American Capitalism: Profit, But Fairly

Adam Davidson wrote up an interesting apologia for Wall Street in the NY Times last week, which I think is ultimately a call for better regulation, rather than bank-hating.  I missed the piece originally, but Yves Smith found it and has nothing good to say about it. I think Yves is a little too harsh on Davidson. I've got issues with parts of the piece, but on different grounds, namely that it efuses to engage on the real issue. The problem isn't financial intermediation.  That's a perfectly fine thing that plays a useful role in society.  

Instead, the problem is when financial intermediaries do not treat the intermediating parties (meaning consumer and investors) fairly. The history of US financial services is nothing short of a history of scandals involving financial institutions variously ripping off investors and consumers. I'm not just talking about those scandals we remember, like Milken or Madoff or the recent slew or even the second tier ones like the Salad Oil scam or all of 1920s mortgage bonds. The history of US financial services is largely a history of unregulated innovation resulting in abuse and then follow-up regulatory reform. Lather, rinse, wash, repeat. 

Davidson argues that the reason to "hate the banks" is that 

Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. 

Davidson misses the mark here a bit. It's not just that the banks get bailed out, meaning that the rules of market discipline don't apply to them. It's that the banks frequently break the rules when applied to others.  It's fine to do foreclosures or hostile takeovers or sell consumers speculative securities. But it's not ok to foreclose without following the law or to profit on insider knowledge on hostile takeovers or or to sell investors "safe" assets when you know they are junk.

The fundamental rule of American capitalism is "profit, but fairly." Whatever one thinks is "fair", I don't think there should be much disagreement that Wall Street too often disregards the second part of this dictum to focus on the first. But take away the "but fairly" and society quickly becomes a Gilded Age baronial kleptocracy, a post-Soviet (or pre-Soviet) Russia. If we want capitalism to work--meaning that there is social stability, pace OWS--market players must play by the rules. This is where the debate needs to be focused:  ensuring that our financial intermediaries play by the rules. 

Consumer Credit Levels Reach Their Lowest Point in over a Year

According to a recent Reuters story, consumers are reluctant to hold debt due to the U.S. Credit rating downgrade and debt problems in Europe. The economy is shaky so people are apparently less willing to carry tons of debt. Consumer credit fell $9.50 billion in August after rising $11.92 billion in July, the report said, which is well below economists’ expectations of a $7.75 billion increase.

Revolving credit, which mostly measures credit card use, dropped $2.27 billion in August after falling $3.56 billion in July. Non-revolving credit, which includes mostly auto loans, fell $7.23 billion, the largest decline since August 2008, after rising $15.48 billion in July.
"Consumers are extraordinarily sensitive to economic conditions and as things started to look a bit more sour, they stopped using their credit card," said Steve Blitz, a senior economist with ITG Investment Research in New York. While this story paints this as a bad thing for the economy as a whole, it speaks well of consumers’ efforts to protect themselves in this economy.

 

Americans are Innumerate and Broke

And not just the ones I tell stories about from my clinical law teaching.  Some of our readers have written in to say that these clients of ours, these title loan and payday loan customers, are idiots or worse yet, should be institutionalized for their stupidity. Most of my stories about our clients have to do with not being able to do complex math.

Now we learn that most consumers think that 36 months is longer than three years.  And these are “regular” Americans, not those dullards who use sub-prime credit.  A study in the Journal of Consumer Research proved that as a result of something called the “unit effect,” no doubt a behavioral bias similar to framing, “people typically fail to realize that the unit of quantitative information is arbitrary.”

As one cool math blog reports, this “unit effect” leads to anomalous conclusions: to most consumers, the difference between an 84-month warranty and a 108-month warranty looks bigger than the difference between a 7-year and a 9-year warranty. A 95 out of 100 rating looks better than 9.5 out of 10. Is it any wonder at all that interest rates stated by the month or bi-monthly make it hard to calculate the cost of credit?

Culture, Attitudes, and Debt

Rather than a post with a lot of (supposed) answers, today I have a post with a lot of questions. My goal is to start a discussion that I hope our insightful readership will take up in the comments.

Lately, I have been thinking a lot about cultural attitudes toward debt. I am not really sure what I mean by "cultural attitudes." The idea is that Bob Lawless, sitting here in Champaign, Illinois, has certain beliefs toward debt--when it is appropriate to use debt, when borrowing is irresponsible, and so forth. These beliefs about debt might differ from someone who had different life experiences because of different socioeconomic circumstances, because of experiences in another country, or because of other differences that broadly travel under the rubric of "culture." There is empirical evidence that, with "culture" defined in this broad way, differences in cultural attitudes toward debt exist.

Google Wallet-Regulatory Implications

Yesterday, Google unveiled its Google Wallet near field communications payment app for Android phones. As far as I can tell, Google Wallet basically stores your payment card information for multiple cards (credit, debit, prepaid) and then lets the phone act as the NFC device instead of a RFID chip in a card. That's not particularly remarkable. What is cool about Google Wallet is that it integrates a loyalty/coupon system (Google Offers) with the payments. I haven't been able to figure out if the loyalty/coupon system integrates locationally-based offers (e.g., GPS in phone says you're 5 blocks from a Home Depot so you get a SMS text message telling you about the proximity and with a link to a digital coupon that has to be used within 2 hours).

The Anti-Consumer Agenda

I often find myself annoyed by left-wing (and occassionally right-wing) anti-business screeds that decry corporations, big business, etc.  I don't find anything inherently troubling about corporate form or business size, and I have no problem with profit-motivated actors (individual or corporate), so long as they play fair. Mindless attacks on the business community have the unfortunate effect of undermining perceived validity of more targeted, thoughtful concerns through a guilt-by-association phenomenon. 

But business and consumer interests often diverge. Now, it should hardly be controversial that there is an unequal playing field between businesses and consumers. Generally, businesses know more about their products than consumers and have more bargaining power than consumers. (Yes, there are information assymetries running the opposite way, which is a particularly salient problem for credit and insurance products.) For many businesses, it is important to maintain this assymetry of information and bargaining power, as there's profit in it.

In theory, and I emphasize in theory, competition should eliminate many of the problems these assymetries create for consumers, but there's no such thing as a perfect, complete market, just varying degrees of market imperfection, so competition alone cannot be relied upon to solve everything. What, if anything else, should be done is an open question, but when one looks at a range of seemingly unconnected recent public policy issues, a troubling common theme emerges.

Instead of a laboratory of experiements to help level the b2c playing field, we see a different trend emerging:  a distinct anti-consumer agenda that aims to reduce consumer bargaining power and information.  Consider the common theme that runs through the following issues: 

• AT&T v. Concepcion (waiver of class actions in arbitrations)
• Attempts to bust up public employee unions (and attacks on unions in general, such as the failure of Card Check legislation)
• Citizens United (corporate speech rights)
• Attempts to retain the current corrupt swipe fee system (failure of antitrust)
• Attacks on public health insurance (prohibition on Medicare bargaining over prescription drug prices and the death of the public option)
• Attempts to first kill off and now to maim the Consumer Financial Protection Bureau

Keeping Up with the Joneses: Credit Score Edition

Do you have good credit? Compared to whom? While your credit price may depend largely on how your credit fares against objective criteria (above 680 to avoid being "subprime," for example), do you ever wonder how you are doing compared to everyone else? Maybe you think the national banks would give credit to a ham sandwich; what you want to know if whether you are  keeping up with the Jones in managing your financial behavior.

Experian provides a chance to test your credit against your neighbors with its National Score Index. (Hat tip to Harvard student Mazen Elfakhani for letting me know about this). Using this tool, you type in your zip code and out pops the "score index," the average credit score based on a representative sample of consumers, for the nation, region, state, and your area. You also get comparable figures on other credit statistics like debt, late payments, and credit inquiries.

The areas are pretty broadly defined, like "Boston area," so you can't really see how you compare to the Jones family on your street. But it's still kind of fun, especially for someone like me who seems to move all the time. This year, Cambridge, MA: 715 score; last year, El Cerrito, CA: 708; prior years, Iowa City: 721. How am I doing? That will have to wait for another blog post; I'm definitely not paying Experian for my credit score.Remember that what you are entitled to one time per year for free is your credit report, not your score. That site: www.annualcreditreport.com, and as the FTC explains, there are lot of imposter sites and efforts to get people to pay for their credit scores when they are only trying to access the free report.

What Do Giving to Charity and Having Sex Have in Common?

Both light up the same pleasure responders in the brain. In other words, it feels good to give! Plus, it is not too late to get a 2010 tax break for a good cause. With over 1.4 billion people currently living below the international poverty line of $1.15 a day, there is also plenty of need.   I was moved to blog about this topic after reading about Betty Londergan, who responded to her job loss by giving $100 a day for 365 days, and then blogging about it. There are more extreme stories too, like the one about the Salwen couple in Atlanta who sold their big house, gave away half the proceeds, and moved into a smaller one. And then there are the rest of us … who just might just be willing to give up a new toothbrush holder or shoe caddy so someone with nothing can have something. 

Holiday Gifts from the Heart

Buy it, sack it, take it home.

Wrap it, unwrap it, look for a place to put it.

Clean it, move it, throw it in a land fill.

Sorry, but I hate this time of year.  We make such a huge carbon footprint, not to mention spending a lot of money we don’t necessarily want to spend. But that’s the culture right?   Newsweek magazine’s Dec. 6^th 2010 edition reports that we Americans can’t get over the urge to splurge, and that we have frugality fatigue.  We are reportedly sick and tired of depriving ourselves.  Wow, that was fast.  How long did the frugality movement last?

What's in Our Wallets?

Capital One made the slogan famous, but it's more fun when it's not just a hypothetical question. Many of the Credit Slipsters research at least some kinds of payments, such as credit cards, and some of us teach payment systems courses in law schools. If, and perhaps it is a big if, you think that means we know something about payment systems, I thought it might be revealing to see how we do or do not translate our knowledge to our own behavior as consumers. So I polled the Credit Slipsters, and a few other people who teach payments law (some of whose responses will appear in comments to this post), and here is what they said about what they carry and how they pay.

I'll go first: I have an LL Bean Visa credit card. I like it because it is offered by Barclays rather than a TARP rescued gigantic card issuer, and perhaps not unrelatedly, because it has very low fees, such as a $15 late fee. I usually pay in full but sometimes I procrastinate (anybody who reads this blog will know this about me already). I also find the free shipping/returns/monogramming is a reward that I actually use, whereas with airline miles they just accumulated and whenever I wanted to use them all the seats were gone. I also have a Visa branded debit card issued by a local bank in Iowa. If possible, I always enter my PIN with this to save the merchant some money (interchange fees for PIN-based debit are cheaper than signature (Visa/MC) debit). If I had to guess, I would say that I use debit and credit each about half the time, but probably use the credit card primarily for travel, which tends to be large ticket items, such as hotel and airline tickets. I also make regular use of one stored value/prepaid/gift card, which is at Starbucks. It has a budgeting effect--when it's out at the end of the month, I at least pause before reloading the card. If you think I'm not exactly the most rational actor in the world, keep reading! 

Make Your Home Finance Audit Fun While Fighting Back Against Bank Fees

The article Katie posted on bank fees was right on. The fees have gotten so creative that we invented a new household game to combat them, in which we compete for a pre-determined prize.  The prize makes it fun.  We do a competitive home finance audit over a glass of wine or two on the 5th or the 6th of the month, once the statements are all complete on line. Today is the 6th. Game on!! Stewart and I like competition.  To play, we scour all bank and credit card statements as well as certain purchases. The prize goes to the one that incurred the least interest or fees of any kind on anything, except the home mortgage. If there are no fees at all, no one wins the prize, but we both win!

Real Housewives of New Jersey Bankruptcy

OK, I'm way, way late on this story, but I thought it was worth a few lines.  Teresa Guidice, one of the Real Housewives of New Jersey has filed a Chapter 7.  Here's the petition for all you financial voyuers.  It's a nice window on the noveau lifestyle, and reasonably comparable to the other Real Housewives' petition (the White House crashing Salahis').  

Bank of America Settlement -- A Sign of True Progress?

In my last post I noted the beginnings of some positive movement by consumer protection agencies that have been largely dormant and, in some cases like the United States Trustee program, actively anti-consumer. A few weeks ago, as Katie Porter noted in a recent post, Bank of America (BOA) reached a settlement with the Federal Trade Commission with respect to certain mortgage overcharges, including overcharges in bankruptcy, on mortgages formerly serviced by Countrywide Mortgage. The settlement requires reimbursement to consumers who were overcharged. BOA, in addition to agreeing not to lie, steal, or file documents without reviewing them, will also have to follow notice procedures similar to those that are already required or are likely to be required for all mortgage companies once new Bankruptcy Rule 3002.1 becomes effective in December, 2011. The United States Trustee (UST) Program assisted the FTC in its efforts.  This settlement is the first significant positive result of increased UST scrutiny of mortgage lenders, although the extent of the UST’s participation is not known.

The Beginning of a Return to Consumer Protection?

Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.

The CFPB Auto Dealer Exemption--A Reminder of the Why We Should be Worried

It looks like auto dealers are going to get their carve out from the CFPB.  I can't think of a policy argument for exempting auto dealers; maybe someone will provide one in the comments.  The used car dealer has long been the poster child for sharp dealing.  But it's worth reviewing the consumer protection problems with auto dealers, so that we realize what practices are being exempted from potential future regulatory oversight.  

White House Dinner Crashers' Bankruptcy

Some of the news reports on the White House dinner crashers (Tariq and Michaela Salahi) have noted that they own a winery that filed for Chapter 11 (reorganization) bankruptcy and then converted to Chapter 7 (liquidation) bankruptcy. My prurient interest was engaged, so I tracked down the petitions and relevant filings (linked below).  What follows is my attempt to sort out the Salahi family's business doings, as well as some musings about where we should really look for bankruptcy abuse--small business filings where the business is the alter ego of the owner, but where corporate law might not allow veil piercing.  In these cases the sophisticated creditors get personal guarantees, but the tax authorities, tort creditors, and unsophisticated creditors get screwed by the corporate form.

As far as I can tell, however, from the PACER filings, this part of the story has been misreported.  There are two separate, but apparently affiliated entities that filed for bankruptcy separately.  First, Oasis Vineyards, Inc., filed for Chapter 11 in December of 2008.  Oasis Vineyards has three shareholders:  Mr. Salahi (5%), his mother (40%, also president of Oasis Vineyards), and his father (55%).  The petition schedules assets of $333K and liabilities of $1.9M.  Tariq Salahi, a Salahi Family limited partnership, Oasis Enterprises, Inc., and Salahi's parents are listed as codebtors (cosignors or guarantors) of various obligations.

In April 2009, the US Trustee filed a motion to convert the case to Chapter 7 liquidation or have it dismissed because the debtor failed to file its monthly operating reports and had not filed a plan of reorganization.  (This is pretty standard; it appears that several monthly operating reports were subsequently filed simultaneously.)  The court has postponed ruling on the motion to convert or dismiss because of the death of the debtor's counsel.

Second, Oasis Enterprises, Inc., a/k/a Oasis Winery, of which Tariq Salahi is the president and sole shareholder, filed for Chapter 7 bankruptcy in February 2009.  That case is still pending.  The scheduled assets are $339K and liabilities oare $982K. The petition states that Oasis Enterprise's income fell from $1.7M in 2007 to a mere $35,000 in 2008.  Ouch.  In 2008, a bank repossessed a $150K Aston-Martin car (resulting in a $85K deficiency) and a $90K Carver 350 Mariner Boat from Oasis Enterprises (resulting in a $56K deficiency judgment).

Unresolved Access Issues

Yesterday’s post on means-measuring versus means-testing offered a positive perspective on the Canadian bankruptcy reforms.  The focus was on debtors who are currently able to access the bankruptcy system and how this will change with the enactment of the reforms.  Unlike the American system, the Canadian surplus payment requirements do not impose additional front-end administrative and financial burdens that in themselves will prevent the poorest of potential bankrupts from accessing the bankruptcy system. However, a number of obstacles hinder access to the bankruptcy process for the poorest debtors.  In particular, such debtors will have difficulty paying the approximately $1800 in costs associated with the administration of a bankruptcy.  The reforms go some way to address this concern by providing a mechanism for the bankrupt to reach an agreement with the trustee to continue paying for bankruptcy services after the bankruptcy period. 

Professor Saul Schwartz of Carleton University and I have been working on issues around debt, low-income households and insolvency remedies for some time now.  Jason Kilborn blogged about our 2007 article at: http://www.creditslips.org/creditslips/2007/04/bankruptcy_for_.html.  In that article, we pointed out that, for two reasons, the conventional wisdom is that the poor are not likely to have needed the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment.

Overspenders to Face Tax Audits?

A recent article in the Wall Street Journal reported on a new effort by the IRS to catch tax cheats. The IRS is going to compare data on mortgage-interest payments provided by financial institutions with homeowners' declarations of income on tax returns. The idea is that people must have more income than they reported to the IRS if they are able to make their mortgage payments, the bulk of which for homeowners with new loans from purchase or refinance, will be payments toward interest. Using data from 2005, the Treasury inspector general said that "tens of thousands of homeowners who paid more than $20,000 in mortgage interest" reported income that appeared "insufficient" to have covered their mortgage payments and basic living expenses. I don't doubt that fact, but I see an alternate hypothesis to explain the situation. These families are accurately reporting their income, but they are just spending more than they earn. They have houses they cannot afford, and they use Capital One to finance their basic living expenses so their income dollars can go to mortgage payments. Back in 2003-005 when these data were gathered, the credit market was loose and many families made up shortfalls in monthly living using credit cards, or in some instances, doing a cash-out refinance, and then living off the cash, expecting the housing market to sustain this strategy. Relying on debt to make ends meet has always carried risks, including bankruptcy risk. Should we add the risk of a tax audit to the reasons that families need to keep income and expenses in alignment?

Bankers, pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers...in 16th Century Holland

It's pretty amazing how the status of some professions has changed over time.  I came across this astounding passage in Simon Schama's The Embarassment of Riches:  An Interpretation of Dutch Culture in the Golden Age (now you know what I read for fun): 

"Bankers were excluded from communion by an ordinance of 1581, joining a list of other shady occupations---pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers---that were disqualified from receiving God's grace.  Their wives were permitted to join the Lord's Supper, but only on condition that they publicly declared their repugnance for their husband's profession!  Their families shared the taint and were only permitted to join communion after a public profession of distaste for dealing in money.  It was not until 1658 that the States of Holland [the representatives of the estates of nobles and commoners to the court of Holland] persuaded the church to withdraw this humiliating prohibition on "lombards."

That's a remarkable shunning of those in finance by a culture that was absolutely obsessed with material goods of every sort (tulips, satin, brocade, damasks, gold, silver, pearls, etc.).  There's a long history of religious discomfort with finance, but to see this in as commercial of an early modern culture as there was surprised me. 

In Favor of the Consumer Financial Protection Agency (CFPA)

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

Shared Suffering in Airports and in Bankruptcy

Warning:  this is one of my odder posts.  Today I got a postcard in the mail encouraging me to sign up for Flyclear, a private service that for a mere $174 annual membership will provide me with a special ID card that will let me go through special airport security lines super fast.  The card works at almost 19 airports.  

I really dislike this product.  It bothers me in a visceral way because it is horrifically inegalitarian and undermines a basic civic value of shared suffering from war.  Airport security lines suck, but this is a national cost imposed by terrorism.  (I'll leave aside the issue of whether airport security lines are a sensible or the best response.)  And there is something really wrong about the costs of terrorism being borne disproportionately by American depending on their economic means.  We're all in this together and should have to shoulder the burdens alike.  It very much bothers me that TSA (or public airport administrations) is willing to countenance this sort of product.  

Flyclear is analogous to letting rich people pay to avoid the draft.  Sure, we did it in the Civil War.  For a few hundred dollars (a lot of money then), you could buy the life of a poor Irish or German immigrant who would go and live a miserable camp life and possibly be killed or maimed in your place.  In Vietnam we did it through the backdoor--rich, connected folks could get themselves places in higher education or seminaries and "Ho Chi Minh yeshivas" or fled abroad (or got into cushy air national guard units).  Maybe this doesn't bother you, but it really gets under my skin.    

I am aware of some of the counter arguments about why Flyclear is a good thing: the more people who are in Flyclear lines, the shorter the lines are for everyone else.  Flyclear lets people choose how they want to bear the burdens of terrorism, be it in their wallet or by waiting in a line.  And maybe Flyclear pays something to TSA, which thereby benefits all the rest of us.  There are responses to all of these arguments, but even if one were to concede their validity, none of them, to my mind, comes close to counterbalancing the erosion of the shared suffering principle.  

This is, of course, a bankruptcy blog, and don't worry, there's a connection with FlyClear.  Shared suffering is a key bankruptcy principle too, of course.  Unsecureds get paid pro rata.  But sophisticated creditors can opt out of this shared suffering by becoming secured or better yet entering into transactions that are not covered by the automatic stay.  

The problems that this creates in bankruptcy are the same that it creates with the "war on terror" (can we find a better phrase now for goodness sake?).  When some folks can opt out of the suffering of a war,but still have a voice in the politics of the war, it will affect how the war is prosecuted, and possibly not in a way that benefits the country overall.  Likewise, if a creditor is not bound by the stay or is secured, the creditor might not act in a way that maximizes value overall (Kaldor-Hicks efficiency) or even maximizes value in a way that doesn't make anyone worse off (Pareto efficiency).  

Let me be clear--I don't think Flyclear will destroy republican virtues.  But the sense of shared community, be it in bankruptcy or in airports, can undergo a death of a thousand cuts, and Flyclear is just another little cut.  

It's Still the Economy

You can't be serious! Federal Reserve chairman Ben Bernanke says what anybody with a passing interest in economics already knows -- that it will take time for the economy to turn the corner -- and the market tanks. The market seemed punch drunk on the massive stabilization packages -- $2.5 trillion and counting -- that the industrialized world was showering on failing financial institutions. A mere 36 hours later, though, Wall Street realized that it cannot regain its strength without a healthy Main Street. It was a weakening labor market, following a bursting housing bubble, that contributed to the massive foreclosure wave and to the crisis. No amount of tinkering with the stabilization package will detract from the fact that people and businesses need more income, not loans, to pay their bills and to invest in their future. It should be clear by now to everybody, even extremely myopic financial markets, that the next policy step lies in helping U.S. businesses and families back on their feet through a well designed second economic stimulus.

The Moral Hazard of Treasury's "Equity" Injection

Treasury Secretary Paulson is jawboning banks to use the Treasury's capital injection to lend, rather than to just sit on the funds. This is very telling about the way Treasury sees the financial crisis and should concern us because it sets up a moral hazard and papers over the looming problem of the US economy: consumer overleverage.

Toward a World with Rational National Consumer Credit Public Policies

The current economic downturn started in the consumer credit area. One of the glaring failures during the build up of the factors that led to the current mess was the lack of sufficient economic or sociological analysis from within the academic communities. There are simply too few funded prestigious institutions that study consumer credit issues. It is interesting that law school bankruptcy professors who operate outside of funded centers and may or may not have credentials in economics and sociology have provided a significant percentage of the analysis that does exist. The current economic recession is hurting many many people and will hurt many more before it comes to rest, but perhaps one benefit to which it could give rise would be more regular and effective analysis of the micro and macro economic and sociological issues that inhere in the supply and demand sides of the consumer credit world, including housing finance, car finance and credit card debt. Such an analysis might lead to a more well informed public and more well informed legislators and other public policy makers. We need this in the United States and the rest of the world. 

As a starting point let’s think about the spending and borrowing habits of both Americans and of the hundreds of millions of potential likely consumers and spenders in China and India and other emerging Asian economies. Ronald Mann has written insightfully about the preferences for debit or credit cards in Japan and Korea and perhaps now it is time to look at China and India, particularly since the numbers of people who will have either money in their pockets or credit available to them is so staggering.

Playing in Peoria

President Bush visited Peoria, Illinois, today for a fund-raising luncheon for the local Republican congressional candidate. From the coverage in the local paper (the Peoria Journal-Star):

Kent and Kristin Boyer of Peoria Heights decided to purchase the $500 tickets to the fund-raiser instead of buying the new water heater they needed.

Maybe I should update my last post and make it "What Can You Buy for $500?"

Comments are open, but let's go easy on the Peoria area. Some of my best friends grew up there, although it was Peoria proper, not the contiguous and indistinguishable Peoria Heights.

What Can You Buy for $5?

Thanks to the always interesting The Consumerist, a project called, "the Five Dollar Comparison" caught my eye. It's a photo stream on Flickr that asks people to show what five dollars (or its equivalent) can buy around the world. (The project also seems to have its own web site, but I could not get it to come up.) Did you know that five dollars can buy 13 lottery tickets in Wales, a package of ham in Helsinki, or a can of air in Los Angeles? I didn't, but I do now--and my life is better for it. Yes, I must lead a boring life.

Debtors Anonymous?

I wanted to pass along an interesting story I saw a few weeks ago in the WSJ about support groups for debtors.  They had such names as the "Sunday Morning Club" and  "Girls Just Wanna Have Funds."  These groups, to me, serve as an indicator that debt has become a socio-cultural phenomenon akin to addiction, such that people now feel the need to have support groups to confront and combat their problems.  I also note a lot seem church-based.  I suspect these are more organic and less slick than. e.g, current commercialized debt gurus.  Here's my lingering question: what do the credit card lenders have to say about them?  I suspect they'll proffer support, the way brewers encourage "responsible drinking," but I can't help but wonder whether secretly they can't stand them...

Consumerism and the Environment: What Would Jesus Buy and Subsequently Throw Away?

Sorry, Morgan Spurlock, had to steal that one. One key to meaningful financial literacy education is that a person has to really care about something to work for it. If you take the time to let it sink in, people can see financial literacy education as a way to consciously choose a course of action that is counter to the prevailing culture of consumerism, and that gives them back their time and their lives. For some, this will resonate, especially younger people.

Yesterday, I was handed a free sample of a Starbucks mocha-something-or-other while in line at Target.  It was my first taste of Starbucks coffee.  I am too cheap for Starbucks. I don’t have cable T.V. I do not choose to live in a home resembling Hadrian's Villa, because I’d have to work at a different kind of job to do all that and don’t want to. These are the kinds of choices I want to help people make.

I used to have more expensive tastes, but realized that one thing they aren’t making any more is more hours in a day. It takes a lot of time to care for expensive stuff. Most things we buy will either end up (1) in our homes or offices where we must dust, move, organize, or otherwise take valuable time caring for, (2)in a landfill somewhere, or (3)in the used items market and then in someone else’s closet or home, after we paid retail for them. Since I don’t want to pay retail for something that ends up in someone else’s house, I see no alternative but to forego…even in the case of shoes.

Credit Card Debt Absent the Mortgage Bubble

We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we'd be seeing much higher levels of credit card debt (and that's where we're headed).

The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

This has an important implication that has escaped notice.

Should We Not Disclose Credit Card Information?

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

The Heady Conversation

After the lunch at the Debt conference on Friday, Professor Brian Knutson, a professor of Psychology & Neuroscience at Stanford, presented a paper on Brain, Decision, and Debt. The field of neuroeconomics (which has been around for about a decade) examines how the brain reacts when a person makes a decision, and how the brain causes individuals to make decisions. His research attempts to link the brain to debt – which he characterizes as a risk problem – and to show how people get into debt.

Maxed Out

The luncheon speaker for the conference was James. D. Scurlock, the director and producer of Maxed Out, which airs this month on Showtime. For those of you who haven’t seen the documentary, it’s a scathing, eye-opening depiction of how the financial services industry (most notably, credit card issuers, debt collection agencies) treats ordinary, hardworking Americans and how people are seduced into debt. He expressed his gratitude to the sponsors for inviting him to a conference where he was sure his talk wouldn’t be the most depressing.

The Very Big Men Who Sort Out Debt

During the last session this morning, Professor Stephen Lea (University of Exeter) provided a psychological perspective on debt in poor households in Britain. He initially listed the people he believes to be the cast of characters involved in debt. First, there are consumers, and their friends and families. On the creditor side, he made a distinction between business creditors (like utilities) and credit businesses (banks, debt collection agencies – whom he labels "the very big men who are left to sort out the mess"). Because of England’s long tradition of credit counseling, he also included credit counselors in the cast.

Consumption Is Too Important to Be Left to Consumers

Professor George Ritzer, another sociologist (University of Maryland), presented a hyper paper ("Hyperconsumption" and "Hyperdebt": A "Hypercritical" Analysis). He argues that it has now become part of our public duty to consume. We were asked to consume after 9-11. We have been encouraged (really, really, encouraged – just ask WalMart) to spend the stimulus tax checks some of us might be receiving over the next few weeks. While consumers aren’t dupes, he stressed, we are being encouraged to do what producers want us to do.

Homeownership Myth (Part II)

As I argue in the earlier posting, the Sunday Washington Post article raises a number of interesting points about the value of homeownership as an investment device.  I discuss many of these points in an article that will be published this Fall, and ultimately conclude that it is time to debunk some of the myths associated with homeownership. 

The Myth of Homeownership

An article in the Sunday Washington Post asks whether -- given the current housing crisis -- real estate or the stock market is the better investment.  Of course, the answer is -- it depends.  Formulating a longer, more sensible answer happens to be something I've been thinking about for the last several months and is the subject of my current research.  I'll discuss this article in two posts.  Here's the first one.

As the title of one of my forthcoming articles suggests ("The Myth of Home Ownership, and Why Home Ownership Is Not Always a Good Thing"), I challenge this country's obsession with Homeownership and the view that attaining homeownership is crucial to achieving the American Dream.  I'll discuss a few points raised in the Post article to explain how I've reached these somewhat heretical views.

Is Spending the Way2Save?

Financial institutions have begun to offer programs that appeal to consumers’ desire for assistance with disciplining their saving and spending decisions. These programs draw on the insight of behavioral economics and cognitive psychology that default rules have a powerful effect in shaping consumer behavior. For example, Richard Thaler and Shlomo Benartzi have proposed requiring people to opt-out, rather than opt-in to employer-sponsored savings plans in order to overcome bounded rationality and encourage higher savings rates.

The first financial institution I know of that offered a savings assistance program was Bank of America’s Keep the Change program, which has been well-critiqued around the web. Now Wachovia has a new program called Way2Save. On the surface the program looks great. But when probed, it isn’t clear whether consumers end up with meaningful savings—increased purchasing power. With all of these programs the question that we need to ask is how much does it cost you to save?

Same Solutions, Different Problems

Economists teach that if the economy is going into a recession, lower interest rates and give people money. That wisdom is so conventional that the only quibbling seems to be over timing, amount, and who gets the money.

But this recession has one very special feature:  Never in history have we hit a recession with the American consumer so loaded down with debt. Shouldn't that cause someone to pause before concluding that more consumer spending is the way out of this hole?

Consumer Spending

As the country contemplates a recession, economists are wringing their hands over a slow-down in consumer buying.  About two-thirds of the economy is driven by consumer purchasing.  Without that engine, economists fear that the economy will be in serious trouble.

But I haven't read much about the role that debt will play in slowing down consumer spending--recession or no recession.  The staggering debt burden that American families are carrying should have everyone worried.  The math is easy:  Every dollar that goes to paying interest is a dollar that is not used to buy socks or movie tickets or double lattes. 

Warren on Marketplace Morning Report

American Public Media's Marketplace Morning Report is running a series on whether the consumer economy is sustainable (see here). This morning's story featured Credit Slips' own Professor Elizabeth Warren on rising consumer debt. You can read the transcript of Professor Warren's interview or listen to the interview here.

Life Only Takes Visa, You Losers

If you use cash, then you're a loser. At least that's the impression Visa creates in a recent series of television spots from it's "Life Takes Visa" campaign. The one that first caught my eye, "Morning in Manhattan" (view it here), features a number of scenes as Manhattan comes to life in the morning.

While Strauss's "Blue Danube" plays in the background, we see morning papers being delivered, a restaurateur hosing down the sidewalk in front of his business, a person hailing a cab, and eventually more and more persons making their way to their places of work. Interspersed are scenes of people using a Visa card to make small purchases--a taxi fare, a cup of coffee, a newspaper, a doughnut. But WAIT! Stop the music. Someone puts cash down on the counter. The cashier glowers. Who dares to commit this affront to the social order? The camera pans up and we see the offender. It's your average doughy, dumpy, middle-aged guy. The message is clear: only a schlub pays with cash.

Watching TV for the Commercials

I recently saw an amazing commercial on CNN Headline News for an operation called 1-800-Credit Card Debt. It appears to be some sort of debt adjustment agency. The CEO, a guy named, Tom Cooke, I think, was speaking and said "Don't let bankruptcy even enter your thoughts." I sure hope these guys are not allowed to serve as a BAPCPA credit counselor. (What I believe to be their website is a bit more balanced.) The commercial, though, raises the question of whether there are any ethical guidelines for credit counselors? What about liability? Malpractice? I would think that a credit counselor should be obligated to neutrally inform people of their full range of options under the law. For some folks, filing for bankruptcy is a wise decision.

Senate Thinks About the Middle Class

For those of us who care about credit issues, yesterday's Senate Finance Committee hearing, called by Senator Baucus, was instructive.  The title: "Can the Middle Class Make Ends Meet?" I testified, along with a Brookings fellow, a social worker specializing in pediatric oncology, and the president of a tax-cut foundation.  Three of us thought the middle class was in trouble, and the fourth thought that thanks to tax cuts the middle class was doing great and the with more tax cuts they would be even better off.  (You can guess who took what positions.) 

While the senators focused mostly on specific issues like paying for college or the impact of a medical problem, everything said in that room (except maybe the tax cut stuff) was also about credit.  Rising debt, falling savings, bankruptcy, aggressive credit marketing, aggressive collection--it all plays out against the background of what's happening to the middle class.  If families could still afford to put away 11% of their incomes in savings, as they did in 1972, then the credit and bankruptcy issues we discuss would be very different.

"Brave" New World of Consumer Spending?/Borrowing?

The Atlanta Braves recently became the first sports franchise to offer a finance plan for their tickets. Articles here and here give some details. Essentially,if you are spending $200 or more, GE Money will offer so-called "90 days same-as-cash" financing. If you don't pay before 90 days, then the APR is between 20 and 25 percent. The Braves management says that they have lots of fans who "want the ticket package" but "don't have that amount of cash on hand." Is this what we mean when we say that the democratization of credit improves consumers' quality of life? Maybe the answer depends on whether you are a Braves fan, or even a baseball fan?

GE Finance announced that it anticipates that "a very high percentage of customers will pay these [loans] off" before paying interest. If that is correct, then some small fraction of people must incur substantial interest or the finance option comes with an up-front convenience charge. I assume that GE Finance is not "brave" enough (sorry!) to be losing money on this deal. As a side note, I wonder why consumers would choose this option when credit cards are available. Perhaps they need a 90-day float rather than a 30-45 day float and zero percent introductory rates are scarce these days. Or perhaps consumers believe that dealing with GE Finance is likely to be a more pleasant experience that working with a credit card company? My co-blogger Angie Littwin may have a few thoughts about this latter idea based on her research about credit preferences and substitution.

The King and Queen of Debt

John Leland published a fascinating article in today’s New York Times.  Debtors Search for Discipline via Blogs describes a new trend, blogging for willpower.  People publish the intimate details of their of personal debt in order to use the exposure and reader feedback to help them control their debt accumulation.  The bloggers believe that by forcing themselves to publish everything they spend, they will become more conscious of their spending and have a stronger incentive to do less of it.  As Tricia of www.bloggingawaydebt.com said, “I think about this blog every time I’m in the store and something that I don’t need catches my eye.”

For those of us who are interested in debt, a few interesting points emerge.  First, for these bloggers, stigma is alive and well.  They are using the Internet as a clever way to circumvent it and still obtain the help they need.  Many of these bloggers are revealing private information they conceal from their families and friends. One couple refused permission to use their names in the article because, “We don’t want our parents to find out and kill us.”  This same couple is even sharing information they find difficult to discuss with each other in person.  The self-titled “King and Queen of Debt” say that, although they have good communication skills in other areas, it is only by writing the blog that they have been able to communicate about their finances.

“Health Care Gluttons” in Bankruptcy

Yesterday New York Times blogger Judith Warner (registration required) asked a startling question:  What if the “health care glutton” is the new welfare queen?  This idea came at the end of a column addressing the recent efforts to scale back the Family and Medical Leave Act (FMLA), which provides workers with twelve weeks of unpaid leave to care for a personal illness, a new child, or a sick relative.  The statute’s critics want to tighten eligibility, allowing only workers with the most “serious” medical conditions to use the program.  Warner spends most of her column making the usual arguments that the FMLA cannot afford to be any more feeble than it already is.  The leave is unpaid, giving workers little incentive to take it unnecessarily, and the United States already has one of the weakest family leave systems in the world.  Our lack of paid maternity leave is on par with that of Liberia and Swaziland.

Warner derives the idea of the “health care glutton” from President Bush’s recent foray into the health-insurance debate, where he accused many American workers of having “overly expensive, gold-plated” health plans, and from the rhetoric of the National Coalition to Protect Family Leave (yes, that’s the group pushing to water down the law), which says that Americans are abusing the FMLA by taking leave for cosmetic surgery and “pink eye, ingrown toenails and colds.”  She conceives the “health care glutton” as the “villain du jour,” who “consumes doctor’s visits like so many donuts, sloughing off the burdens of his waste onto the hard-working and the health-care abstemious.”  She concludes by warning that if such rhetoric takes hold, the quality health insurance some American workers do have could go the way of welfare benefits.

If the image of the “health care glutton” takes hold, it could have a damaging effect on the consumer bankruptcy debate as well.  One of the central arguments for a generous consumer bankruptcy system is that vast majority of families who file for bankruptcy do so because of job loss, divorce, and/or medical problems.  But if the fact of having high medical bills becomes stigmatized in and of itself, where does that leave us?  Current bankruptcy critics argue that families who file are spendthrifts who acquire too many luxury goods.  I have nightmarish visions of future bankruptcy critics contending that these families are spendthrifts who acquire too much luxury health care.

The Department of Labor is accepting comments about the FMLA here until February 16.

It's All Up to You

National Consumer Protection Awareness Week (Feb. 4-11)

http://www.consumer.gov/ncpw/toolkit.htm

If you see a scam, say something....

This is a federal website!?

PIRG to the People!

I thought Credit Slips readers might be interested to hear that PIRG has come up with a telephone script to help consumers negotiate rate adjustments (i.e., lowerings) on their personal credit cards.   Some lenders interviewed for a newspaper article said, sure they lower rates sometimes, but they were (understandably) coy about giving specifics on quantities.

The Manifesto of the Communist Party in 2006

One of my favorite pieces to read (and reread) when I teach the theory component of my social inequality class is the "Manifesto of the Communist Party," written by Marx and Engels in 1848. My students are always floored at how applicable the manifesto is in today's world--they can't believe that it was written more than 150 years ago. My favorite passage talks about how the survival of the bourgeoisie (or capitalism) depends upon constant revolutionizing, constant change. Marx and Engels insist that it is imperative to the survival of the capitalist system that olds wants be replaced with new ones--and the more rapidly this happens, the better.

Every holiday season, the barrage of advertising reminds me just how right Marx and Engels were. For example, if you bought an IPod this past autumn, you are utterly uncool. The new IPod is so much better that using the old model is unthinkable (and to some young people, unbearable). The same goes for the GameBoys. And cell phones (god forbid that one's phone cannot take photos). And Christmas lawn decorations. And Elmos. And big screen tvs. And laptops. And, and, and....

Consuming as a Sense of Control

In 1989, Fiske wrote the following in his article "Shopping for Pleasure: Malls, Power, and Resistance": "Ownership is at present the only form of control legitimized in our culture." Could it be that Americans are consuming because, in large part, they feel that they otherwise have no control in their lives? As I ponder this, I look out my apartment window at the mall parking lot. (Living in an apartment overlooking a mall is not my idea of a great location, but....) Every day since November 24, that lot has been chuck-a-block full of the cars of shoppers. Mornings, evenings, weekdays and weekends---full to overflowing.