Starter savings accounts February 18, 2012 at 5:26 pm

From Steve Randy Waldman at Interfluidity, a typically intriguing and thoughtful post:

The Federal government should offer inflation-protected savings accounts to individual citizens, but with a strict size limit of, say, $200,000. These accounts would work like bank savings accounts, and might even be administered by banks. But deposits would be advanced directly to the government (reducing borrowing by the Treasury), and the government would be responsible for repayment. The accounts would promise a tax-free real interest rate of 0% on balances up to the limit. Each month, accounts would be credited with interest based on the most recent increase in the Consumer Price Index (adjusted for any revisions to estimates for previous months).

For me, there are two things really right with this idea. First, it creates a new class of safe asset for folks would cannot easily buy inflation-linked bonds. Second, it funds the government in a way that (like the issuance of linkers) creates an incentive not to let inflation run rampant. [This means, as SRW points out, that you would want to keep the total notional constrained – he suggests 25% of GDP.]

There is one thing that worries me slightly though, and that is the drain that this would cause on bank deposits. Right now deposit insurance means that the banking system receives retail funding without retail investors taking risk. This is good: it funds credit to the rest of the economy, while not exposing ordinary depositors to a risk they would find hard to assess. But starter savings accounts would compete directly with bank deposits: their presence would undoubtedly cause substantial falls in insured deposits at a time when we are trying to encourage banks to fund themselves via deposits (rather than via CP, or repo, or other risky sources). If the net effect of starter savings accounts is for the government to raise expensive money which it then has to lend to the banking system cheaply (because the discount window rate is less than inflation), then they might be a bit of an own goal…

Still, this is a good idea and it definitely deserves further study.

One Response to “Starter savings accounts”

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