Beyond the Headlines: The Dark Side of Fed Policy and Cloudy Days for Investors
Personal finance news and research you may have missed
If you’ve been following personal finance news lately, you might be feeling a bit of whiplash—even if you’re not a GameStop investor.
Millions who received unemployment checks are discovering at tax time that the relief comes with a surprise downside, but Democratic lawmakers have hatched a plan to try to spare them from the ambush. Government economists increased their forecasts for economic growth because of optimism about COVID-19 vaccines, but still predicted it could take another three years for the job market to return to pre-pandemic levels.
We also learned that the country’s personal savings rate rose for the first time in eight months in December, and that the average U.S. wage rose even in the tough pandemic economy. But turns out the average wage rose because so many low-paid workers lost their jobs, and the changing tide on savings just shows how much people are hunkered down.
Then there was the news that thanks to soaring home prices, 30% of mortgaged homes around the country are now equity-rich (worth at least twice as much as the mortgage balances), but also the sober reality that many who are behind on payments are at risk as government relief programs near expiration. And let’s not forget the Biden administration may be on a path to replace the big three credit bureaus with a federal agency, a seismic shift to eliminate the discriminatory effects of credit scores on African-Americans and Latinos.
But here’s what you may not be aware of. Did you know that investors’ moods literally change along with the weather, or that lowering interest rates actually exacerbates racial inequalities? To reach beyond the biggest headlines, we scoured the latest research, surveys, studies, and commentary to bring you the most interesting and relevant personal finance news you may have missed.
What We Found
Stock Bubble Pops Mean Innovation Ahead
A lot of people lost a lot of money recently in the manic Reddit-Robinhood-GameStop trading fiasco, but on the plus side, such stock bubbles have historically channelled much-needed funding into innovation, according to a newly published working paper by a University of Alberta economist.
Take radio stocks. In the 1920s, unsophisticated investors poured money into those shares only to watch them collapse in the crash of 1929. But the funds didn't go to waste. In fact, the economy was blessed with home radios, radio manufacturing plants, radio stations, radio program writers and actors, radio advertising, radio air traffic control, ship-to-ship radio, radar, radio dispatched police and emergency services, and on and on.
The same things happened in 2000, amid the bursting of the Dotcom bubble, which led to a much more robust internet.
Take comfort in that the next time the market doesn't go your way.
Cloudy Days Dampen Investor Mood
Investor contributions through crowdfunding (where startup companies raise money from small individual investors) dip about 10% to 15% on fully cloudy days, according to an article by researchers from California State University East Bay and Copenhagen Business School published in the Journal of Corporate Finance.
The researchers used data from Companisto—one of the largest European equity crowdfunding platforms—to study investor behavior. The results were based in part on 2013 psychological research that found bad weather increases risk aversion.
There is a caveat, however. The more experienced you are, the less likely you are to be affected by cloud cover. Full cloud cover had a 35% smaller impact on an investor with average levels of crowdfunding investment experience as it did on someone with no prior experience.
Car Insurance Costs Drop, But Not by as Much as You’d Think
It’s probably no surprise that car insurance rates dropped last year for the first time since 2013. After all, the pandemic has put quite a damper on commuting and going out. But did you know that the annual cost of car insurance fell, on average, just 3.9% to $1,483 in 2020?
According to a report by The Zebra, an insurance comparison website, premiums have been ballooning ever since companies began punishing smartphone-distracted drives with higher premiums. The average 2020 cost was still up 24%, or $288, compared to just seven years earlier.
The dip in prices came as U.S. vehicle travel dropped 14% in 2020 (through November) compared to the year before, the Federal Highway Administration reported. This decrease put a major dent in the rate of car accidents, saving insurance companies billions, and consumer advocates say customers have seen precious little of the windfall.
Argument Against Minimum Wage Hike Doesn’t Hold Water, Study Says
Bernie Sanders, Joe Biden and a host of Democrats have been hell bent on passing a law raising the federal minimum wage to $15.
But could that actually hurt the economy? Some economists and lawmakers have argued that more than doubling the federal minimum wage from $7.25 an hour (some states already have higher minimum wages) would devastate the job market, with employers preferring to let workers go rather than give them a raise.
Researchers including economists from the University of Massachusetts and University College London examined this very issue using machine learning. An analysis of 172 state-level wage increases between 1979 and 2019 showed that a hike in the wage not only increased paychecks, but also ever so slightly reduced unemployment, according to a non-peer-reviewed report published by the National Bureau of Economic Research this month.
Lowering Interest Rates Can Do More Harm Than Good
The Federal Reserve has been waving away concerns that pouring money into the economy might cause too much inflation, but that’s not the only risk stemming from the Fed’s policy of lowering interest rates to stimulate growth. New research published by one of the Federal Reserve Banks itself shows all those cheap loans might actually be worsening racial wealth inequality, despite some central bankers and politicians claiming it does the opposite.
Sure, typical “accommodative monetary policy shocks” (when the Fed suddenly drops benchmark interest rates) increase employment—and a little more so for Black households than White ones.
But they also exacerbate the wealth difference between the two, according to the report, published by the New York Fed and co-authored by one of its own researchers. More specifically, they boost the value of assets like stocks and homes—which Black households are less likely to have.
“The reduction in the earnings gap pales in comparison to the effects on the wealth gap,” the researchers wrote.
The gains enjoyed by White families were far greater than by Black families, the researchers found, in part because they are more likely to invest in stocks and other assets that are interest-rate sensitive. Capital gains for White households were $25,000 to $35,000 (or 20% to 30% of their mean income) and for Black households, $5,000, or 10% of income.