Tools of Indian Monetary Policy
· Open Market Operations (OMO)
· Cash Reserve Ratio (CRR)
· REPO/Reverse Repo
· Statutory Liquidity Ratio (SLR)
Open market operations
Sales or purchases of government debt instruments (treasury bonds, treasury bills, treasury notes) on the open financial markets by a country's central bank as part of its efforts to influence the size of the money supply and the levels of interest rates.
Central bank decisions to buy up government debt instruments make for an expansionary (increase) monetary policy, while sales of government debt instruments by the central bank represent a contractionary (tightening) monetary policy.
Different Policy Rates:
Repo-Bank Rate is the rate at which banks borrow money from the RBI, When Repo-Bank Rate is increased money supply in the economy decreases. It is 7.75% as of today in India.
Reverse-repo rate is the rate at which the RBI absorbs liquidity from the system, or the interest rate paid to banks for RBI's borrowings from them. It is 6% as of today in India.
Bank-Discount Rate is the Rate at which Banks borrow money from the Central Bank (RBI). It is 6% as of today in India.
Reserve Ratios:
CRR – Cash Reserve Ratio, the portion or percentage of Depositor’s balances banks must have on hand as cash. It is a requirement determined by country’s Central Bank. It Affects money supply in a country.
for e.g.: if CRR in India is set at 7.5% (this is current CRR rate in India) and Banks total deposits are in tune of Rs 100 Cr then Rs 7 Cr is required to be kept as reserve.
SLR – Statutory Liquidity Ratio is that amount which a bank has to maintain in the form of cash, gold or approved securities. The ratio is derived broadly on the total demand and time liabilities of a bank. It is 25% as of today in India.
Lending/Deposit Rates:
Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers. It is 12.75 to 13.25 % as of today in India.
Savings Bank Rate – is the interest rate offered by banks for the money kept in Savings account. It is 3.5% as of today in India.
Deposit Rate – is the rate interest rate offered by banks for short-long term deposits with the banks. It is 7.5 to 9.6 % depending on tenure as of today in India.
Capital Markets:
BSE Sensex
S&P CNX Nifty
Government Securities Market:
T Bills (91/182/364 Days) : T-Bills are treasury bills issued by the government of a country and are exchangeable (redeemable) in less than a year.
Money Markets:
Call Rates – is the overnight inter-bank interest rate. It is 6.65 to 8.05% as of today in India.
LIABILITIES for a Bank
1. Capital
2. Reserves & Surplus
3. Deposits
3.1 Demand Deposits
3.2 Savings Bank Deposits
3.3 Term Deposits
4. Borrowings
5. Other Liabilities and Provisions
ASSETS of a Bank
1. Cash & balances with RBI
2. Balances with banks and money at call & short notice
3. Investments
3.1 Govt. Securities
3a. In India
3b. Outside India
3.2 In other approved securities
3.3 In non-approved securities
4. LOANS & ADVANCES
4.1 Bills purchased & discounted
4.2 Cash credit, Overdrafts etc.
4.3 Term loans
5. Fixed Assets
6. Other assets
I will come up with a more detailed analysis on how this tools work and their impact (positive as well as negative) on other variables
Monday, April 14, 2008
Tools of Indian Monetary Policy
· Open Market Operations (OMO)
· Cash Reserve Ratio (CRR)
· REPO/Reverse Repo
· Statutory Liquidity Ratio (SLR)
Open market operations
Sales or purchases of government debt instruments (treasury bonds, treasury bills, treasury notes) on the open financial markets by a country's central bank as part of its efforts to influence the size of the money supply and the levels of interest rates.
Central bank decisions to buy up government debt instruments make for an expansionary (increase) monetary policy, while sales of government debt instruments by the central bank represent a contractionary (tightening) monetary policy.
Different Policy Rates:
Repo-Bank Rate is the rate at which banks borrow money from the RBI, When Repo-Bank Rate is increased money supply in the economy decreases. It is 7.75% as of today in India.
Reverse-repo rate is the rate at which the RBI absorbs liquidity from the system, or the interest rate paid to banks for RBI's borrowings from them. It is 6% as of today in India.
Bank-Discount Rate is the Rate at which Banks borrow money from the Central Bank (RBI). It is 6% as of today in India.
Reserve Ratios:
CRR – Cash Reserve Ratio, the portion or percentage of Depositor’s balances banks must have on hand as cash. It is a requirement determined by country’s Central Bank. It Affects money supply in a country.
for e.g.: if CRR in India is set at 7.5% (this is current CRR rate in India) and Banks total deposits are in tune of Rs 100 Cr then Rs 7 Cr is required to be kept as reserve.
SLR – Statutory Liquidity Ratio is that amount which a bank has to maintain in the form of cash, gold or approved securities. The ratio is derived broadly on the total demand and time liabilities of a bank. It is 25% as of today in India.
Lending/Deposit Rates:
Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers. It is 12.75 to 13.25 % as of today in India.
Savings Bank Rate – is the interest rate offered by banks for the money kept in Savings account. It is 3.5% as of today in India.
Deposit Rate – is the rate interest rate offered by banks for short-long term deposits with the banks. It is 7.5 to 9.6 % depending on tenure as of today in India.
Capital Markets:
BSE Sensex
S&P CNX Nifty
Government Securities Market:
T Bills (91/182/364 Days) : T-Bills are treasury bills issued by the government of a country and are exchangeable (redeemable) in less than a year.
Money Markets:
Call Rates – is the overnight inter-bank interest rate. It is 6.65 to 8.05% as of today in India.
LIABILITIES for a Bank
1. Capital
2. Reserves & Surplus
3. Deposits
3.1 Demand Deposits
3.2 Savings Bank Deposits
3.3 Term Deposits
4. Borrowings
5. Other Liabilities and Provisions
ASSETS of a Bank
1. Cash & balances with RBI
2. Balances with banks and money at call & short notice
3. Investments
3.1 Govt. Securities
3a. In India
3b. Outside India
3.2 In other approved securities
3.3 In non-approved securities
4. LOANS & ADVANCES
4.1 Bills purchased & discounted
4.2 Cash credit, Overdrafts etc.
4.3 Term loans
5. Fixed Assets
6. Other assets
· Cash Reserve Ratio (CRR)
· REPO/Reverse Repo
· Statutory Liquidity Ratio (SLR)
Open market operations
Sales or purchases of government debt instruments (treasury bonds, treasury bills, treasury notes) on the open financial markets by a country's central bank as part of its efforts to influence the size of the money supply and the levels of interest rates.
Central bank decisions to buy up government debt instruments make for an expansionary (increase) monetary policy, while sales of government debt instruments by the central bank represent a contractionary (tightening) monetary policy.
Different Policy Rates:
Repo-Bank Rate is the rate at which banks borrow money from the RBI, When Repo-Bank Rate is increased money supply in the economy decreases. It is 7.75% as of today in India.
Reverse-repo rate is the rate at which the RBI absorbs liquidity from the system, or the interest rate paid to banks for RBI's borrowings from them. It is 6% as of today in India.
Bank-Discount Rate is the Rate at which Banks borrow money from the Central Bank (RBI). It is 6% as of today in India.
Reserve Ratios:
CRR – Cash Reserve Ratio, the portion or percentage of Depositor’s balances banks must have on hand as cash. It is a requirement determined by country’s Central Bank. It Affects money supply in a country.
for e.g.: if CRR in India is set at 7.5% (this is current CRR rate in India) and Banks total deposits are in tune of Rs 100 Cr then Rs 7 Cr is required to be kept as reserve.
SLR – Statutory Liquidity Ratio is that amount which a bank has to maintain in the form of cash, gold or approved securities. The ratio is derived broadly on the total demand and time liabilities of a bank. It is 25% as of today in India.
Lending/Deposit Rates:
Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers. It is 12.75 to 13.25 % as of today in India.
Savings Bank Rate – is the interest rate offered by banks for the money kept in Savings account. It is 3.5% as of today in India.
Deposit Rate – is the rate interest rate offered by banks for short-long term deposits with the banks. It is 7.5 to 9.6 % depending on tenure as of today in India.
Capital Markets:
BSE Sensex
S&P CNX Nifty
Government Securities Market:
T Bills (91/182/364 Days) : T-Bills are treasury bills issued by the government of a country and are exchangeable (redeemable) in less than a year.
Money Markets:
Call Rates – is the overnight inter-bank interest rate. It is 6.65 to 8.05% as of today in India.
LIABILITIES for a Bank
1. Capital
2. Reserves & Surplus
3. Deposits
3.1 Demand Deposits
3.2 Savings Bank Deposits
3.3 Term Deposits
4. Borrowings
5. Other Liabilities and Provisions
ASSETS of a Bank
1. Cash & balances with RBI
2. Balances with banks and money at call & short notice
3. Investments
3.1 Govt. Securities
3a. In India
3b. Outside India
3.2 In other approved securities
3.3 In non-approved securities
4. LOANS & ADVANCES
4.1 Bills purchased & discounted
4.2 Cash credit, Overdrafts etc.
4.3 Term loans
5. Fixed Assets
6. Other assets
RBI's Monetary and Fiscal Policy
What is RBI's Monetary Policy?
The Reserve Bank of India will announce its Monetary and Credit Policy for the first half of the financial year 2002-03 on April 29. Even as RBI Governor Bimal Jalan puts the finishing touches to the document, have you ever considered what is the significance of the biannual exercise?
In a world of policies in the financial sector, nothing could get as alien as the Monetary Policy. Terms like M3, CRR, SLR, PLR and OMO would make you think that the typical IT-bug has caught the financial sector. But take a closer look as the Monetary and Credit Policy is crucial to all of us and more so to the banking sector.
For the uninitiated, this policy determines the supply of money in the economy and the rate of interest charged by banks. The policy also contains an economic overview and presents future forecasts.
What is the Monetary Policy?
The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy.
These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy.
Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it. These would be banks, financial institutions, non-banking financial institutions, Nidhis and primary dealers (money markets) and dealers in the foreign exchange (forex) market.
When is the Monetary Policy announced?
Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year.
Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy.
However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. However a review of the policy does take place later in the year.
How is the Monetary Policy different from the Fiscal Policy?
Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy.
The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks.
The Monetary Policy aims to maintain price stability, full employment and economic growth.
The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.
The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government.
The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices.
For instance, at the time of recession the government can increase expenditures or cut taxes in order to generate demand.
On the other hand, the government can reduce its expenditures or raise taxes during inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes.
The annual Union Budget showcases the government's Fiscal Policy.
What are the objectives of the Monetary Policy?
The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy.
Stability for the national currency (after looking at prevailing economic conditions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.
There are four main 'channels' which the RBI looks at:
* Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates).
* Interest rate channel.
* Exchange rate channel (linked to the currency).
* Asset price.
All this is more linked to the banking sector. How does the Monetary Policy impact the individual?
In recent years, the policy had gained in importance due to announcements in the interest rates.
Earlier, depending on the rates announced by the RBI, the interest costs of banks would immediately either increase or decrease.
A reduction in interest rates would force banks to lower their lending rates and borrowing rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower rate of interest.
On the other hand, if there were to be an increase in interest rates, banks would immediately increase their lending and borrowing rates. Since the rates of interest affect the borrowing costs of corporates and as a result, their bottomlines (profits), the monetary policy is very important to them also.
But over the past 2-3 years, RBI Governor Bimal Jalan has preferred not to wait for the Monetary Policy to announce a revision in interest rates and these revisions have been when the situation arises.
Since the financial sector reforms commenced, the RBI has moved towards a market-determined interest rate scenario. This means that banks are free to decide on interest rates on term deposits and loans.
Being the central bank, however, the RBI would have a say and determine direction on interest rates as it is an important tool to control inflation.
The bank rate is a tool used by RBI for this purpose as it refinances banks at the this rate. In other words, the bank rate is the rate at which banks borrow from the RBI.
How was the scenario prior to recent liberalisation?
Prior to recent liberalisation, the RBI resorted to direct instruments like interest rates regulation, selective credit control and CRR (cash reserve ratio) as monetary instruments.
One of the risks emerging in the past 5-7 years (through the capital flows and liberalisation of the financial sector) is that potential risk has increased for institutions. Thus, financial stability has become crucial and there are concerns relating to credit flows to the agricultural sector and small-scale industries.
What do the terms CRR and SLR mean?
CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.
The government securities (also known as gilt-edged securities or gilts) are bonds issued by the Central government to meet its revenue requirements. Although the bonds are long-term in nature, they are liquid as they can be traded in the secondary market.
Since 1991, as the economy has recovered and sector reforms increased, the CRR has fallen from 15 per cent in March 1991 to 5.5 per cent in December 2001. The SLR has fallen from 38.5 per cent to 25 per cent over the past decade.
What impact does a cut in CRR have on interest rates?
From time to time, RBI prescribes a CRR or the minimum amount of cash that banks have to maintain with it. The CRR is fixed as a percentage of total deposits. As more money chases the same number of borrowers, interest rates come down.
Does a change in SLR and gilts products impact interest rates?
SLR reduction is not so relevant in the present context for two reasons:
First, as part of the reforms process, the government has begun borrowing at market-related rates. Therefore, banks get better interest rates compared to earlier for their statutory investments in government securities.
Second, banks are still the main source of funds for the government.
This means that despite a lower SLR requirement, banks' investment in government securities will go up as government borrowing rises. As a result, bank investment in gilts continues to be high despite the RBI bringing down the minimum SLR to 25 per cent a couple of years ago.
Therefore, for the purpose of determining the interest rates, it is not the SLR requirement that is important but the size of the government's borrowing programme. As government borrowing increases, interest rates, too, rise.
Besides, gilts also provide another tool for the RBI to manage interest rates. The RBI conducts open market operations (OMO) by offering to buy or sell gilts.
If it feels interest rates are too high, it may bring them down by offering to buy securities at a lower yield than what is available in the market.
How does the Monetary Policy affect the domestic industry and exporters in particular?
Exporters look forward to the monetary policy since the central bank always makes an announcement on export refinance, or the rate at which the RBI will lend to banks which have advanced pre-shipment credit to exporters.
A lowering of these rates would mean lower borrowing costs for the exporter.
The stock markets and money move similarly, in some ways. Why?
Most people attribute the link between the amount of money in the economy and movements in stock markets to the amount of liquidity in the system. This is not entirely true.
The factor connecting money and stocks is interest rates. People save to get returns on their savings. In true market conditions, this made bank deposits or bonds (whose returns are linked to interest rates) and stocks (whose returns are linked to capital gains), competitors for people's savings.
A hike in interest rates would tend to suck money out of shares into bonds or deposits; a fall would have the opposite effect. This argument has survived econometric tests and practical experience.
Is the money supply related to jobs, wages and output?
At any point of time, the price level in the economy is determined by the amount of money floating around. An increase in the money supply - currency with the public, demand deposits and time deposits - increases prices all round because there is more currency moving towards the same goods and services.
Typically, the RBI follows a least-inflation policy, which means that its money market operations as well as changes in the bank rate are generally designed to minimise the inflationary impact of money supply changes. Since most people can generally see through this strategy, it limits the impact of the RBI's monetary moves to affect jobs or production.
The markets, however, move to the RBI's tune because of the link between interest rates and capital market yields. The RBI's policies have maximum impact on volatile foreign exchange and stock markets.
Jobs, wages and output are affected over the long run, if the trends of high inflation or low liquidity persist for very long period.
If wages move slower than other prices, higher inflation will drive real wages lower and encourage employers to hire more people. This in turn ramps up production and employment.
This was the theoretical justification of a long-term trend that showed that higher inflation and employment went together; when inflation fell, unemployment increased.
What are the measures to regulate money supply?
The RBI uses the interest rate, OMO, changes in banks' CRR and primary placements of government debt to control the money supply. OMO, primary placements and changes in the CRR are the most popular instruments used.
Under the OMO, the RBI buys or sells government bonds in the secondary market. By absorbing bonds, it drives up bond yields and injects money into the market. When it sells bonds, it does so to suck money out of the system.
The changes in CRR affect the amount of free cash that banks can use to lend - reducing the amount of money for lending cuts into overall liquidity, driving interest rates up, lowering inflation and sucking money out of markets.
Primary deals in government bonds are a method to intervene directly in markets, followed by the RBI. By directly buying new bonds from the government at lower than market rates, the RBI tries to limit the rise in interest rates that higher government borrowings would lead to.
Considering that interest rates are now tweaked looking at market conditions, is the Monetary Policy losing its importance?
Bimal Jalan has said he would make the Credit Policy a 'non-event' and would use the policy only to review developments in the banking industry and money markets. Interest rate announcements since 1998-99 were based on economic and market developments.
The policy now concentrates mostly on structural issues in the banking industry.
Some Monetary Policy terms:
Bank Rate
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.
Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit.
Cash Reserve Ratio
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent.
Inflation
Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices are pushed up.
The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce the supply of money or increase interest rates to reduce inflation.
Money Supply (M3)
This refers to the total volume of money circulating in the economy, and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public.
The RBI has adopted four concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts.
The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee.
The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1.
Statutory Liquidity Ratio
Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities.
These are collectively known as SLR securities. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam.
Repo
A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities.
Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.
Open Market Operations
An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations.
In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.
The Reserve Bank of India will announce its Monetary and Credit Policy for the first half of the financial year 2002-03 on April 29. Even as RBI Governor Bimal Jalan puts the finishing touches to the document, have you ever considered what is the significance of the biannual exercise?
In a world of policies in the financial sector, nothing could get as alien as the Monetary Policy. Terms like M3, CRR, SLR, PLR and OMO would make you think that the typical IT-bug has caught the financial sector. But take a closer look as the Monetary and Credit Policy is crucial to all of us and more so to the banking sector.
For the uninitiated, this policy determines the supply of money in the economy and the rate of interest charged by banks. The policy also contains an economic overview and presents future forecasts.
What is the Monetary Policy?
The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy.
These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy.
Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it. These would be banks, financial institutions, non-banking financial institutions, Nidhis and primary dealers (money markets) and dealers in the foreign exchange (forex) market.
When is the Monetary Policy announced?
Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year.
Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy.
However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. However a review of the policy does take place later in the year.
How is the Monetary Policy different from the Fiscal Policy?
Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy.
The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks.
The Monetary Policy aims to maintain price stability, full employment and economic growth.
The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.
The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government.
The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices.
For instance, at the time of recession the government can increase expenditures or cut taxes in order to generate demand.
On the other hand, the government can reduce its expenditures or raise taxes during inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes.
The annual Union Budget showcases the government's Fiscal Policy.
What are the objectives of the Monetary Policy?
The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy.
Stability for the national currency (after looking at prevailing economic conditions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.
There are four main 'channels' which the RBI looks at:
* Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates).
* Interest rate channel.
* Exchange rate channel (linked to the currency).
* Asset price.
All this is more linked to the banking sector. How does the Monetary Policy impact the individual?
In recent years, the policy had gained in importance due to announcements in the interest rates.
Earlier, depending on the rates announced by the RBI, the interest costs of banks would immediately either increase or decrease.
A reduction in interest rates would force banks to lower their lending rates and borrowing rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower rate of interest.
On the other hand, if there were to be an increase in interest rates, banks would immediately increase their lending and borrowing rates. Since the rates of interest affect the borrowing costs of corporates and as a result, their bottomlines (profits), the monetary policy is very important to them also.
But over the past 2-3 years, RBI Governor Bimal Jalan has preferred not to wait for the Monetary Policy to announce a revision in interest rates and these revisions have been when the situation arises.
Since the financial sector reforms commenced, the RBI has moved towards a market-determined interest rate scenario. This means that banks are free to decide on interest rates on term deposits and loans.
Being the central bank, however, the RBI would have a say and determine direction on interest rates as it is an important tool to control inflation.
The bank rate is a tool used by RBI for this purpose as it refinances banks at the this rate. In other words, the bank rate is the rate at which banks borrow from the RBI.
How was the scenario prior to recent liberalisation?
Prior to recent liberalisation, the RBI resorted to direct instruments like interest rates regulation, selective credit control and CRR (cash reserve ratio) as monetary instruments.
One of the risks emerging in the past 5-7 years (through the capital flows and liberalisation of the financial sector) is that potential risk has increased for institutions. Thus, financial stability has become crucial and there are concerns relating to credit flows to the agricultural sector and small-scale industries.
What do the terms CRR and SLR mean?
CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.
The government securities (also known as gilt-edged securities or gilts) are bonds issued by the Central government to meet its revenue requirements. Although the bonds are long-term in nature, they are liquid as they can be traded in the secondary market.
Since 1991, as the economy has recovered and sector reforms increased, the CRR has fallen from 15 per cent in March 1991 to 5.5 per cent in December 2001. The SLR has fallen from 38.5 per cent to 25 per cent over the past decade.
What impact does a cut in CRR have on interest rates?
From time to time, RBI prescribes a CRR or the minimum amount of cash that banks have to maintain with it. The CRR is fixed as a percentage of total deposits. As more money chases the same number of borrowers, interest rates come down.
Does a change in SLR and gilts products impact interest rates?
SLR reduction is not so relevant in the present context for two reasons:
First, as part of the reforms process, the government has begun borrowing at market-related rates. Therefore, banks get better interest rates compared to earlier for their statutory investments in government securities.
Second, banks are still the main source of funds for the government.
This means that despite a lower SLR requirement, banks' investment in government securities will go up as government borrowing rises. As a result, bank investment in gilts continues to be high despite the RBI bringing down the minimum SLR to 25 per cent a couple of years ago.
Therefore, for the purpose of determining the interest rates, it is not the SLR requirement that is important but the size of the government's borrowing programme. As government borrowing increases, interest rates, too, rise.
Besides, gilts also provide another tool for the RBI to manage interest rates. The RBI conducts open market operations (OMO) by offering to buy or sell gilts.
If it feels interest rates are too high, it may bring them down by offering to buy securities at a lower yield than what is available in the market.
How does the Monetary Policy affect the domestic industry and exporters in particular?
Exporters look forward to the monetary policy since the central bank always makes an announcement on export refinance, or the rate at which the RBI will lend to banks which have advanced pre-shipment credit to exporters.
A lowering of these rates would mean lower borrowing costs for the exporter.
The stock markets and money move similarly, in some ways. Why?
Most people attribute the link between the amount of money in the economy and movements in stock markets to the amount of liquidity in the system. This is not entirely true.
The factor connecting money and stocks is interest rates. People save to get returns on their savings. In true market conditions, this made bank deposits or bonds (whose returns are linked to interest rates) and stocks (whose returns are linked to capital gains), competitors for people's savings.
A hike in interest rates would tend to suck money out of shares into bonds or deposits; a fall would have the opposite effect. This argument has survived econometric tests and practical experience.
Is the money supply related to jobs, wages and output?
At any point of time, the price level in the economy is determined by the amount of money floating around. An increase in the money supply - currency with the public, demand deposits and time deposits - increases prices all round because there is more currency moving towards the same goods and services.
Typically, the RBI follows a least-inflation policy, which means that its money market operations as well as changes in the bank rate are generally designed to minimise the inflationary impact of money supply changes. Since most people can generally see through this strategy, it limits the impact of the RBI's monetary moves to affect jobs or production.
The markets, however, move to the RBI's tune because of the link between interest rates and capital market yields. The RBI's policies have maximum impact on volatile foreign exchange and stock markets.
Jobs, wages and output are affected over the long run, if the trends of high inflation or low liquidity persist for very long period.
If wages move slower than other prices, higher inflation will drive real wages lower and encourage employers to hire more people. This in turn ramps up production and employment.
This was the theoretical justification of a long-term trend that showed that higher inflation and employment went together; when inflation fell, unemployment increased.
What are the measures to regulate money supply?
The RBI uses the interest rate, OMO, changes in banks' CRR and primary placements of government debt to control the money supply. OMO, primary placements and changes in the CRR are the most popular instruments used.
Under the OMO, the RBI buys or sells government bonds in the secondary market. By absorbing bonds, it drives up bond yields and injects money into the market. When it sells bonds, it does so to suck money out of the system.
The changes in CRR affect the amount of free cash that banks can use to lend - reducing the amount of money for lending cuts into overall liquidity, driving interest rates up, lowering inflation and sucking money out of markets.
Primary deals in government bonds are a method to intervene directly in markets, followed by the RBI. By directly buying new bonds from the government at lower than market rates, the RBI tries to limit the rise in interest rates that higher government borrowings would lead to.
Considering that interest rates are now tweaked looking at market conditions, is the Monetary Policy losing its importance?
Bimal Jalan has said he would make the Credit Policy a 'non-event' and would use the policy only to review developments in the banking industry and money markets. Interest rate announcements since 1998-99 were based on economic and market developments.
The policy now concentrates mostly on structural issues in the banking industry.
Some Monetary Policy terms:
Bank Rate
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.
Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit.
Cash Reserve Ratio
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent.
Inflation
Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices are pushed up.
The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce the supply of money or increase interest rates to reduce inflation.
Money Supply (M3)
This refers to the total volume of money circulating in the economy, and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public.
The RBI has adopted four concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts.
The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee.
The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1.
Statutory Liquidity Ratio
Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities.
These are collectively known as SLR securities. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam.
Repo
A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities.
Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.
Open Market Operations
An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations.
In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.
F-1 visa cracked
Visa Interview!
1) Greet the Visa Officer even if he is busy with his work.
2) Dont even bother if the Visa Officer is not looking at you. It is not your concern but wat your primary duty is to answer him correctly and to the point.
3) While answering the Officer maintain a constant eye-eye contact. Dont even bother to look away from him.
4) Be confident while answering the Visa Officer.
5) At the end of each response try to smile back at the Visa Officer. That is a symbol that you are done with your answering and taking the next question with positive attitude.
6) Always answer to the point.
7)First give short and to the point answers. and if the Visa Officer looks for a furthur explanation give him long justified answers.
8) Confidence is the main key for your success at the visa interview.
Some more points to be noted
1) Use formal dress to appear for the interview. That should portray you as a professional student.
2) You will be made to stand in big queues so be patient and always keep a smile on your face and dont get excited.
3) Carry the relevant documents for the visa interview and nothing else.
4) Your I-20, and the DS Forms will be taken and be kept in a file so that it will be easy for the Visa Officers to Identify your category of Visa.
5) You will be asked to leave your thumb impressions. and after that you will be asked to wait for the Final Stage dat is Visa Interview.
So u have learnt about how to answer the Visa Officer.
Now try to practice the answers correctly and aptly according to your case.
Why USA?
To do my masters program in Electrical Engineering in Perdue University at Indiana.
Why MS?
In order to have sound knowledge, and detailed view of my chosen area, to continue further in research, to excel in my area of interest or to better my career prospects, I need to have a Masters degree.
(Or)
It accelerates my career once I reach good position in industry, due to the improved skill set, and in-depth knowledge, domain expertise and professionalism and being at ease with the corporate culture, to which Indian Industry is giving more importance these days.
Which University? How did u come to know of this university?
Based on my scores and academics, I have short-listed few universities (based on your case) through Internet and from the feedback given by some of my seniors present in that particular school. So I applied to those schools and got I-20’s from them and selected the best school which offers much credit in my area of interest.
Based on all these points I am interested in this school.
How many schools you applied? And how many you got admissions and rejections?
This is the most often question so answer it according to your case..
What is your area of interest or specialization? Explain something about your area of interest? How it’s going to help you later?
Choose your area of interest and be prepared to answer the Visa officer in detail if asked for. Find out the future prospects of your area of interest.
Who is going to sponsor your education?
My parents will be sponsoring me for my education.
What is your father’s occupation? What is their annual/monthly income?
(Talk about your father’s occupation only and how much he gets per annum and per month if possible)
How will they pay for your education?
My parents have saved Rs. XY Lakhs amount for my higher education, and my family annual income from all sources is around Rs. Z Lakhs. So I well be able to meet the financial requirements posed to me.
What is your academic background? About your under-graduate percentage? How many backlogs you had in your under-graduation? Why?
Answer it accordingly and don’t lie before a visa officer because he might counter check your answers if he is not satisfied with your answer.
What is your role in under-graduation project? Tell about it?
Answer accordingly..
About your scores?
Show GRE and TOEFL scores if asked for. If he is skeptical about your low scores then you can tell the VO that Sometimes, we are destined to perform well but score less and say him that the test days were among them.
And I have anyways qualified for the school’s requirement so I am not much concerned about my low scores.
What is your career plan? What will you do after completion of your Masters?
After completing my masters, I will be joining the Indian industry in a good company. Thought I may work for lesser salary, but when I prove my abilities learned from US education, I am sure that within no time I will be getting due recognition and position also.
Will you come back to India? Why you will come back to India?
YES, I’ll come back to India. Since, I want to join the Indian industry for my future career. India has been recognized as one of the biggest markets, world has ever seen for all kinds of technological products and consumer products, due to which almost all foreign companies want to establish their manufacturing units in India. As there is dearth for skilled people and with my US Masters degree I am confident of settling down in a good company with a decent pay to my name.
Can you show me proof of your funds? Can you show CA statement? Can you show me the transaction of your funds? Can you show me your IT returns?
Show the relevant documents when asked for.
NOTE:
These are few of the well repeated questions and some of the sample answers. They keep varying based on the individual’s case so make some necessary changes before preparing your answers.
Just take some idea from these sample answers and make your own responses to these questions.
If you are having a gap or have job experience then a question might rise on your job and your job’s description may be asked for.
1) Greet the Visa Officer even if he is busy with his work.
2) Dont even bother if the Visa Officer is not looking at you. It is not your concern but wat your primary duty is to answer him correctly and to the point.
3) While answering the Officer maintain a constant eye-eye contact. Dont even bother to look away from him.
4) Be confident while answering the Visa Officer.
5) At the end of each response try to smile back at the Visa Officer. That is a symbol that you are done with your answering and taking the next question with positive attitude.
6) Always answer to the point.
7)First give short and to the point answers. and if the Visa Officer looks for a furthur explanation give him long justified answers.
8) Confidence is the main key for your success at the visa interview.
Some more points to be noted
1) Use formal dress to appear for the interview. That should portray you as a professional student.
2) You will be made to stand in big queues so be patient and always keep a smile on your face and dont get excited.
3) Carry the relevant documents for the visa interview and nothing else.
4) Your I-20, and the DS Forms will be taken and be kept in a file so that it will be easy for the Visa Officers to Identify your category of Visa.
5) You will be asked to leave your thumb impressions. and after that you will be asked to wait for the Final Stage dat is Visa Interview.
So u have learnt about how to answer the Visa Officer.
Now try to practice the answers correctly and aptly according to your case.
Why USA?
To do my masters program in Electrical Engineering in Perdue University at Indiana.
Why MS?
In order to have sound knowledge, and detailed view of my chosen area, to continue further in research, to excel in my area of interest or to better my career prospects, I need to have a Masters degree.
(Or)
It accelerates my career once I reach good position in industry, due to the improved skill set, and in-depth knowledge, domain expertise and professionalism and being at ease with the corporate culture, to which Indian Industry is giving more importance these days.
Which University? How did u come to know of this university?
Based on my scores and academics, I have short-listed few universities (based on your case) through Internet and from the feedback given by some of my seniors present in that particular school. So I applied to those schools and got I-20’s from them and selected the best school which offers much credit in my area of interest.
Based on all these points I am interested in this school.
How many schools you applied? And how many you got admissions and rejections?
This is the most often question so answer it according to your case..
What is your area of interest or specialization? Explain something about your area of interest? How it’s going to help you later?
Choose your area of interest and be prepared to answer the Visa officer in detail if asked for. Find out the future prospects of your area of interest.
Who is going to sponsor your education?
My parents will be sponsoring me for my education.
What is your father’s occupation? What is their annual/monthly income?
(Talk about your father’s occupation only and how much he gets per annum and per month if possible)
How will they pay for your education?
My parents have saved Rs. XY Lakhs amount for my higher education, and my family annual income from all sources is around Rs. Z Lakhs. So I well be able to meet the financial requirements posed to me.
What is your academic background? About your under-graduate percentage? How many backlogs you had in your under-graduation? Why?
Answer it accordingly and don’t lie before a visa officer because he might counter check your answers if he is not satisfied with your answer.
What is your role in under-graduation project? Tell about it?
Answer accordingly..
About your scores?
Show GRE and TOEFL scores if asked for. If he is skeptical about your low scores then you can tell the VO that Sometimes, we are destined to perform well but score less and say him that the test days were among them.
And I have anyways qualified for the school’s requirement so I am not much concerned about my low scores.
What is your career plan? What will you do after completion of your Masters?
After completing my masters, I will be joining the Indian industry in a good company. Thought I may work for lesser salary, but when I prove my abilities learned from US education, I am sure that within no time I will be getting due recognition and position also.
Will you come back to India? Why you will come back to India?
YES, I’ll come back to India. Since, I want to join the Indian industry for my future career. India has been recognized as one of the biggest markets, world has ever seen for all kinds of technological products and consumer products, due to which almost all foreign companies want to establish their manufacturing units in India. As there is dearth for skilled people and with my US Masters degree I am confident of settling down in a good company with a decent pay to my name.
Can you show me proof of your funds? Can you show CA statement? Can you show me the transaction of your funds? Can you show me your IT returns?
Show the relevant documents when asked for.
NOTE:
These are few of the well repeated questions and some of the sample answers. They keep varying based on the individual’s case so make some necessary changes before preparing your answers.
Just take some idea from these sample answers and make your own responses to these questions.
If you are having a gap or have job experience then a question might rise on your job and your job’s description may be asked for.
Sunday, April 6, 2008
Financial literacy
“EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy.”
For years John Bryant has been telling anyone who will listen about the problems caused by widespread ignorance of finance. In 1992, in the aftermath of the Los Angeles riots, he founded Operation HOPE, a non-profit organisation, to give poor people in the worst-hit parts of the city “a hand-up, not a handout” through a mixture of financial education, advice and basic banking. Among other things, Operation HOPE offers mortgage advice to homebuyers and runs “Banking on Our Future”, a national personal-finance course of five hour-long sessions that has already been taken by hundreds of thousands of young people, most of them high-school students.
That many poor people do not have a bank account—and that few of them understand why this puts them at a disadvantage (let alone other essentials of personal finance)—is at the heart of “the civil-rights issue of the 21st century”, says Mr Bryant. He calls the attempt to help people help themselves out of poverty through financial literacy and economic opportunity the “silver-rights movement”.
In January George Bush appointed Mr Bryant vice-chairman of his new President's Council on Financial Literacy. This was launched as part of his administration's increasingly frenetic response to the financial crisis that followed the meltdown in subprime mortgages, many of them given to borrowers who may not have understood the risks. Often borrowers did not even realise that their monthly payment would rise if interest rates went up, says Mr Bryant. Subprime borrowers on adjustable interest rates, whose mortgages make up just 7% of the total, accounted for more than 40% of the foreclosures begun in the fourth quarter of last year.
The council is not short of expertise. It is chaired by Charles Schwab, eponymous boss of a broking firm. Its other members include the head of Junior Achievement, which has been teaching children about money since 1919, and a co-author of “Rich Dad, Poor Dad”, a self-help bestseller. Already, it has approved a new curriculum for middle-school students, “MoneyMath: Lessons for Life”. (Lesson one: the secret to becoming a millionaire. Answer: save, save, save.) It is starting a pilot programme to work out how to connect the “unbanked” to financial institutions. And it is supporting what, echoing the Peace Corps, is called the Financial Literacy Corps: a group of people with knowledge of finance who will volunteer to advise those in financial difficulties.
April has been declared Financial Literacy Month by Congress. The need to make this more than a slogan is especially apparent this year. But America is not the only country where doing something about the widespread ignorance of personal finance is on the agenda. Governments from Britain to Russia are declaring their commitment to financial education. This month the World Savings Banks Institute, which represents retail and savings banks from 92 countries, will hold a summit in Brussels about financial education in the light of the subprime crisis.
Meanwhile, on March 17th a new campaign to promote financial literacy in the developing world was launched at a conference in Amsterdam. Called Aflatoun (“Explorer”), after a cartoon character based on a Bollywood star, it is the brainchild of Jeroo Billimoria, a social entrepreneur who previously worked with street children in India. Among other things, she founded a successful emergency 24-hour telephone service, called Childline. She found that many of the children she helped were entrepreneurial (indeed, such spirits may have played a part in their decision to leave home) and became convinced that, given better education, they would have done well in life.
Ms Billimoria addresses herself to children aged between six and 14, whom most educators consider too young to understand money. Having begun with experiments in rural India, her non-profit organisation, Child Savings International, has piloted the Aflatoun course in 11 countries, including Argentina, South Africa, Vietnam and Zimbabwe, since 2005. It is now extending the course to 35 developing countries. Only recently, after suggestions from the Dutch central bank and the European Commission, has Ms Billimoria started to adapt Aflatoun for rich countries such as Britain, the Netherlands, Ireland and perhaps America. “My mistake. I never thought it would be needed in developed countries,” she says. If only.
Fools and their money
It is a “well-established fact” that “a substantial proportion of the general public in the English-speaking world is ignorant of finance,” writes Niall Ferguson, an historian at Harvard University, in his forthcoming book about the history of finance, “The Ascent of Money”. He produces a long list of evidence to support this conclusion. According to one survey last year, four in ten American credit-card holders do not pay the full amount due every month on the credit card they use most often, despite the punitive interest rates charged by credit-card companies. Nearly one-third said they had no idea what the interest rate on their credit card was.
There is similar evidence elsewhere. For instance, a survey in 2004 by Cambridge University and Prudential, a big insurer, found that some 9m Britons are “financially phobic”, meaning that “they shy away from anything to do with financial information, from bank statements to savings accounts to life assurance.” Research by the British regulator, the Financial Services Authority, found that one-quarter of adults did not realise that their pensions were invested in the stockmarket.
Financial illiteracy is not limited to subprime mortgage borrowers, then; it is pervasive in all age groups, income brackets and countries. “Subprime is a mere symptom,” says Mr Ferguson, noting that many of the students he has taught in the “best universities in the world, including MBA programmes, don't even know the difference between the nominal and real interest rate.” This problem is more pressing than ever, he adds, because governments and businesses have pushed more of the responsibility for financial well-being onto individuals, whether by encouraging homeownership or by promoting personally-managed retirement accounts rather than defined-benefit pensions.
The education system deserves much of the blame, says Mr Ferguson, who recalls having learnt nothing about personal finance at school in Scotland. In the 2007 survey of American credit-card holders, over half of the respondents said they had learnt “not too much” or “nothing at all” about finance at school.
Americans still leave school not knowing much about money. A sample of high-school pupils aged 17 or 18 gave correct answers to barely half of a set of questions about personal finance and economics posed in 2006 by researchers at the State University of New York, Buffalo. Less than one-quarter knew that income tax could be levied on interest earned in a savings account. Three-fifths did not know the difference between a company pension, Social Security and a 401(k) savings account.
The same survey, undertaken every two years for Jump$tart, a coalition of 180 organisations in America that promote financial literacy, found that one in six had taken part in a course dedicated to personal finance. A further one-third said they had learnt a bit from studying other subjects, such as business or economics. Laura Levine, the head of Jump$tart and a member of Mr Bush's financial-literacy council, says things are moving in the right direction, but that progress is slow. The results of the 2008 survey, which are unlikely to show much change, are due to be published on April 9th.
At present only three American states require that students take a course in personal finance. Another 15 insist that it be incorporated in other courses. Beyond that, it is a case of persuading schools one at a time. “Personal-finance education is not a hard sell conceptually,” says Ms Levine, “but only when it comes to getting it prioritised.” School principals will usually agree that financial literacy is worth teaching, but they are reluctant to give it time and resources.
Even when personal finance is taught, the right lessons are not necessarily learnt. “Wherever you look in America or the OECD, classes in financial literacy don't do much good,” says Lewis Mandell, an economist at Buffalo. “As an educator, I'd like to believe you can teach people to do anything right, but clearly the way we are going about teaching personal finance needs to be improved.”
To Mr Mandell's frustration, the only classroom method that seems consistently to raise financial literacy among high-school pupils is playing a stockmarket-investing game—which rewards taking high-risk bets. Most other approaches tend to show only short-term increases in financial literacy, he says.
According to Mr Mandell, one problem is that if financial literacy is taught, it tends to be before a student's final year—before she has faced any important financial decisions, such as buying a car or taking out a credit card. Another is that teachers are often financially illiterate, too. Financial literacy may be less about acquiring knowledge than forming good habits, something that is arguably better done before high school, let alone adulthood.
This is where Aflatoun comes in. Ms Billimoria encountered a great deal of scepticism when she developed her financial-literacy programme for six- to 14-year-olds. Yet she was convinced that starting with youngsters would be more effective, because that is “when their concept of themselves is developing and by 14 most of their habits have formed.”
An important part of the teaching is getting the children to start saving, ideally by opening bank accounts. Typically, they have only tiny amounts, but this is enough to get them used to handling money properly. At first this faced a lot of resistance, as people asked, “How can young children handle money?” recalls Ms Billimoria, but “it soon caught on and parents started giving children money to save.” To demonstrate its broad applicability, Aflatoun was piloted in economies beset by different difficulties. Zimbabwe, for example, was selected for its astronomical inflation rate. The course was adapted to encourage children to save by buying assets such as pencils, which, unlike the country's money, could be a store of value.
A nudge in the right direction
“The depressing truth is that financial literacy is impossible, at least for many of the big financial decisions all of us have to take,” says Richard Thaler, a behavioural economist at the University of Chicago. Aptly for someone who has built his career on the study of irrational financial behaviour, Mr Thaler admits that even he finds it hard to know the right thing to do. “If these things are perplexing to people with PhDs in economics, financial literacy is not the right road to go down.”
Instead, policymakers should “focus on making the world easier”, he argues in a new book, “Nudge: Improving Decisions About Health, Wealth and Happiness”, written with Cass Sunstein, a law professor (and an adviser to Barack Obama). By this he means defining more carefully and simply the financial choices that people have to make, and building “sensible default options” into the design of financial products, so that the do-nothing option is “financially literate”. Today, the best choice typically requires some working out and an active decision.
This does not mean that the same choice is right for everyone. The growing complexity of financial choices in part reflects remarkable innovation, much of which has benefited consumers. As Operation HOPE's Mr Bryant points out, thanks to the availability of subprime mortgages, “homeownership has lifted many poor people out of poverty; the challenge is to make the product better.”
Sweden's system of saving for old age contains an example of what Mr Thaler means. It offers Swedes a choice of funds to invest in, but includes a well-designed low-cost default option, which has become the choice of 90% of the people. The same approach might be taken to America's company 401(k) retirement plans, in which today's choices require a high degree of financial literacy. Employees might also be automatically enrolled in savings plans, with a right to opt out, instead of today's under-used opt-ins.
Mr Thaler deserves to be taken seriously, as one of his earlier attempts to apply behavioural economics to saving has had impressive results. Recognising that people find it harder to save money they already possess than to promise to put aside what they might have one day, he designed the Save More Tomorrow scheme, which gets people to commit themselves to saving a slice of any future pay increases. Where implemented, the plan has already brought about sharp increases in saving rates.
Another idea would make it easier for people to choose a suitable credit card, by obliging card companies to supply customers with two downloadable files, perhaps once a year. One would explain the issuer's charging rules; the other would list the charges the consumer has actually incurred. The consumer could then upload this to one of several websites that Mr Thaler believes would soon appear. With one click, the most suitable card would be recommended. A similar system could work for America's Medicare prescription programme, in which preliminary research suggests that matching the drugs a person needs with the right insurance plan would save on average $700 a year, he says.
Better product design and financial education need not be alternatives, points out Mr Mandell. They can work in tandem. He is enthusiastic about schemes such as the Child Trust Funds introduced in Britain. These “baby bonds” give every child a fund that matures at adulthood, letting everyone start out with a nest-egg. Mr Mandell is particularly excited by the curriculum being designed to be taught in conjunction with these funds, starting when children reach the age of seven. “Teachers will be able to talk about money realistically, because the kids will have ownership of wealth.”
If you can make it there
One of the most interesting attempts to combine teaching and superior products is taking place in New York, championed by a mayor, Michael Bloomberg, who made his fortune selling financial information. He has created an Office of Financial Empowerment, which is trying to use the powers of government to promote both financial education and better design of financial products.
The city's regulatory powers mean that it can crack down on firms that exploit financial literacy, and educate the public at the same time, says Jonathan Mintz, New York's Commissioner of Consumer Affairs. It has found that many tax-preparation agencies are offering “rapid refunds” which, as many consumers do not realise, are in fact loans in anticipation of refunds. Its publicity blitz about these loans led to coverage on news programmes “in 22 states and Canada”, allowing the city to promote the message that “anyone promising a tax refund within two days is selling a loan—don't do it.”
Another initiative is to use the city's system of helping people to apply for the earned income-tax credit as a chance to encourage them to open a bank account. As well as explaining to applicants the importance of saving, the city is working with banks to offer carefully designed accounts, and has even persuaded some philanthropists to provide matching funds for the first $250 someone saves. “You are not just educating me, you are allowing me to nod my head and say yes, and get a windfall,” says Mr Mintz. “Financial education is much more effective when it is connected to something real that is happening.”
With Miami, San Antonio, San Francisco, Savannah and Seattle, New York has formed the Cities for Financial Empowerment Coalition, which met for the first time to share ideas on March 18th. There was general agreement that education and better product design should go hand in hand. Most big banks have started to sponsor financial-literacy efforts, if only to cover their backs. However, Mr Mandell remarks, by increasing the charges for bank accounts with only small balances they have in effect deprived children of what was traditionally the best practical educational tool, an account of their own.
Indeed, one of the biggest problems may be the illiteracy of financial-service firms, which often fail to provide the products that poor consumers most want. That, at least, seems to be the conclusion of a recent survey in two of New York's poorer neighbourhoods. Many people were using fringe financial products such as pay-day loans or money orders rather than the services of mainstream banks.
The mainstream financial providers are “missing genuine markets”, says Mr Mintz. “One of the open secrets in this industry is that when people are engaged in behaviour that seems irrational, often it has a rational basis.” Which only goes to show that consumers are sometimes only as literate as the products the financial-services industry chooses to sell them.
Mr Bryant makes the same point more colourfully, noting that some of the first people to be hit by the subprime-mortgage crisis were the very brokers who had sold people inappropriate mortgages. Having drunk their own Kool-Aid, they found themselves with enormous debts and no job. “It takes less credentials to be a mortgage broker than a pimp on a street corner in Harlem,” he says. “Because a pimp needs references.”
For years John Bryant has been telling anyone who will listen about the problems caused by widespread ignorance of finance. In 1992, in the aftermath of the Los Angeles riots, he founded Operation HOPE, a non-profit organisation, to give poor people in the worst-hit parts of the city “a hand-up, not a handout” through a mixture of financial education, advice and basic banking. Among other things, Operation HOPE offers mortgage advice to homebuyers and runs “Banking on Our Future”, a national personal-finance course of five hour-long sessions that has already been taken by hundreds of thousands of young people, most of them high-school students.
That many poor people do not have a bank account—and that few of them understand why this puts them at a disadvantage (let alone other essentials of personal finance)—is at the heart of “the civil-rights issue of the 21st century”, says Mr Bryant. He calls the attempt to help people help themselves out of poverty through financial literacy and economic opportunity the “silver-rights movement”.
In January George Bush appointed Mr Bryant vice-chairman of his new President's Council on Financial Literacy. This was launched as part of his administration's increasingly frenetic response to the financial crisis that followed the meltdown in subprime mortgages, many of them given to borrowers who may not have understood the risks. Often borrowers did not even realise that their monthly payment would rise if interest rates went up, says Mr Bryant. Subprime borrowers on adjustable interest rates, whose mortgages make up just 7% of the total, accounted for more than 40% of the foreclosures begun in the fourth quarter of last year.
The council is not short of expertise. It is chaired by Charles Schwab, eponymous boss of a broking firm. Its other members include the head of Junior Achievement, which has been teaching children about money since 1919, and a co-author of “Rich Dad, Poor Dad”, a self-help bestseller. Already, it has approved a new curriculum for middle-school students, “MoneyMath: Lessons for Life”. (Lesson one: the secret to becoming a millionaire. Answer: save, save, save.) It is starting a pilot programme to work out how to connect the “unbanked” to financial institutions. And it is supporting what, echoing the Peace Corps, is called the Financial Literacy Corps: a group of people with knowledge of finance who will volunteer to advise those in financial difficulties.
April has been declared Financial Literacy Month by Congress. The need to make this more than a slogan is especially apparent this year. But America is not the only country where doing something about the widespread ignorance of personal finance is on the agenda. Governments from Britain to Russia are declaring their commitment to financial education. This month the World Savings Banks Institute, which represents retail and savings banks from 92 countries, will hold a summit in Brussels about financial education in the light of the subprime crisis.
Meanwhile, on March 17th a new campaign to promote financial literacy in the developing world was launched at a conference in Amsterdam. Called Aflatoun (“Explorer”), after a cartoon character based on a Bollywood star, it is the brainchild of Jeroo Billimoria, a social entrepreneur who previously worked with street children in India. Among other things, she founded a successful emergency 24-hour telephone service, called Childline. She found that many of the children she helped were entrepreneurial (indeed, such spirits may have played a part in their decision to leave home) and became convinced that, given better education, they would have done well in life.
Ms Billimoria addresses herself to children aged between six and 14, whom most educators consider too young to understand money. Having begun with experiments in rural India, her non-profit organisation, Child Savings International, has piloted the Aflatoun course in 11 countries, including Argentina, South Africa, Vietnam and Zimbabwe, since 2005. It is now extending the course to 35 developing countries. Only recently, after suggestions from the Dutch central bank and the European Commission, has Ms Billimoria started to adapt Aflatoun for rich countries such as Britain, the Netherlands, Ireland and perhaps America. “My mistake. I never thought it would be needed in developed countries,” she says. If only.
Fools and their money
It is a “well-established fact” that “a substantial proportion of the general public in the English-speaking world is ignorant of finance,” writes Niall Ferguson, an historian at Harvard University, in his forthcoming book about the history of finance, “The Ascent of Money”. He produces a long list of evidence to support this conclusion. According to one survey last year, four in ten American credit-card holders do not pay the full amount due every month on the credit card they use most often, despite the punitive interest rates charged by credit-card companies. Nearly one-third said they had no idea what the interest rate on their credit card was.
There is similar evidence elsewhere. For instance, a survey in 2004 by Cambridge University and Prudential, a big insurer, found that some 9m Britons are “financially phobic”, meaning that “they shy away from anything to do with financial information, from bank statements to savings accounts to life assurance.” Research by the British regulator, the Financial Services Authority, found that one-quarter of adults did not realise that their pensions were invested in the stockmarket.
Financial illiteracy is not limited to subprime mortgage borrowers, then; it is pervasive in all age groups, income brackets and countries. “Subprime is a mere symptom,” says Mr Ferguson, noting that many of the students he has taught in the “best universities in the world, including MBA programmes, don't even know the difference between the nominal and real interest rate.” This problem is more pressing than ever, he adds, because governments and businesses have pushed more of the responsibility for financial well-being onto individuals, whether by encouraging homeownership or by promoting personally-managed retirement accounts rather than defined-benefit pensions.
The education system deserves much of the blame, says Mr Ferguson, who recalls having learnt nothing about personal finance at school in Scotland. In the 2007 survey of American credit-card holders, over half of the respondents said they had learnt “not too much” or “nothing at all” about finance at school.
Americans still leave school not knowing much about money. A sample of high-school pupils aged 17 or 18 gave correct answers to barely half of a set of questions about personal finance and economics posed in 2006 by researchers at the State University of New York, Buffalo. Less than one-quarter knew that income tax could be levied on interest earned in a savings account. Three-fifths did not know the difference between a company pension, Social Security and a 401(k) savings account.
The same survey, undertaken every two years for Jump$tart, a coalition of 180 organisations in America that promote financial literacy, found that one in six had taken part in a course dedicated to personal finance. A further one-third said they had learnt a bit from studying other subjects, such as business or economics. Laura Levine, the head of Jump$tart and a member of Mr Bush's financial-literacy council, says things are moving in the right direction, but that progress is slow. The results of the 2008 survey, which are unlikely to show much change, are due to be published on April 9th.
At present only three American states require that students take a course in personal finance. Another 15 insist that it be incorporated in other courses. Beyond that, it is a case of persuading schools one at a time. “Personal-finance education is not a hard sell conceptually,” says Ms Levine, “but only when it comes to getting it prioritised.” School principals will usually agree that financial literacy is worth teaching, but they are reluctant to give it time and resources.
Even when personal finance is taught, the right lessons are not necessarily learnt. “Wherever you look in America or the OECD, classes in financial literacy don't do much good,” says Lewis Mandell, an economist at Buffalo. “As an educator, I'd like to believe you can teach people to do anything right, but clearly the way we are going about teaching personal finance needs to be improved.”
To Mr Mandell's frustration, the only classroom method that seems consistently to raise financial literacy among high-school pupils is playing a stockmarket-investing game—which rewards taking high-risk bets. Most other approaches tend to show only short-term increases in financial literacy, he says.
According to Mr Mandell, one problem is that if financial literacy is taught, it tends to be before a student's final year—before she has faced any important financial decisions, such as buying a car or taking out a credit card. Another is that teachers are often financially illiterate, too. Financial literacy may be less about acquiring knowledge than forming good habits, something that is arguably better done before high school, let alone adulthood.
This is where Aflatoun comes in. Ms Billimoria encountered a great deal of scepticism when she developed her financial-literacy programme for six- to 14-year-olds. Yet she was convinced that starting with youngsters would be more effective, because that is “when their concept of themselves is developing and by 14 most of their habits have formed.”
An important part of the teaching is getting the children to start saving, ideally by opening bank accounts. Typically, they have only tiny amounts, but this is enough to get them used to handling money properly. At first this faced a lot of resistance, as people asked, “How can young children handle money?” recalls Ms Billimoria, but “it soon caught on and parents started giving children money to save.” To demonstrate its broad applicability, Aflatoun was piloted in economies beset by different difficulties. Zimbabwe, for example, was selected for its astronomical inflation rate. The course was adapted to encourage children to save by buying assets such as pencils, which, unlike the country's money, could be a store of value.
A nudge in the right direction
“The depressing truth is that financial literacy is impossible, at least for many of the big financial decisions all of us have to take,” says Richard Thaler, a behavioural economist at the University of Chicago. Aptly for someone who has built his career on the study of irrational financial behaviour, Mr Thaler admits that even he finds it hard to know the right thing to do. “If these things are perplexing to people with PhDs in economics, financial literacy is not the right road to go down.”
Instead, policymakers should “focus on making the world easier”, he argues in a new book, “Nudge: Improving Decisions About Health, Wealth and Happiness”, written with Cass Sunstein, a law professor (and an adviser to Barack Obama). By this he means defining more carefully and simply the financial choices that people have to make, and building “sensible default options” into the design of financial products, so that the do-nothing option is “financially literate”. Today, the best choice typically requires some working out and an active decision.
This does not mean that the same choice is right for everyone. The growing complexity of financial choices in part reflects remarkable innovation, much of which has benefited consumers. As Operation HOPE's Mr Bryant points out, thanks to the availability of subprime mortgages, “homeownership has lifted many poor people out of poverty; the challenge is to make the product better.”
Sweden's system of saving for old age contains an example of what Mr Thaler means. It offers Swedes a choice of funds to invest in, but includes a well-designed low-cost default option, which has become the choice of 90% of the people. The same approach might be taken to America's company 401(k) retirement plans, in which today's choices require a high degree of financial literacy. Employees might also be automatically enrolled in savings plans, with a right to opt out, instead of today's under-used opt-ins.
Mr Thaler deserves to be taken seriously, as one of his earlier attempts to apply behavioural economics to saving has had impressive results. Recognising that people find it harder to save money they already possess than to promise to put aside what they might have one day, he designed the Save More Tomorrow scheme, which gets people to commit themselves to saving a slice of any future pay increases. Where implemented, the plan has already brought about sharp increases in saving rates.
Another idea would make it easier for people to choose a suitable credit card, by obliging card companies to supply customers with two downloadable files, perhaps once a year. One would explain the issuer's charging rules; the other would list the charges the consumer has actually incurred. The consumer could then upload this to one of several websites that Mr Thaler believes would soon appear. With one click, the most suitable card would be recommended. A similar system could work for America's Medicare prescription programme, in which preliminary research suggests that matching the drugs a person needs with the right insurance plan would save on average $700 a year, he says.
Better product design and financial education need not be alternatives, points out Mr Mandell. They can work in tandem. He is enthusiastic about schemes such as the Child Trust Funds introduced in Britain. These “baby bonds” give every child a fund that matures at adulthood, letting everyone start out with a nest-egg. Mr Mandell is particularly excited by the curriculum being designed to be taught in conjunction with these funds, starting when children reach the age of seven. “Teachers will be able to talk about money realistically, because the kids will have ownership of wealth.”
If you can make it there
One of the most interesting attempts to combine teaching and superior products is taking place in New York, championed by a mayor, Michael Bloomberg, who made his fortune selling financial information. He has created an Office of Financial Empowerment, which is trying to use the powers of government to promote both financial education and better design of financial products.
The city's regulatory powers mean that it can crack down on firms that exploit financial literacy, and educate the public at the same time, says Jonathan Mintz, New York's Commissioner of Consumer Affairs. It has found that many tax-preparation agencies are offering “rapid refunds” which, as many consumers do not realise, are in fact loans in anticipation of refunds. Its publicity blitz about these loans led to coverage on news programmes “in 22 states and Canada”, allowing the city to promote the message that “anyone promising a tax refund within two days is selling a loan—don't do it.”
Another initiative is to use the city's system of helping people to apply for the earned income-tax credit as a chance to encourage them to open a bank account. As well as explaining to applicants the importance of saving, the city is working with banks to offer carefully designed accounts, and has even persuaded some philanthropists to provide matching funds for the first $250 someone saves. “You are not just educating me, you are allowing me to nod my head and say yes, and get a windfall,” says Mr Mintz. “Financial education is much more effective when it is connected to something real that is happening.”
With Miami, San Antonio, San Francisco, Savannah and Seattle, New York has formed the Cities for Financial Empowerment Coalition, which met for the first time to share ideas on March 18th. There was general agreement that education and better product design should go hand in hand. Most big banks have started to sponsor financial-literacy efforts, if only to cover their backs. However, Mr Mandell remarks, by increasing the charges for bank accounts with only small balances they have in effect deprived children of what was traditionally the best practical educational tool, an account of their own.
Indeed, one of the biggest problems may be the illiteracy of financial-service firms, which often fail to provide the products that poor consumers most want. That, at least, seems to be the conclusion of a recent survey in two of New York's poorer neighbourhoods. Many people were using fringe financial products such as pay-day loans or money orders rather than the services of mainstream banks.
The mainstream financial providers are “missing genuine markets”, says Mr Mintz. “One of the open secrets in this industry is that when people are engaged in behaviour that seems irrational, often it has a rational basis.” Which only goes to show that consumers are sometimes only as literate as the products the financial-services industry chooses to sell them.
Mr Bryant makes the same point more colourfully, noting that some of the first people to be hit by the subprime-mortgage crisis were the very brokers who had sold people inappropriate mortgages. Having drunk their own Kool-Aid, they found themselves with enormous debts and no job. “It takes less credentials to be a mortgage broker than a pimp on a street corner in Harlem,” he says. “Because a pimp needs references.”
Problem solving with candor
When trying to solve various problems in life, an approach I find very useful is to first identify what I’d consider the most direct solution, regardless of how I feel about actually implementing it. What’s the clearest, most direct path to my goal or the most efficient way to get around an obstacle?
Many problems will have multiple direct solutions, but often these solutions will be unsavory at first glance because they’ll require courage, self-discipline, creativity, or persistence to implement. But if we can somehow get ourselves to follow through, we know the solutions will actually work.
For example, suppose you want to lose weight. And suppose we can say that one (of many) direct solutions is to eat the same as you’re eating now, and boost your exercise output by 500 calories a day. If you implement this rather simplistic solution, you’ll lose weight. It may require discipline and persistence, but most people would agree that it will work if you follow through.
Another example: Suppose you’re interested in starting a relationship with someone, but you don’t know how that person feels about you. One direct solution would be to simply walk up, explain your thoughts and feelings, and ask if s/he is interested in discussing the possibility of a closer relationship. This will take less than a minute to say, and regardless of the outcome, at least you know where you stand. Of course this solution may require a lot of courage to overcome the possibility of rejection, but it’s very simple and straightforward.
See if you can identify the most direct solution to some of your problems. What’s the simplest and quickest way to reach your goals, assuming you had limitless courage and discipline?
Benefits of Directness
There are many seemingly challenging problems that have very simple, direct solutions. The real challenge is how to become the kind of person who can implement the most direct solutions instead of having to take a circuitous path to compensate for laziness or timidity. This is why working on your personal development, especially building your courage and self-discipline, is one of the best problem-solving techniques there is. When you go to work on yourself, problems that once seemed untenable become much easier to solve. You get better at implementing direct solutions instead of falling back on indirect ones.
One of the best areas where the idea of directness helped me was in making my career transition from game development to personal development in 2004. I asked myself what I’d do if I was already retired. My answer was that I’d spend most of my time working on personal growth with other growth-oriented people. That’s what I was already doing in my spare time when I wasn’t working. I realized I was running a games business to generate income, so I could pay my bills and then work on personal development in my spare time. That seemed like a needlessly indirect solution to me. Why couldn’t I just eliminate the middleman? I asked myself, “Wouldn’t it be smarter to work on personal development full-time and find a way to pay all my bills from doing that?”
I identified a more direct solution, but it was a solution that would require courage, discipline, and creativity to implement. I could see that if I actually did it, it would work. (I’m glossing over the specific details, but I think you get the idea.) So then the problem became: How can I muster the inner resources I need to make this happen? When I tried to tackle that problem, the results were a bit unexpected. It turns out I didn’t need to build those inner resources so much. I just needed to be willing to apply them.
Why We Resist the Direct Solution
There’s something reassuring about a direct solution that you know is going to work, but there’s also something disturbing about it. When you see a direct solution staring you in the face, and you haven’t implemented it even though you know it will work, you have to stop and ask yourself, “Why am I holding myself back from solving this problem when the solution is right there?” If you really give that question some thought, it may lead you down an interesting rabbit hole.
My particular rabbit hole was that I had to consider whether I was willing to work hard to achieve a result I wanted. Was I only willing to take the easy path? I saw that the only real barrier to achieving my goal was whether I was willing to put in the time and effort to make it happen. Running my games business had become very easy for me, and I didn’t have to work that hard to keep it profitable. I had to decide whether I was willing to push myself to a new level of action. Once I could honestly say to myself, “Yeah, I’m willing to do that,” I was able to get moving and implement the direct solution. But as long as I was thinking, “There must be an easier way,” or “I’m not sure I want to do that much work,” all solutions (direct or indirect) eluded me.
Consider one of the direct solutions you identified in your own life. Stop and ask yourself, “Am I willing to do that? Am I willing to be the kind of person who could implement this solution?”
What does it mean if you say you don’t want to be the kind of person who’d implement the direct solution? Are you saying you’d rather be uncreative, undisciplined, and timid instead of creative, disciplined, and courageous? When you bring these issues up and deal with them consciously, it’s hard to admit that you’ve been choosing to be that kind of person — the kind of person who has to settle for slower, more indirect solutions and sometimes no solution at all. But that is what you’re choosing when you shun the direct solution, isn’t it?
You have an important choice to make regarding what kind of person you want to be. Do you want to be courageous, disciplined, creative, and persistent or not? Do you think those are good qualities to develop in yourself? If not, then you’re basically left to embrace their opposites by default. Is that something you’re willing to do?
Directness and the Law of Attraction
What about using the Law of Attraction? Is that part of a direct solution? That depends on the problem.
Consider this simple example. A common manifestation exercise is to try to manifest a blue feather somewhere in your reality. You hold the intention to see a blue feather sometime in the next 24 hours. What’s the most direct solution to that intention? Is it to wait patiently and let the universe bring it to you somehow? Why not simply do a Google image search? You’ll find your blue feather within seconds. Problem solved. Next.
Many times when people try to apply the Law of Attraction, they simultaneously resist implementing the most direct solution to their problem. To me that’s a mixed intention. If you really desire something badly enough, why on earth would you resist the most direct path to it? Doesn’t that imply you don’t really want it? Or maybe you don’t want to become the kind of person who’d be able to get it. If you already have a direct solution staring you in the face, and you don’t implement it, I’d say you’re using the Law of Repulsion more than the Law of Attraction.
The point of the Law of Attraction is to hold the intention to discover a direct solution to a problem. Once that solution is already known to you, the Law of Attraction has done its job. Your job is to implement the solutions you attract.
When you find yourself having difficulty solving a problem, but you can identify a direct solution with relative ease, perhaps the real problem isn’t what you think it is.
Many problems will have multiple direct solutions, but often these solutions will be unsavory at first glance because they’ll require courage, self-discipline, creativity, or persistence to implement. But if we can somehow get ourselves to follow through, we know the solutions will actually work.
For example, suppose you want to lose weight. And suppose we can say that one (of many) direct solutions is to eat the same as you’re eating now, and boost your exercise output by 500 calories a day. If you implement this rather simplistic solution, you’ll lose weight. It may require discipline and persistence, but most people would agree that it will work if you follow through.
Another example: Suppose you’re interested in starting a relationship with someone, but you don’t know how that person feels about you. One direct solution would be to simply walk up, explain your thoughts and feelings, and ask if s/he is interested in discussing the possibility of a closer relationship. This will take less than a minute to say, and regardless of the outcome, at least you know where you stand. Of course this solution may require a lot of courage to overcome the possibility of rejection, but it’s very simple and straightforward.
See if you can identify the most direct solution to some of your problems. What’s the simplest and quickest way to reach your goals, assuming you had limitless courage and discipline?
Benefits of Directness
There are many seemingly challenging problems that have very simple, direct solutions. The real challenge is how to become the kind of person who can implement the most direct solutions instead of having to take a circuitous path to compensate for laziness or timidity. This is why working on your personal development, especially building your courage and self-discipline, is one of the best problem-solving techniques there is. When you go to work on yourself, problems that once seemed untenable become much easier to solve. You get better at implementing direct solutions instead of falling back on indirect ones.
One of the best areas where the idea of directness helped me was in making my career transition from game development to personal development in 2004. I asked myself what I’d do if I was already retired. My answer was that I’d spend most of my time working on personal growth with other growth-oriented people. That’s what I was already doing in my spare time when I wasn’t working. I realized I was running a games business to generate income, so I could pay my bills and then work on personal development in my spare time. That seemed like a needlessly indirect solution to me. Why couldn’t I just eliminate the middleman? I asked myself, “Wouldn’t it be smarter to work on personal development full-time and find a way to pay all my bills from doing that?”
I identified a more direct solution, but it was a solution that would require courage, discipline, and creativity to implement. I could see that if I actually did it, it would work. (I’m glossing over the specific details, but I think you get the idea.) So then the problem became: How can I muster the inner resources I need to make this happen? When I tried to tackle that problem, the results were a bit unexpected. It turns out I didn’t need to build those inner resources so much. I just needed to be willing to apply them.
Why We Resist the Direct Solution
There’s something reassuring about a direct solution that you know is going to work, but there’s also something disturbing about it. When you see a direct solution staring you in the face, and you haven’t implemented it even though you know it will work, you have to stop and ask yourself, “Why am I holding myself back from solving this problem when the solution is right there?” If you really give that question some thought, it may lead you down an interesting rabbit hole.
My particular rabbit hole was that I had to consider whether I was willing to work hard to achieve a result I wanted. Was I only willing to take the easy path? I saw that the only real barrier to achieving my goal was whether I was willing to put in the time and effort to make it happen. Running my games business had become very easy for me, and I didn’t have to work that hard to keep it profitable. I had to decide whether I was willing to push myself to a new level of action. Once I could honestly say to myself, “Yeah, I’m willing to do that,” I was able to get moving and implement the direct solution. But as long as I was thinking, “There must be an easier way,” or “I’m not sure I want to do that much work,” all solutions (direct or indirect) eluded me.
Consider one of the direct solutions you identified in your own life. Stop and ask yourself, “Am I willing to do that? Am I willing to be the kind of person who could implement this solution?”
What does it mean if you say you don’t want to be the kind of person who’d implement the direct solution? Are you saying you’d rather be uncreative, undisciplined, and timid instead of creative, disciplined, and courageous? When you bring these issues up and deal with them consciously, it’s hard to admit that you’ve been choosing to be that kind of person — the kind of person who has to settle for slower, more indirect solutions and sometimes no solution at all. But that is what you’re choosing when you shun the direct solution, isn’t it?
You have an important choice to make regarding what kind of person you want to be. Do you want to be courageous, disciplined, creative, and persistent or not? Do you think those are good qualities to develop in yourself? If not, then you’re basically left to embrace their opposites by default. Is that something you’re willing to do?
Directness and the Law of Attraction
What about using the Law of Attraction? Is that part of a direct solution? That depends on the problem.
Consider this simple example. A common manifestation exercise is to try to manifest a blue feather somewhere in your reality. You hold the intention to see a blue feather sometime in the next 24 hours. What’s the most direct solution to that intention? Is it to wait patiently and let the universe bring it to you somehow? Why not simply do a Google image search? You’ll find your blue feather within seconds. Problem solved. Next.
Many times when people try to apply the Law of Attraction, they simultaneously resist implementing the most direct solution to their problem. To me that’s a mixed intention. If you really desire something badly enough, why on earth would you resist the most direct path to it? Doesn’t that imply you don’t really want it? Or maybe you don’t want to become the kind of person who’d be able to get it. If you already have a direct solution staring you in the face, and you don’t implement it, I’d say you’re using the Law of Repulsion more than the Law of Attraction.
The point of the Law of Attraction is to hold the intention to discover a direct solution to a problem. Once that solution is already known to you, the Law of Attraction has done its job. Your job is to implement the solutions you attract.
When you find yourself having difficulty solving a problem, but you can identify a direct solution with relative ease, perhaps the real problem isn’t what you think it is.
Subscribe to:
Posts (Atom)
Posts
