Jimmy Stewart Cared, But Why Should You?

I have a confession: I've made it this far in my life without ever seeing It's a Wonderful Life.  I consider this an accomplishment for someone who studied economics.  You cannot imagine how many lecturers reference a single scene of an old film.  All I know is that Jimmy Stewart has the teller window slammed on him at the bank.  He apparently didn't like that.

Most people reading this wouldn't particularly care if their bank failed.  Your deposits fall below FDIC insurance limits, so you won't lose anything.  I know several people who have experienced failure in their primary banking relationships, and they barely noticed.  Most bank failures since FDIC, luckily, have not hurt any depositors.

Bank failures more likely strike blows at companies. Imagine some very large deposits. Microsoft's cash to make payroll on January 31st, for example.  At some point, it must sit in a reasonably small number of places.  Not in $250,000 slices.  Microsoft has no interest in taking risk with their payroll, for even an instant, when someone else, (shareholders of a bank) reap the rewards.  Or, maybe they do break it magically into $250,000 slices.  That has a cost.  Microsoft shouldn't have to bear that cost, or the risk.

Bank of Dad sets interest rate policy tomorrow

As an "economist" by training, (in quotes because I've never been a practicing economist,) I find dealing with my kids and money uniquely difficult: I want to encourage them to understand the semi-reality that is modern finance, and I want to properly educate them (read "train") about personal finance and their own behavior.

My son justed turned seven. He received a check from my father-in-law. He knows the check isn't money. He knows it can be exchanged for money at the bank, only if his grandfather actually has the money. His almost 10 year old sister reminds him, however,that the money isn't worth anything unless someone else is willing to give him something for the "worthless piece of paper", her own words that make me very proud!

My kids also have a very complicated spreadsheet we manipulate together that computes their allowances (fixed base-line plus age based component,) allocates the allowance between spendable cash paid in specie, charitable contributions they then select, and their savings at the Bank of Dad. Why the Bank of Dad? I don't see how, even under reasonable interest rate environments, parents can encourage children to save. Their discount rates are too high. (That's my view. Others could simply say they don't understand discounting. I disagree with that, as we shall see.) In the current environment, its hard to see why anyone saves...but then again, that is the point!

Last year the Bank of Dad paid 25% annually compounded weekly. Quite fairly, the kids argued that I cannot change interest rates more than once a year. They did not want me to arbitrarily move rates to manipulate short term behavior. Ironic that a six and nine year old figure that out!

We also agreed that the BofD is only required to pay the guaranteed rate on balances below $100.

For this year, I think I'll keep rates on deposits constant. However, I may issue some risky securities. My other thought is to allow them to have non-dollar deposits. There's a reasonable chance we'll go to Israel next year, and on vacation we typically give fixed per diem allowances to avoid the "can I have" syndrome. Seems completely logical to offer them the ability to manage their future currency risk.

Teaching them about the use of credit works equally well. They rarely carry cash. They know unplanned, spontaneous purchases have a higher cost. How? I charge them small fees. Running into Rite Aid to pick up medicine, and someone wants that $0.99 candy? Well, it's going to cost $1.20 or $1.25 after sales tax and the fee to borrow money from Dad for a few hours. No, that is NOT usury. That is a transaction fee combined with an interest free loan...just ask BofA!

Bottom line: I certainly fit many of the stereotypes of this article!