not everyone can be perfect.
Nicole- in agreement with you completely. Rock on!
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Note that “The Economist” magazine wrote an article about Mango Bank in the March 12, 2011 issue on page 88. … an interesting idea. They also mentioned something about 5% interest on savings accounts!
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