It's Not Just the Economy Stupid!

“Greeks are protesting new austerity measures” is a common headline these days. It definitely captures some of what protesting Greeks are doing, but certainly leaves a whole lot out of the picture. Many Greeks are protesting not only the deterioration of their standard of living, but equally importantly, what they experience as a political disenfranchisement that has been orchestrated by the government, with the collaboration of the European heads of state. The situation in Greece is going to get much worse not only because of the economy, but also because of the repressive politics that are threatening to ignite Greek society.

To understand the Greek political cauldron you need to put yourself in the shoes of the average salaried Greek and what she has experienced these past two years. Picture this:

Greek Family and Welfare Provision

I have argued previously (here) that the EU/IMF/ECB insistence on “flexibilizing” labor law in Greece overlooked the basic structure of the Greek private market, which consists overwhelmingly of small, family owned and operated businesses, with ultra –flexible wage arrangements (a wife’s labor, especially, is often unremunerated). Add de facto non-enforcement of labor law even in the tiny segment it applied to and the massive informal sector and you end up with one of the most flexible markets, labor cost-wise, in Europe. Moreover, despite the infamous Greek welfare “drones” in the media, Greece does not have a welfare regime comparable to the rest of Europe. In fact, much like in the US, the Greek family internalizes most of the cost of basic services such as education, healthcare, housing. State employment and pensions have for a long time played the role of a substitute for the lack of such a welfare regime, for those of course who could access these jobs, usually on the basis of clientelist relations. The basic structure of state employment included jobs distributed widely among the client base of the governing party, with wages too low as remuneration and too high as welfare, along with privileged wages and perks for a narrow elite group within the public sector. Average wage and pension levels remained well below European levels before the crisis, while consumer prices had skyrocketed and remain among the highest in Europe even today.

All this may help clarify the compounded impact of the austerity measures on the average Greek. Dramatic wage cuts in both the public and the private sector, along with a largely successful program of taxation mainly targeting the salaried and small businesses transformed private sector workers and the average public sector worker into a newly struggling lower middle class or the newly poor-depending where they started from. The tax campaign also led to the closure of tens of thousands of businesses, while consumer prices remained steadily high. During all this, the family has been providing basic welfare except with less capacity to absorb the cost as unemployment skyrockets and the wages of those who have jobs are slashed. According to a friend, the new trend in one small city in northern Greece is for families to take in elderly relations, aunts, uncles, in return for their pension. People in their mid thirties, who had barely made it out of the parental household before the crisis are now moving back in. In Athens, which has been hit the worst, new forms of solidarity are being invented everyday (such as the “social kitchen” advertised here), but redistribution within the family still remains the main shock absorber. Overall capacity for shock absorption, however, may be busting at the seams as can be seen from Sunday’s events.

Kudos to Jean Braucher and Bob Lawless!

A new study by Credit Slips own Jean Braucher and Bob Lawless (with Dov Cohen) on race and bankruptcy filings received very prominent and well-deserved page A1 coverage in the New York Times.  It's a fabulous study, and it's wonderful to see it getting such great media attention. 

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. 

BROKE: A New Book on Consumer Debt and Bankruptcy

Just in time for New Year's resolutions on 1) reading more, 2) paring back your own debt, and 3) learning more about consumer bankruptcy to help you do your job (if you are a lawyer, judge, or academic, media, etc), the book, Broke: How Debt Bankrupts the Middle Class was released from Stanford University Press.

The book makes extensive use of the 2007 Consumer Bankruptcy Project data, providing statistics, analysis, and commentary on consumer bankruptcy and debt topics. I edited the volume, and chapter contributors are many Credit Slips regulars or guest bloggers--Jacob Hacker, Bob Lawless, Kevin Leicht, Angela Littwin, Deborah Thorne, and Elizabeth Warren--along with other top scholars.

In the next few weeks, the chapter authors will blog here at Credit Slips about the research featured in the book, but to whet your appetite, I've included a table of contents for the book after the break. The book is accessible to lay readers but its scholarly focus provides plenty of data to educate and surprise even bankruptcy experts. Working on the book, I certainly learned a great deal about timely and important topics such as how pro se debtors (those without attorneys) fare in bankruptcy, where families go after they lose their homes to foreclosure, how bankruptcy affects couple's marriages, and the ways that bankrupt households differ in their financial straits from other households of concern such as those with low assets or late payments on debt. Of course I'm biased but I think the book provides the most comprehensive overview of the consumer bankruptcy system since the enactment of the 2005 bankruptcy amendments.

The Value(s) of Foreclosure Law Reform?

As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012. A letter from the ULC president includes a list of questions that the committee is charged to consider. But what principles will guide their analysis of these questions?

Lies and Denial: the 2012 GOP Strategy

The last 24 hours have witnessed some remarkable historical revisionism on financial regulation coming out of the GOP.

First, we had one of the most bizarre and simply untrue attack ads I've ever seen, courtesy of Karl Rove's Crossroads GPS outfit. The ad calumnies Elizabeth Warren, claiming that first she was responsible for the TARP bailout and then set out to butter up bankers. Is this man on drugs? Rove seems to be confusing Elizabeth Warren with George W. Bush. 

Let's set the record straight.  Elizabeth Warren involvement with TARP was as chair of the Congressional Oversight Panel.  That was a body created by Congress to monitor and report on the effectiveness of TARP bailout.  The Oversight Panel did not create the bailout.  Congress did at the urging of the Bush Administration. The Oversight Panel had absolutely no authority to direct the use of the bailout. Its sole authority was to act as a watchdog.

And what a watchdog it was! It was Elizabeth Warren's trenchant criticism of the bailout that catapulted her to the national stage. The reason she started being invited to appear on the Daily Show and the like was because there was no better and more articulate critic of the bailout than Elizabeth Warren. The Oversight Panel could easily have been a sleepy, impotent backwater. Elizabeth Warren turned it into a ferocious bully pulpit for the interests of middle class Americans who were confused and angry over what was happening to their country. To blame Elizabeth Warren for the bailout is like calling Larry Bird the greatest New York Knick ever. It's so ridiculous that it's insulting. (And fighting words in Boston.) 

Then there's a hooter of a claim that Elizabeth Warren was courting bankers. Let's put that in some context to show how silly the charge is.  Elizabeth Warren left the Oversight Panel to help push for the creation of the Consumer Financial Protection Bureau, and for a long time it was thought that she would be nominated as the Bureau's Director. One reason she wasn't nominated was because the banks took an "over our dead [but now rescusitated via bailouts thank you very much] bodies" approach to Warren, claiming that she was "anti-bank."

Now, some might think that's a compliment, but Warren tried to show that she's not anti-bank. She just wants fair, transparent markets.  (Apparently, that's a problem for banks.  Heck, apparently, if you want market to be fair, and transparent and work as they are supposed to that makes one anti-bank, a socialist, a communist, or worse.  Capitalism, it turns out has nothing to do with markets.) To show that she wasn't anti-bank, Warren took great pains to reach out to banks and to show them that she's open-minded and willing to listen to their concerns, especially the concerns of small community banks and credit unions.  So now Elizabeth Warren is being damned for having been gracious and fair and open-minded. 

For more commentary on this lunacy, see here and here. 

Occupy Wall Street, "Fringe Banking" and Public Options

I happened to walk by Zuccoti Park in Manhattan yesterday, where the Occupy Wall Street protest is centered. I picked up a few pieces of protester literature. I can't say that I was in any way comprehensive in my collection. Some of the literature was just nuts, e.g., a flier blathering about admiralty law usurping the common law and the Trading with the Enemies Act. This flier could just as easily have been found at a Tea Party gathering. It gave new meaning to the term "fringe banking." 

But I also picked up a thoughtful and intelligent, for example a flier about public banking and the Bank of North Dakota (the only state-owned bank in the United States).  Hmmm.  That sounds like a public option for banking. If the financial system is broken, maybe it needs some better competition. It's not such a crazy idea. We actually already do that quite a bit in the mortgage market-FHA, VA, RHS, Ginnie Mae, and historically the FHLBs, HOLC and Fannie Mae (Susan Wachter and I have a forthcoming book chapter on this, to be posted to SSRN soon). We've even done it in straight banking--most people forget that we used to have a U.S. Post Office Bank. We have an FDIC that used to compete with private bank insurance funds (see the opening chapters of Kathleen Day's S&L Hell for a description of the private Maryland S&L insurance fund that failed). And we have federal (public) currency that used to compete with and has now supplanted private bank notes.  My point here is not to endorse public options or not, but merely to note that historically they were a response to failed private markets and should be part of the policy discussion. 

Are Corporations People Too?

The "corporations are people, my friend" line was quite the momement. But as bad as it sounded, Mitt had a theoretical point. People (as well as other corporations) own corporations and people work for corporations.  The problem isn't that there aren't people at the end of the line behind corporations. The problem is that it's a minority of (primarily wealthier)people.  

According to the Federal Reserve's 2007 Survey of Consumer Finances, only 17.9% of families held stocks, 11.4% hold mutual funds, and 52.6% hold retirement accounts that likely hold a lot of stocks and mutual fund assets.   

I haven't been able to find data on the percentage of people employed by corporations, but it's assuredly large. That said, it's hard to imagine that corporate tax breaks would generally result in higher salaries for most employees rather than higher dividends for shareholders. The competition to attract capital is likely fiercer than the competition to attract labor (and certainly for semi-skilled or unskilled labor), which would mean that corporate tax breaks would benefit shareholders (a minority of people) and highly skilled labor (again a minority that probably doesn't need a lot of help).  So maybe a more accurate phrase for Mitt is "corporations are wealthy people, my friend". 

Bankruptcy Politics and State Bankruptcy

I have a new paper out, Bankrupt Politics and the Politics of Bankruptcy, that examines state bankruptcy proposals and then uses them as a jumping-off point for sketching out a political theory of bankruptcy as a "creditor's armistice," an unstable political bargain, rather than an economic bargain ala Jackson & Baird's "creditor's bargain."  

The paper argues that bankruptcy is unlikely to do much good for the states because states' fiscal woes are akin to business model problems, rather than simple overleverage, and bankruptcy cannot fix business models.  States' business model--US fiscal federalism--is an inherently procyclical business model that is exacerbated by a moral hazard problem in state politics. Bankruptcy can no more fix this bad business model than it can make a buggy whip manufacturer (or a brick-and-mortar bookstore or video store) a viable operation.  

The intensely and patently political nature of the issues raised by state bankruptcy show a major set of deficiencies in contractarian theories of bankruptcy law, which have been developed primarily in the business bankruptcy context.  While others (such as our former co-blogger Elizabeth Warren) have criticized the creditors' bargain for failing to account for all of the stakeholders in bankruptcies, I argue that the inclusion or exclusion of various interests in bankruptcy is itself an essential part of a dynamic system of competing rent-seeking interests.

I don't attempt a formal exposition of an alternative political theory of bankruptcy in this paper--that's for another day--instead, I use this paper to lay out the idea and start linking the sovereign debt, subnational debt, business debt, and consumer debt literatures into a "unified theory" (yeah, I'm going to aim big, why not?) of debt restructuring (as in bankruptcy with a small "b").  The abstract is below the break:

Prisoners: When it Comes to Debtor-Creditor Issues, They’re Just Like Us

Once or twice a year, students from the University of New Mexico School of Law Clinic visit a women’s prison to provide brief legal services to those incarcerated there. We always assumed most of  inmates’ questions dealt with family law, so my group, the Business and Tax Clinic (the “B & T Clinic”), never went. This year, our Qualified Tax Expert, Professor Pamelya Herndon wanted to attend, and three of our students joined her. Professor Herndon suspected that at least a few of the women would have tax or consumer issues that we might be able to assist with. When our posse got to the prison, they were amazed by the demand for our services. Our mini-group was at least as busy as the groups answering questions about guardianships, divorces and parenting plans. Sixteen of the 64 women that were served that day had questions about taxes and debt. 

Insurance Redlining and Transparency

Insurance nerds like to point out that insurance coverage is a pre-requisite to a wide range of activities, from starting a business to practicing medicine to driving a car.  In this sense, insurers often serve as gatekeepers to fundamental social privileges.  Nowhere is this more starkly illustrated than in the residential real estate context.  As one court succinctly put it: “No insurance, no loan; no loan, no house; lack of insurance thus makes housing unavailable.”  

Given the centrality of both credit and insurance to home ownership, one might expect that the rules in these two domains would similarly respond to the risk of redlining, which is the practice of denying or charging more for services in residential areas with large minority populations.  But as with coverage terms and claim handling, quite the opposite is true: whereas bank regulation has embraced transparency, insurance regulation has actively rejected it.  

Democratizing the Money Issue

Robert Kuttner has a fantastic piece on creditor-debtor conflicts in several contexts (sovereign, consumer, current, historical). For Kuttner it alls points to a need to "democratize the money issue," by which he means returning the money issue--creditors' interests versus debtors' and whether credit would be cheap or dear--to the forefront of national politics. 

Dodd-Frank Gotterdämerung: The Durbin Amendment Rollback

As early as this Tuesday we might find out who runs this country.  Is it Wall Street and the financial economy or the real economy of consumer citizens and retailers?  We will know the answer to this question based on what happens when the Senate votes on a bill to unwind a Dodd-Frank Act provision that would prevent banks from charging anticompetitive debit card swipe fees.

This provision, known as the Durbin Amendment is a bellwether for the state of political power and thus financial regulatory reform in the United States. Banks are working furiously to roll back the Durbin Amendment, and their success or failure at doing so is a measure of the political power of financial institutions. If the banks win, it will not just be the traditional story of the banks' routing the consumer groups. If the banks win, it will show that the financial services sector is more powerful than the largest retailers in the US.  (Heck, the US Chamber of Commerce is on the banks side on this, which might say something about the Chamber's funding. It's certainly not from all the small businesses over which they weep crocodile tears.) 

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

The Morality of Strategic Default

Professor Curtis Bridgeman (FSU College of Law) has an article on The Morality of Jingle Mail:  Moral Myths About Strategic Default.  I have a fundamental philosophical disagreement with the article, but it's got a lot of very good, clear analysis of arguments about strategic default, including a very useful typology of argument.  

Perceptions of Income Inequality

A friend alerted me to "Building a Better America -- One Wealth Quintile at a Time," an article by Michael Norton of the Harvard Business School and Dan Ariely of Duke University and that appears in the current issue of Perspectives on Psychological Science. Although a discussion of the paper kicked around in the blogosphere last fall, I missed it. Credit Slips readers might find the paper interesting but, if you're like me, might not otherwise see it. Here is the abstract:

Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of “regular” Americans into these debates, by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to “build a better America” by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.

A full version of the paper can be found on Professor Norton's web site.

Building a Culture of Compliance

I was scheduled to speak at the AALS Financial Institutions breakfast this morning, but due to flight cancellations I was unfortunately unable to attend. I’m posting below a summary of what I intended to say there, and which I had already planned to share with the readers of Credit Slips anyway. I wanted to talk about what anthropological research among market participants and regulators tells us about how to change the way people behave in the financial markets.  After all, the whole point of regulation is just this--to change behavior. Yet how do you do it?

What Can We Learn from Wikileaks About Market Regulation--or, Is Transparency Always a Good Thing?

In the wake of the Wikileaks debacle, we have started to see some conversation in the editorial pages about whether transparency is always a good thing in international affairs. The point is that there are times when allowing the parties to talk in private may help to reach optimal outcomes for all sides. As we learn more about the personalities and motivations behind the leaks, also, the image of the whistleblower as the pure-hearted pursuer of truth and justice is getting a bit tarnished. It is a complicated issue, with room for reasonable people to disagree, but that in itself is news: it used to be that if you were against transparency you had to be for cronyism, corruption, and fraud, and in fact everybody everywhere felt compelled to assert that they were of course in favor of full public disclosure. Now we are not quite so sure.

I think that some of the heatlhy skepticism--or at least complexity of thought--about transparency that is coming into the public debate about foreign affairs also has a place in the conversation about the regulation of financial markets. Why?

Welcome Annelise Riles

Credit Slips would like to welcome Annelise Riles as a guest blogger. Annelise is the Jack G. Clarke Chair in Far East Legal Studies and Professor of Anthropology at Cornell University, where she teaches in both the Law School and the Anthropology Department. Annelise's work examines financial institutions and networks from an anthropological perspective.  

As a would-be historian, I am a particular fan of anthropological (and sociological) studies of consumer finance and the institutions involved there in. There aren't many, but they bring a much needed dose of reality to a field that is too often analyzed through economic theory. Legal scholarship rarely engages in the sort of qualitative field interviews that are the bread and butter of anthropology. (I recognize that there are important exceptions, including work by co-bloggers and past guest bloggers.) This is not just a matter of pesky internal review boards, but simply because this method of acquiring knowledge is not hard-wired into legal academia. (Given that it is somewhat analogous to the deposition, there's a lingering irony.) While we are not all going to becoming anthropologists, there's an enormous amount we can learn from the anthro literature about how regulators and market participants actually think , and I'm thrilled that Annelise will be sharing some of the insights with us on the Slips. Welcome Annelise!

Market Governance Is About People (And How They Think)

Hello everyone and thank you so much to Bob and Adam for bringing me into this exciting conversation. This week I want to raise with you a few thoughts about the way forward on financial regulation that have come out of interviewing and observing regulators in their interactions with market participants over ten years. My research has been mainly in Japan but involves some US components as well.

Principles Aren't Always Enough; Rules Are Needed Too.

In my last posting, I discussed the tradeoffs of regulation on the consumer side, and the extent to which disclosure would be sufficient to resolve consumer protection issues.

Here, I pose a simple problem to illustrate why principles based regulation would be inadequate.

Google, Bankruptcy & Bieber

One of the many wonderful things about university teaching is that you get to hang around lots of smart people who tell you lots of interesting things. One of my students, David Henken, pointed out to me a very interesting pattern that comes from Google Insights for Search. People use Google to search for the word "bankruptcy" much more often during the week than the weekend. Does this pattern tell us something about how people think about bankruptcy? Perhaps.

Compared to the weekly pattern for other search terms, "bankruptcy" seems to have its own rhythm. This includes a search I did for "Justin Bieber," perhaps the most useful Bieber-related search that has ever occurred. And, yes, my invocation of Justin Bieber is largely motivated by a shameless attempt to increase blog readership among girls aged 10-14, especially those living at Casa Lawless.

Give Me Glass-Steagall or Give Me Death?

I've recently seen some really surprising graffiti in DC:  on the outer loop of the Beltway, just after the I-95 merger someone has neatly printed on the overpass "End the Fed".  And this evening as I was driving toward DuPont on Massachusetts Avenue, I saw a banner hanging down from the railing above the 14th Street underpass (at 13th Street) that showed a snake divided into pieces and was labeled "Glass-Steagall or Die".  I haven't been able to get a picture of either, unfortunately.  I'm not really sure what to say other than that this is pretty different than the Folk and People tags I grew up with.  

[Update:  see Ed Mierzwinski's comment about this being a LaRouche campaign.  That would definitely explain things.] 

The War on Bank Profits?

The Wall Street Journal had a peculiar opinion piece today about bank regulation.  I won't pick the low-hanging fruit of its bizarre statements about potential CFPB Director nominees, but I think it's noteworthy for the revealing language it uses.  It says that Washington should "call off the war on bank profits" and allow[] banks to make profits."  

The conceit of the piece is that a subset of businesses have an entitlement to be profitable.  That's deeply inconsistent with a belief in markets.  The fundamental rule of American capitalism is "Go Forth and Profit, but Fairly."  It's one thing to debate what sort of practice is fair or not.  But that's not what the WSJ piece argues.  It argues that legislation like the Credit CARD Act and the Consumer Financial Protection Act are wrong because the restrict banks' profitability.  This is a serious misunderstanding of financial services reform, and if this is how the financial services industry as a whole understands regulatory reform, we've got serious problems as a society.

Debt Distress: Symptoms and Treatment

From the United Kingdom comes an interesting new study, based on a survey of more than 10,000 applicants for legal aid about their problems and the means they use to address them. The study explores the linkages between overindebtedness and social exclusion.  Consumers seeking help with debt problems are much more likely to face multiple related difficulties, including employment, mental health and other civil justice problems.  This longitudinal study also reports on the duration of debt problems and the success or failure of different strategies consumers employed.  The findings support the need for a broad array of services to assist consumers overwhelmed by debt, an approach characteristic of many European consumer bankruptcy and debt adjustment systems, about which Jason Kilborn and others have written.  These coordinated social service approaches are notably absent from the US bankruptcy system, at least officially, and apart from some token counseling requirements.  

Portrait of California Foreclosures

An important and empirically robust new study belies the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.

The typical California home in foreclosure is a very modest 1,500-square-foot, 2- to 3-bedroom house in the Central Valley or Inland Empire, refinanced in 2005 or 2006 by a Latino family.  The average home value at the time of the loan was about $400,000, considerably less than the $500,000 median home price statewide.   At today’s prices, that average California foreclosure property is likely to be worth between $200,000 and $300,000.   Fewer than half of mortgages in foreclosure were purchase loans.  Thus, the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes.  Essentially half of all foreclosures in California involve Hispanics, roughly in the same proportion that subprime mortgages were given out in the years prior to the crisis.  Thus, the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.

The picture that emerges from this foreclosure study is of a generation of Hispanic homeowners, typically refinancing an existing, modest home, rather than buying an extravagant McMansion, losing years of accumulated wealth and savings in the process.  Opponents of foreclosure relief and debt reduction regularly invoke the useful fiction of foreclosure victims as profligate yuppies with surplus bathrooms.  The facts are otherwise.

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').  

Are the Rich More Likely to Default on Their Mortgages?

The NY Times has an article about mortgage default rates being higher on larger (>$1M) mortgages than on small mortgages.  The argument suggested by the article is that the rich are more likely to see their homes simply as investments.  Put a different way, the consumption utility component of the home is relatively less important to the rich.  A house has two value components--it's an investment, and it is also a consumable (but durable) product.   The consumption value of a home is basically the same for everyone--I might derive more or less utility from any particular house, but it is all within a relatively constrained range, and my range is probably around the same as everyone else's.  That means that the consumption value component of a house is largely fixed, regardless of the house's price.  The more expensive the house, the smaller the ratio of the consumption value to the investment value.  Therefore, it would follow that people with more expensive houses place more value on the investment component and treat the house more like an investment.  

I think that's correct, but I also think there's more going on and wish that the analysis in the article had dug deeper because it has unfortunately fed into a narrative of the mortgage crisis being one of strategic default by ruthless investors, with the corollary being that they do not merit any government assistance and even deserve opprobrium or punishment (although they are only playing by the rules of the game, which should have been priced in by lenders).  Here's what I wish the story had pointed out:

The CFPA--A Bureaucracy to Benefit Women and Families

I recognize that some folks dislike the idea of a CFPA. Indeed, it may well feel like just another bureaucracy--and sometimes it seems that our country is awash in the doggone things. Why in the world would we want another one? I think there are many good reasons for a CFPA, and not the least of which is discussed in a paper I recently published in Journal of Family and Economic Issues ("Extreme Financial Strain: Emergent Chores Gender Inequality, and Emotional Distress").

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).

Laughing through the Pain

This economic meltdown isn't fun for anyone, not even bankruptcy law professors. But Americans are creative, resilient folks and in the midst of hardship, some people are finding ways to cheer themselves with humor. Here are three recent examples to lighten your day:

A former student of mine wanted to teach his elementary school-age son about the financial system and give him a taste of entreprenuership. They created Bankster Buddies toilet paper, which is printed with the faces of government officials who had a role in the meltdown. The bipartisan paper bears a memorable slogan: They dump on us; we wipe with them!

Next up is the Disposable Bullshit Bag. The bag comes printed with directions and carries a handy warning:  "Do not attempt to dispose of your BS through any government agency since they produce more bullshit than they can dispose of themselves." I've located a picture here but don't know where to purchase them. They are the perfect gift for that hard-to-shop for family member though.

Max Gardner of Shelby NC sent me a new twist on a classic song. Take a load off Fannie illustrates the current meltdown with visual images, including some great headlines from 2008 like "Bernake says housing crisis is contained."

I'm sure Credit Slips readers will have other examples. I think I've already pushed the outer limits of taste with my first two examples, so keep it in bounds, but feel free to share. We all need a laugh to lighten our load these days.

Hearings on Squeezing the American Family

Yesterday, the Joint Economic Committee of the U.S. Congress (JEC) held a hearing on the economic state of the American family. We've got falling real incomes, a mortgage crisis and a housing market in turmoil, record gas prices, and other increases in the costs of living. It's not going well.

Among the witness was Credit Slips's own Elizabeth Warren who started off with this:

From 2000 to 2007, measured in real dollars, incomes declined while basic expenses increased sharply. By the time today’s family makes a few basic purchases—housing, health insurance, food, gas, phone—it has about $5800 less than it had back in 2000.

Warren backs up that statement with numerous charts and statistics that demonstrate how incomes have failed to keep up with the rising cost of living. Her full testimony is here.

Older Americans in Bankruptcy--The First Paper Out of the Consumer Bankruptcy Project

Many of us on Credit Slips are part of the Consumer Bankruptcy Project (CBP), a multidisciplinary research initiative. This week, many of you probably saw the press coverage for the first paper published out of the CBP data: Generations of Struggle by Deborah Thorne, Elizabeth Warren, and Teresa A. Sullivan. This paper's reports three key findings. Since 1991--

• Americans age 55 or older have experienced the sharpest increase in bankruptcy filings.
• Americans age 34 or younger have experienced the greatest decrease in bankruptcy filings.
• The influence of Baby Boomers on bankruptcy filings has moderated substantially.

A full copy of the paper is available from the AARP here. The paper shows that older Americans are under greater financial stress than ever before. I am sure we will have more to say about this paper here on Credit Slips.

Because the courts do not collect any basic demographic data about who files bankruptcy, this sort of information would not be available without interdisciplinary research teams like the CBP and the organizations who generously support our research (the AARP, the Robert Wood Johnson Foundation, the Federal Deposit Insurance Corporation, and research funds at the University of Michigan and Harvard University). The data collection for the CBP is complete, and we will keep announcing the availability of new papers here on Credit Slips. What exactly, however, is the CBP?

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.

God Was the Poor Man’s Only Surety

The Conference opened with a talk on "Debt, Credit and Poverty in Early Modern England" presented by Dr. J. Craig Muldrew, a history professor from Cambridge (the one in England, not the one in the US).  (He used the term that is the title for this post.)

Though his paper related to Early Modern England, you'll notice striking similarities between what happened then, and what's going on now.  Indeed, Professor Edward Balleisen (a history professor at Duke) connected the dots between then, and now, in his response to Dr. Muldrew's paper.

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.

The Meaning of the Loss of Home

When Bob Lawless posted yesterday (April 17) the table showing the daily filings for March, 2008, it got me thinking about what exactly those numbers mean, and specifically, about the families who are represented by those statistics and in the middle of financial crises. And while I recognize that not all, or even most, of these filers are losing their homes in the process of bankruptcy, some will be. And this fact really tugged at my emotions.

An Update on Erica Stevens

Back on February 24, I posted the story of Erica Stevens (again, not her real name). Erica is one of the respondents of the Consumer Bankruptcy Project 2007. I described how her bank had held a check from the bankruptcy study for five days, without telling Erica, thus causing a couple of her checks to bounce---to the tune of $33 per check. In our outrage over the way Erica was treated, a couple of us who blog here on Credit Slips volunteered to contact her bank on her behalf (with no charge to Erica whatsoever). The objective was simply to attempt to get the charges reversed. When our interviewer, Denise McDaniel, called Erica with the offer, her reaction surprised us.

Ripped Off by the Banking Industry

Bankrupt folks who participated in the Consumer Bankruptcy Project 2007 had the opportunity to complete a telephone interview. For the interview, they were paid $50. Respondents who shared particularly heroic and inspirational stories could be nominated by the interviewers for additional compensation. Denise McDaniel, one of our interviewers, nominated Erica Stevens (not her real name) for this "award." Little did we know that Erica's bank would take this opportunity to rip her off.

Another Consequence of Economic Crises: The Loss of our Four-Legged Family Members

In my free-time, I frequently cruise the sites of horse rescues and adoption facilities. I certainly don't need another large, four-legged, hairy family member, but, like visiting the local ice cream shop, it's fun to look. Anyway, I've come across several comments describing some of the less-recognized effects of the economic downturn and the increase in home foreclosures. Namely, it appears that as people lose their homes and their jobs, they are increasingly forced to leave their horses at rescues or other shelters. (Even more disturbing, because the market is currently flooded with horses and they are so expensive to maintain, many end up slaughtered rather than at rescues and shelters.) And back in December, The Columbus Dispatch ran a piece on families who had lost their homes in foreclosure and had to leave their dogs at the Franklin County Dog Shelter. The director of the shelter, Lisa Wahoff, said: "There's even a national term for it: 'foreclosure dogs.' We started seeing it more about 18 months ago, people writing 'foreclosure' or 'financial reasons' on their surrender forms."

The Isolation of Debt and Other Such Things

As of today, 700 telephone interviews have been completed as part of the current round of data collection on the Consumer Bankruptcy Project. Since I am overseeing this part of the process, I have had the privilege of being one of the first to hear about people's experiences with bankruptcy. One thing that has struck me repeatedly is the extreme loneliness and isolation that typically accompanies these families as they wind their way through bankruptcy. The people who are going through it often go it alone. They seldom turn to family members or friends for support. More often, they say that it would be a cold day in hell before they even told anyone else about their insolvency, let alone ask them for help. And there simply are no support groups for these people.

Good Debt?

I grew up believing that some types of debt were good and necessary: namely, mortgage and student loan debt. (I'm in my mid-40s, just to provide some historical context.) The assumption, I expect, was that these debts would, in the long-run, pay off. (The house would eventually evolve into wealth to be passed to one's kids and the education would make it possible to pay off that mortgage.) However, with recent reports of corruption in certain segments of the student loan industry, the stories of educated Americans owing more student loan debt than they can ever hope to repay, the historically high rates of home foreclosures, and the meltdown of the mortgage lending industry, I'm not so convinced that either one of these types of debts is at all good. In fact, I think that Americans should be encouraged to rethink (even reject?) these taken-for-granted pillars of the American dream.

Hang On To Your Bootstraps!

One of the things that so many Americans pride themselves on is their ability to make it on their own. Call it the "boot-strap" approach, if you'd like. Very individualistic. Much more so than most other industrialized nations. I was reminded of this quintessential American attitude when I read an email from one of our research assistants who is currently completing questionnaires with bankrupt families for the Consumer Bankruptcy Project.

The questionnaires ask folks what they did to try to "make ends meet" before they finally filed bankruptcy. While we give them a list of prepared options, we also provide them the opportunity to tell us about "anything else" they did to try to make it. Today, one woman told our RA the following:

"I ran an ad in the local newspaper that said, 'Disabled woman wanting to sell household items for gas money.'" This woman went on to say that she had sold almost everything in her house that she doesn't use on a daily basis, as well as family treasures that had been passed down from her grandmother. She said that she also has 25 zucchini in her garden that she is thinking about selling at a veggie version of a lemonade stand. However, she's reluctant because she's afraid she will be fined for not having a vendor's license.

Now if that isn't the American way, I don't know what is. Kind of blows that whole "bankrupts are deadbeats" myth right out of the water, doesn't it?

How deplorable that this country treats its most vulnerable citizens with such disregard. 

Debt to the Future

This will be my final Credit Slips post. I want to thank the keepers (and the audience) for indulging me. I've enjoyed posting here, and hope that it's been useful and perhaps interesting for some of you.

Looking Backwards; Looking Forwards

My first posts were largely backwards-looking, in the sense that they were about a case (Gheewalla) that was flawed in part because it was burdened by the logic of a fairly ancient doctrine (the "trust fund" cases). Indeed, I think problems of financial distress are often backwards-looking:  You lent me a dollar yesterday, which I can (or cannot) repay today. To be sure, we spend a good deal of energy thinking about how much better the future will be depending on the bankruptcy result you're looking for (the debt is paid or discharged). But debts are usually the product of prior behavior.

Which is why a new symposium issue of the University of Chicago Law Review is so interesting. Entitled Intergenerational Equity and Discounting, it is in general about how to calculate the costs and benefits of big decisions today that might have no impact until the distant future. The key example is usually global warming: Most of us are not likely to live to see the moment in the future when there is atmospheric payoff from levying a carbon tax, abiding by the Kyoto Protocols, or whatever else we might do today that saves the planet for later generations.

The authors in the symposium do not generally write in bankruptcy or commercial law (with the exception of Eric Posner), so do not discuss these problems in those terms. But really, what we are talking about is a future debt, an obligation to the distant future, that may be payable today (or in the near future). The problem of intergenerational equity is figuring out how to come up with fair and efficient decisional rules about what that debt and those payments should be.

Predatory Lending: Robin Hood in Reverse

The story of Robin Hood – of the noble bandit stealing from the rich in order to give to the poor – is a popular cultural motif. It’s a shame that that’s just not true, that the real scenario is the rich stealing from the poor in order to give to themselves. Predatory lending has become one of the more common ways that this is now happening. Unfortunately, these practices are not even thought of as stealing. Actually, they are perfectly legal.

So-called “payday” services, including check-cashing and short-term loans, are the most scurrilous of these business activities. When I typed “payday services” into the Google search engine, I found one directory that included 66 separate providers, and that was only on the first page of results!

In Columbus, Ohio, a local community advocacy group has been calling for legal limits on these services. BREAD (Building Responsibility, Equality and Dignity) is demanding that the Ohio legislature limit the interest rates that can be charged. In a story written by Sherri Williams for the Columbus Dispatch (May 8, 2007), an example was given of a woman who borrowed $500 and ended up paying back $3,000. Loan sharks might actually provide better interest rates than that! Obviously, these are lucrative businesses, since the number of shops in Ohio grew from 107 to 1,562 in the ten years between 1996 and 2006. Of course, when interest rates can be as high as 390% a year, who should be surprised?

Targeting the Elderly

The elderly are increasingly the victims of various kinds of scams.  Older people – especially those who are poor – are seen as easy targets.  Telemarketing schemes often focus on the old through lists of names compiled by organizations such as InfoUSA, according to Charles Duhigg of the New York Times in an article headlined "Banks aid thieves in bilking elderly, feds say" (Columbus Dispatch, Sunday, May 20, 2007).

This "bilking" can occur in many ways.  It is most blatant in the case of individuals who find their bank accounts have been emptied out.  Even legitimate companies help.  According to Duhigg, "And major banks have made it possible for criminals to dip into victims' accounts without their authorization, according to court records."  But the elderly are taken advantage of in other ways as well.

Being Poor in America

Recently, I was asked to join Credit Slips as a guest blogger.  I am a social scientist, and my work has focused for many years on the broad issues of poverty and inequality.  Everyone in our society is affected by credit in many ways.  The poor are especially affected because of the kinds of credit to which they have access - especially predatory lenders who prey on the disadvantaged.  I include so-called "payday" services among these predatory lenders. I'd like to begin by taking a look at the nature of poverty and inequality in the United States.  Since the beginning of the Reagan era, far too many people in this society - especially politicians and media figures - have become very hard-hearted and mean-spirited, working long and hard to demonize the poor.  What is popularly known as "welfare reform" - the Personal Responsibility and Work Opportunity Reconciliation  Act (PRWORA) of 1996 was the final outcome of these efforts.  This law changed public assistance from an entitlement to a privilege and has put many of the most disadvantaged individuals and families in our society in dire circumstances.  My colleague Elizabeth A. Segal and I recently edited a book titled The Promise of Welfare Reform:  Political Rhetoric and the Reality of Poverty in the Twenty-First Century (Haworth, 2006) that documents just how draconian welfare reform has been and how ruthless it has been on those at the bottom of our society. But there is a bigger problem:  during the past quarter century poverty and public assistance have come to be seen as one and the same.  The reality is different.  The poor in our society have never received much help from the government, whether at the federal, state, or local level.  But that doesn't seem to matter.  It has been easy for politicians to use the poor as a whipping post and to blame them for their own problems.  And much of the public has bought into that viewpoint, perhaps as a way of separating themselves from the poor – from being seen as even having the possibility of being among the poor.