Rebuilding Family Balance Sheets, Rebuilding the Economy: Audience Q&A

May 22, 2013

Julie Stackhouse moderates the audience question-and-answer session after the presentation with Ray Boshara and William Emmons.


Julie Stackhouse: Yes, sir?

Male: I'm just wondering, the research that you did with the reports of the 70-year-old college-educated versus the middle-aged high school graduate. I mean, that's a pretty large disparity. Did you also look at like groups in the same age group?

William Emmons: I'm sorry?

Male: For example, the middle-aged, college-educated versus the middle-aged, high school educated across this.

William Emmons: Yes, absolutely. So we have the 18 different groups. And, yes, we've looked at that. We've got a few things available out on the table. Maybe, Ray, you want to show the annual report that has a lot more details on the—across those different dimensions. And there are a few things referenced in there you can find on our website. We also just today put out a two-page front and back that has—I think we've got nine of the 18 groups shown, looking at a couple of different points in time to give a lot more detail like that. So, yeah, I mean, we have tried to present that data in several different ways.

Female: So all the data you presented was averages. And I'm wondering—I feel like that huge discrepancy that you showed between the different groups—

William Emmons: Right.

Female: How much of that would disappear or maybe become more similar if you subtracted out the top 10 percent?

William Emmons: Right, medians. We've also done that, looking at the medians, which is the 50th percentile. And we've looked at the 10th and the 20th and the 30th and the 80th and the 90th. The basic point is, of course, that there is a compression if you look at different points of the distribution. But the relative levels are pretty similar, whether you're looking at medians or means. And I think in one of the tables I reported the medians versus the means, and you could see that, because there's a skew, the higher-wealth families bring up the average. But you're right that the numbers—there is much less of a difference at the medians, but the rank ordering is pretty robust.

Julie Stackhouse: Yes, in the back?

Female: I was a little confused, because it seemed to me that, Bill, you were telling us a big reason for a slowing down, that we didn't recover or not recovering faster, is the lack of spending. And then I heard, "Y'all should be saving more." (Laughter) If we're going to get out of this mess, I'm not quite sure what I'm supposed to do.

William Emmons: Right. That's—thank you, Lois. (Laughter) That's what economists call the paradox of thrift, that what seems to be good for households, what we talked about why household financial stability, why balance sheets matter for families, may appear to conflict with what's good for the overall group. In fact I've looked at this, and didn't bring it tonight, but there is no conflict between families saving more and the economy moving ahead. The reason for that is because household saving is only a piece of total saving.

What really matters for the overall economy is national saving. And so what historically has happened is that the other components of national saving—and the government, of course, is a big part of that—deficits are negative saving; surpluses are positive saving. Businesses also are very significant in contributing to the total savings. And what has happened historically is that when households save a little bit more, other sectors compensate in the other direction.

So there is no reason that we should as a policy discourage household saving when we know—and that's really a fundamental sort of an underlying theme to the work we're doing, is that, as Ray pointed out in several different ways, saving and resilient balance sheet financial stability of the household is so important for individuals and for preventing this kind of collapse across the economy.

And yet as a nation we can save through these other sectors, which is why many economists for years and years and years have suggested that the government is a very important part. So, going back to fiscal policy, we talked about the last time around that that is a way to kind of balance it. In fact, that is what's happened during this recovery, is that the government has dis-saved, creating more space for household saving.

Julie Stackhouse: Okay. Sir?

Male: Quick question. Actually, two on the—it seems like the—a lot of the issues are brought on by college debt. Did you notice a stratification between not-for-profit and for-profit colleges? And the second question, have you looked at the possibility, or maybe what it would look like to have colleges that are, you know, primarily financing—having their debt financed someplace else through their students, having some—having them have some skin in the game? Right now other lenders are being forced to hold more and more capital against loans, different kinds of loans, different levels of capital. Is there any sense that universities, colleges should be doing the same thing?

William Emmons: I'm going to have Julie answer the second question, the skin in the game question. On the first, I can see Bryan back there. He's trying to think now, is that in our dataset? The private versus government loans.

Male: Ah, no, it's not, they don't differentiate. And I don't think college sources of student debt can simply...

William Emmons: There are other datasets. And in fact, Alex is looking at that. An economist here on our staff has access to a dataset that splits out that. But I think what you're referring to is that—not the work that we've done, but there is work that suggests that the for-profit college-related debt seems to be associated with less good outcomes.

Julie Stackhouse: That's actually interesting on the skin in the game, and I admit I haven't really thought about it. But I do have a daughter in college, so I have thought about the cost of college. I actually have a son in college too, so I get to double-think about the cost of college. And in a way, we're in a great situation, because very, very early on, we saved for college. We didn't understand though that college is now college plus graduate school. That seems to be the new norm. So for everyone that's got a new family, you need to really be thinking something more like eight years and not four years.

So, you know, I think though, one of the things that I find interesting on the part of students in having gone through this is the remarkable marketing that colleges and universities are doing, getting that name brand out to the students without necessarily offering the idea that perhaps there is value derived from the quality of the education you get versus the price, and that particularly for an undergraduate degree, that doesn't have to be the highest-priced institution.

There are actually—I believe the Consumer Financial Protection Bureau has produced a calculator that helps students understand what they would have to earn to afford the college debt they're taking on, and to some extent pushing it back on the student to say, "Is this a reasonable investment relative to what you are actually incurring?" That helps the student make the decision. But at the end of the day, your point is, shouldn't the colleges bear a part of this?

You know, in a sense, I suppose some of them would argue they are with their grants and scholarships and those sorts of things, so I'd have to think about that further in terms of anything more than that. The other thing we should realize too is, remember the vast majority of student loans debt is held by the U.S. government, which is very, very interesting when you think about it. If there is the inability to repay, it becomes a government issue, not so much a private sector issue. So very different from the mortgage debt experience that we had not too long ago.

Ray Boshara: Just a couple of comments. I mean, the skin in the game, there is a study showing that kids who work through college, but only up to a certain point, tend to do better because they value it more. If it goes beyond 10 to 15 hours, it starts to have a negative effect. But in the 10 to 15-hour per week sweet spot, those kids actually do better in college than kids who don't work. Just—and on the subject of student loans, since we're talking about it, you know, it's about $1 trillion right now. It's the second largest debt on household balance sheets after mortgage debt.

What may be surprising is that most of the growth is not because average balances are getting bigger. It's because there's a huge increase in the number of borrowers, the number of people who actually have student loans, which is one thing that happens in a down economy. 3/4 of those outstanding loans are anywhere between $1,000 and $25,000. It's the 1/4 of borrowers who have more than $25,000 in outstanding student loans that are the real concern. And most of those are the private colleges, for-profit colleges.

Julie Stackhouse: We have a question towards—yes, sir, right there.

Male: Yes. I'm wondering about the cost per each individual under Pell Grant and the cost total. And what is the likelihood that that such a policy would be instituted nationwide in the next few years?

Ray Boshara: I spent the better part of 10 years in my previous life trying to get such a policy off the ground. And I can—we had two accomplishments, even though we didn't pass the policy. First of all, if you put 500—there's 4 million babies born in the U.S. every year. $500 per account per child is about $2 billion per year. So it's not cheap. But we did manage to bring together conservative Democrats—I'm sorry, conservative Republicans and liberal Democrats around this idea.

Senators Santorum, DeMint, two very conservative Republicans, stood side by side with Senator Jon Corzine and Senator Chuck Schumer. This was the only multibillion-dollar savings proposal that brought Democrats and Republicans together when we worked on this idea. So that was the first accomplishment, that we got these guys together when the Democrats and Republicans weren't talking.

Secondly, we did inspire the U.K. to do this exact thing. And up until very recently for nine years, each of the 700,000 babies born in the U.K. every year received £250 at birth, with of course 1/3 of those kids having another £250 deposited into their account. For fiscal reasons, they had to discontinue the policy. But it did happen.

What's happening now in the U.S. is that, you know, every kid in the state of Maine gets a college savings account. Every child who enters kindergarten in the City of San Francisco gets a college savings account. And here in St. Louis every kid who starts school in the Normandy School District, thanks to the good work of Beyond Housing, now gets a college savings account. So these someday could add up to a national policy.

Julie Stackhouse: Yes, in back? Can you use your microphone, please?

Male: I'm sorry?

Julie Stackhouse: Can you use your microphone? Thank you. Or someone's microphone.

Male: Do you believe that prize-linked saving accounts are effective towards household savings? And if they are effective, would we see these accounts more in the future?

Ray Boshara: Great question. That's a softball, by the way. I don't know—I didn't plant that. Prize-linked savings is something that's happening in the U.K. and South Africa and other nations. It's their version of a lottery. Basically, what happens is you enter a lottery by making a savings deposit. What you give up is the interest earned on that deposit. If you win, you win. You know, you win several hundred thousand dollars, maybe $1 million, maybe more than that.

The bank gets all the deposits. You know, they give up having to pay interest on those deposits, but it really does result in a pretty significant increase in savings for the family and for the credit—and it's mostly credit unions that are doing this. It's being demonstrated in four states right now. I think the challenge to scale these things are the actual real estate lotteries, who don't want any competition and who are run by the government.

You know, we talk about wealth-building versus wealth-depleting institutions. I mean, lotteries, let's face it, are wealth-depleting institutions, state-sponsored wealth-depleting institutions. And I think, you know, the brilliance of these prize-linked savings is that they've managed to take that institution—you know, the ease, the fun, the excitement—and turn it into something that actually generates savings. So we're hopeful that we can do more, but that's the barrier.

Julie Stackhouse: I take it you didn't buy a Powerball ticket last week.

Ray Boshara: No, I didn't. I mean, believe me, I'm tempted, you know. And sometimes my family will send me to the local store to buy one, because it's a lot of fun. But overall it's hard to—it's hard to say that's a good policy for building a balance sheet. (Laughter)

Julie Stackhouse: All right. I think there was another one toward the—yes, sir?

Male: Early on in your talk you spoke about the fact that, you know, the economy is growing slowly. There is improvement, but it's not very great. Isn't that kind of the way it should move along, rather than have some sort of boom and bust kind of cycle? You know, John Galbraith, I think he wrote a rather concise book about booms and busts through history. And it seems like it is those busts that destroy wealth. How do—on a sort of a macro level, isn't there a way, a better way, that everybody could progress more steadily if we didn't have that kind of boom and bust where people are sucked into putting money into assets that ultimately deflate?

William Emmons: I agree with you. I think steady, stable growth would be better. And, as you probably know, the Federal Reserve now has—explicitly by law we are tasked with financial stability, overall financial stability, which I think can be interpreted as, you know, trying to reduce the boom and bust cycle.

And what we have done very consciously is echo that mandate in our choice of a name for our center, a Center for Household Financial Stability, because we think that—as you have said it very well—that these large boom and bust cycles that we see on the news and in the newspaper, that's the result of individual families participating in these booms and busts. And we have found that it's terribly damaging to many, many families.

And the point I tried to make too is that it affects everyone, this time more so than we'd ever experienced before. But that is very much one of our messages, is that all of the things that we were talking about—you know, building the emergency saving, having the diversified assets, keeping debt low—will have the effect of mitigating those boom and bust cycles. It's, you know, aspirational at this point. But that's absolutely the vision, I think, that we have in mind, is individual families' financial situations wouldn't be as volatile, and for the economy as a whole it would be more stable.

Julie Stackhouse: You know, on several sessions, I guess maybe now over a year and a half ago, we talked a little bit about factors leading to the financial crisis and specifically the mortgage market, and in the case of mortgages that were not traditional conventional prime mortgages, how those mortgages were so leveraged for the individuals taking them on with virtually no equity. So these sub-prime or non-prime mortgages, as they're often referred to, typically there was no equity put in by the individual.

And today we look at that, and we say, "Well, that explains that. It's very easy to understand why that happened." I will say that at the time that it was occurring, it was also very unpopular to be a dissident and say, "This is very high-risk. This is something that shouldn't be done." And often what we heard is, "Homeownership is the American Dream. It is the way to build wealth." And it had been for decades, at least at some systematic pace.

The problem is it got out of control. And it got out of control with a lot of high leverage behind it. And then, of course, when asset values collapsed, whether it was during an energy crisis in the 1980s or an ag crisis in the late 1980s, values fall. We have debt that exceeds values, and then we have a crisis. We just had a really big crisis in the mortgage market.

So part of what I think is intriguing is, in a way, we've come full-circle to now say, we still think homeownership is right if you have the ability to put some money, some skin in the game, back to your point, if you have the income that is going to be stable enough to afford, because we know a house isn't just the mortgage payment. We know it's the reinvestment you make when you have to replace the roof and the water heater and all those sorts of things.

So do it if you can afford it. But if it's something that you can't afford, then consider this alternative way. And, certainly, even if you have a house, continue to diversify that balance sheet. What's intriguing and what these guys are looking at is, "Okay, well, that's great. It's great to say. How do you do it?" And, again, what we're coming back to is, it's going to take some structure. Now exactly how you get that structure, it might be through your employer here at the Federal Reserve.

When you start work here, you are opted into our savings plan. And you can opt out. But you're in unless you opt out. And that's a great way for our employees to begin to save. But it's got to be more than corporate mechanisms. And I think the intriguing piece is, how do we find these mechanisms that are affordable from the standpoint of fiscal issues, but also provide enough structure that housing isn't the core of savings?

Ray Boshara: And, Julie, can I just point out, when I was giving you those examples of auto-escalation and opt-out and, you know, what happened at tax time when people could anchor different savings amounts, we were not talking about any additional dollars, not one zero. I mean, not one dollar. No public subsidy, no matching money, nothing.

These were simply tweaking, you know, systems, behavioral systems, institutions, that resulted in billions and billions of dollars of new savings. So it's not purely or even necessarily a function of having more money to help people save. It's primarily making these small changes that result in big savings.

Julie Stackhouse: Yes, sir?

Male: As it appears that a lot of these problems can be solved by more growth, what public policy changes, if any, could this or future administrations promote to make the growth come back to 2 or 3 percent trend instead of 1 or 1 1/2 percent?

William Emmons: Well, that's dangerously close to fiscal policy kinds of questions that we're not—I mean, that's not what the Fed does. But, speaking for myself—did we give our disclaimers yet?

Julie Stackhouse: Yeah, go—he's speaking for himself.

William Emmons: We are speaking for ourselves. I'd link back to the previous question. I mean, boom and bust was not the way to create sustainable growth. You know, what I think we're focusing on is strong families, strong underpinnings, and that involves the things that we talked about. I don't think there is a real short-term solution, because, as Julie said, we are—and the picture showed—we are digging out of this historic set of balance sheet failures.

And I don't think there is any quick fix. It's simply the price we're paying for building up those—the excessive exposure to homeownership, the excessive debt. And once we get further down—you know, further through this process, we would hope that the economy would be more balanced in the sense of not relying on consumer borrowing for housing, for consumer spending to power our growth.

Julie Stackhouse: Yeah. In other sessions we've talked a little bit about sort of the fiscal policy versus the Fed's part, which is monetary policy. And most in here are probably aware that the Fed's been very aggressive in monetary policy over the past few years, really working beyond what today we call a near-zero short-term interest rate environment to pushing even more funds into the economy to stimulate it, to hopefully get the economy moving more quickly, and of course has undertaken some criticism for that very aggressive policy.

Yet the economy, because of many things that have occurred, continues to just sort of churn along at a pace that is well below the historical growth rate. On the other side of it, these guys I think probably inkled a little bit what they think about fiscal policy without taking a position—we're, again, very neutral on that—and pointed out that, in the case of some fiscal incentives they are biased towards individuals in higher income level.

I love my home mortgage tax deduction. I really do. But if I had to be honest about it, am I the one that needs that tax deduction, as compared to, perhaps what might be a program that would incent savings on the part of someone in a lower income level? Well, maybe if I were pretty—really neutral and not self-serving, I would say maybe that would be better, all things considered. But we do love the benefits that we have, and that's a challenge, both given the fact that the policies are slanted that way and the fact that any material new spending is going to be very hard to justify, given the current fiscal situation. Anything you want to add?

Ray Boshara: No, but I do think in a tight fiscal environment we have to look at these very low-cost policies that can generate new savings—opt-out, easy and automatic, social norms, and anchoring. And I think it's fair to look at the efficiency of how we spend our money. Conservatives don't like money wasted. Democrats often like new spending on programs that they think are going to generate mobility.

You know, you can argue that a lot of the tax incentives are not necessarily well-spent. It's not good money. It's not spent very well. So from a purely efficiency standpoint, I think it's fair to put those kinds of incentives on the table and say, "Can we do better?"

Julie Stackhouse: Sir?

Male: You had one slide up there that showed the debt per person and obviously that coming down and then it all spiking in that GDP per person. I wonder if you have an opinion as to how long that deleveraging is going to continue. Do those lines begin to marry again? Or do they actually—is it going to deleverage on below the line?

William Emmons: Well, I think your question is right in that it's going to take a long time. And that picture was drawn to be suggestive that we are still not that close to getting those lines back together. Maybe they won't come back all the way together. But my own view is that it's likely to be a number of years. And so that—you know, going back to the earlier question, I mean, it's just the situation we're in that we have dug ourselves a very significant hole. And the deleveraging is likely in my view to take at least another five years before we really see, you know, the relief from that pressure.

Julie Stackhouse: Have you recently looked at the number of mortgages that are materially past due or in foreclosure?

William Emmons: Yeah. Those numbers are coming out all the time. And, you know, the negative equity numbers, for example—homeowners whose houses are estimated to be worth less than their debt—those numbers have come down, but it's still on the order of 20 percent of all families with mortgage debt. So, you know, it's 10 million families that are still underwater. And a normal level would be, you know, a million or two, maybe. So it's a matter of years, probably.

Julie Stackhouse: Some of the deleveraging too is—again, I think we may have shown this in a past presentation. I don't remember for sure. We looked at some of the implications of state laws on mortgage foreclosures. And some states have very generous consumer laws, which if that's your mortgage sounds very good.

From the standpoint of creating resolution in the housing market, it can really hamper it. If a foreclosure is going to take place, if that's inevitable, then extending the foreclosure has implications, both for ultimately the deleveraging, but also valuations of surrounding homes in that area. And we've had a very, very slow process in some states that is not complete.

Male: I'm curious about inflation rates and your underlying assumptions in your graphs about, you know, what kind of inflation rates were used there. And also, anecdotally, you know, if you're using a very low inflation number and trying to project what's happening in the household level, households are seeing gas prices hit four bucks a gallon, grocery prices doubling, and that kind of stuff. How do you incorporate inflation rates into your models? Or do you just use what's published?

William Emmons: We use what's published. All of those numbers were using the CPI, a special version of that, which we think is as good as any measure out there. Certainly, every family's experience is a little different. Your basket of what you buy is different. So if that's kind of what you're getting at, you know, that is an issue for different age groups that buy very different sets of goods and services. And this is a single inflation measure that we use, the CPI.

Julie Stackhouse: Yes, sir?

Male: So we've talked a lot about housing, and it appears discipline is coming back, and for all the things you've mentioned, Julie. What's the next bubble? I mean, there's been a lot of talk about student loans. I mean, is that—is there—is that a fair question? What's kind of the next thing that gets attention, if that's the right, you know...

William Emmons: Well, you'd mentioned student loans. And that is something that the Fed and many other people are very—looking at very closely. It's unlikely in our view that student loans will have any kind—anything near the negative impact that the mortgage boom did, in part because the mortgage—or rather, the student loans, are mostly held by the government, federal government. So, as I tried to suggest that kind of the spread of the problems from individuals defaulting, the losses hitting financial institutions—Fannie Mae and Freddie Mac and banks—we won't see that with student loans.

There are other aspects, you know, some of the other questions about, you know, the extent or Ray's point about excessive amounts of student debt. Well, that will hurt individual families. But it doesn't at this point seem that the student loans will be on the same scale, any problems as they were in the housing.

And I think that's, you know, one of the things that kept—that got people—or caught us off guard, was that we have had big booms and busts, whether it was the agriculture Julie mentioned or gold prices, or the stock market, even, in the late 1990s. And each of those bubbles burst, and it didn't seem to bring down the whole economy. This time it did. And it has to be because of housing and just how widespread housing was and how incredibly large mortgage debt had become.

And that's my point, that this was—this is the biggest—hopefully, this is the biggest bubble any of us will ever experience in our lives. But it's going to take a long time because it was so pervasive and the dollar amounts were so large. And I think the practices that, by the end of the boom—you know, we look back now and we can't even believe it, that you could get a mortgage multiples of your income and you didn't even have to show the lender what you own. You didn't have to prove anything. Just give me the money. And, you know, we're now looking back and say, "How was that possible?"

Julie Stackhouse: Yes. Oh, my gosh, we have more questions. Let's take one over here. I know we have a couple more there. Maybe we can get you at the very end after we conclude.

William Emmons: Yeah, and we should probably close.

Male: You've listed a lot of reasons for some of the problems we've had. Some people would argue though that the Fed is a problem and the Fed policies are a problem. How would you answer that?

William Emmons: I would say wait until Jim Bullard is here. (Laughter) And he will—and he'll answer that question.

Julie Stackhouse: Yeah. And I would only offer this. I mean, that's the point of great debate. On the one hand, we talked about, how do we get this economy moving again? So that's the side that's very pro-Fed. Pro-Fed. Good. Do it. Do it more. Keep going. You know, we have to get this moving. There is the other side that is the criticism, which is, "You have done too much. You've kept rates too low."

I certainly—with banking organizations I hear this all the time. "We can't make money in this environment." For those that are on fixed incomes, I hear it all the time. "I can't make money. I don't have enough income on my savings to be able to have the cash flow I need. You've gone too far. Get these rates back up." So it's an ongoing point of debate, and it sounds like we need to have an economic update in a future session to address some of those questions.

Ray Boshara: But I would also say I think this whole center, the point of that is for the Fed to make another kind of contribution to reigniting economic growth. The Fed has never really had an explicit conceptual focus on the household and the balance sheets and why they matter for families and for growing the economy. So there's different ways and new ways for the Fed to think about how to grow the economy. This is one of them.

Julie Stackhouse: Okay. So I know we had a couple of last questions. If you'd like to come down after we close out, we'll make sure you get those questions answered. We'd like to thank you all for coming tonight. Hopefully, you picked up some new thoughts about challenges that may not—obviously may not be visible to some of us or as visible as it may be to those in those circumstances. But hopefully, you've gotten a picture of that, and importantly, some of the things we need to start thinking about to begin to reduce the challenges for those that are in those situations. So, again, thank you all for coming tonight.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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