Hasta La Vista

Let me (again) thank the Credit Slips bloggers generally, and Bob Lawless specifically, for inviting me to be a guest blogger. I have never done this before and, and quite honestly the thought of blogging terrified me. But, had I not been so fearful of having nothing to say this week, I might not have listened as intently to the talks at the Debt conference. Periodically zoning out would have been a grave error as the conference was one of the best I’ve attended in my academic career.

So, let me also take the opportunity to thank Professor Lawless, Deans Ralph Brubaker and Charles Tabb, and Sam Gerdano (ABI) for organizing that event and for asking me to attend it.

With that, I bid you a fond farewell.

Why People Should Be Allowed to Walk Away from Their Debts

Professor Heidi M. Hurd, a law and philosophy professor at the University of Illinois, ended the conference by discussing first principles in The Jurisprudence of Bankruptcy. Why should we forgive people who break contracts and harm others?

Where Do All the Corporate Debtors Go During Reform Time?

Dr. Terrence Halliday, a sociologist at the American Bar Foundation, shifted us back to corporate insolvencies. His paper, Missing Debtors: National Lawmaking and Global Norm-Making of Corporate Bankruptcy Regimes, discusses the systems that are created to regulate corporate debt and corporate debtors. He notes that some debtors who have a keen interest in corporate bankruptcy regimes are missing from the table when those regimes are being discussed at UNCITRAL meetings, in World Bank or IMF discussions. Why are they absent?

Gathering Your Private Information for Private Gain

Professor Elizabeth Warren’s (Harvard) paper, Balance of Knowledge, questions why academics do interdisciplinary work at all. But, she easily answered that question.

She noted the role that empirical data played during the BAPCPA discussions. She mentioned both the influence of the now-discredited $400 bankruptcy tax and also the study conducted by Creighton Law School Professors Marianne Culhane and Michaela White and how the Culhane/White study caused Congress to narrow the scope of the means test. She also discussed the way data has been used in the current mortgage policy debates. Professor Warren mentioned as well that Congress appears to be warming to the idea that empirical data has value, since credit card bills currently pending in Congress all have provisions that require credit card companies to make more data publicly available.

When Agencies Get it Wrong, They Reeeeeeeeeeeeeeeeeealy Get it Wrong

We ended the first day of the conference with management professors, Professor Gerry McNamara (Michigan State University) and Professor Paul M. Vaaler (University of Minnesota). They discussed How and Why Credit Assessors "Get It Wrong" when Judging the Risk of Borrowers: Past and Present Evidence at Home and Abroad. Professor Vaaler observed that the subprime meltdown is just one of the latest mistakes the rating agencies have made in recent times (he also points to the S&L crisis, Asian financial crisis). He argues, however, that private, credit rating agencies are at the center of the current housing crisis.

Professor Vaaler stressed that the agencies almost always get it right when assessing the risk posed by individual securities. But, when they get it wrong they get it wrong in a spectacular way.

How did Lenders Get it So Wrong?

An economist, Professor Amir Sufi (University of Chicago), shifted our focus in the afternoon session from debtor, to lender, behavior. In discussing his paper, Lender Incentives, Credit Risk, and Securitization: Evidence from the Subprime Mortgage Crisis, Professor Sufi asks why lenders made such bad decisions when making subprime mortgages. He concludes that securitization reduced lender incentives to scrutinize borrowers, because lenders knew they would sell virtually all the subprime loans they originated and, thus, knew they would shed the credit risk associated with those loans. Professor Sufi argues that this is to be expected, since financial intermediaries overcome information frictions only if they have an incentive to properly screen and monitor borrowers.

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.

Data, Data, Data

Provost (at Michigan) Teresa Sullivan presented the second paper of the morning, Debt and the Simulation of Social Class. She opened by repeating two conversations she heard while waiting at the airport yesterday. One involved a couple that was concerned that one of their neighbors might lose their home, and might have to file for relief under Chapter 13 of the US Bankruptcy Code. The second conversation involved parents who were discussing their child, a soon-to-be-college graduate, and the amount of student loan debt the child had. This debt level, the parents feared, would effect the type of job their child would be able to have, at least until the loan debt was repaid. She then observed that while debt is clearly on the mind of many people, it’s not a topic that has really concerned most sociologists (other than the ones who are attending the conference!)

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.

Live, From A Debt World

I just accomplished probably the most important thing I needed to do this morning.  I figured out how to log on the University of Illinois network.  Because I was a bit concerned that I would mess that up, I got here well before the first session -- just to be sure.  Since the U of IL and the ABI conference planners have made it impossible for me not to be able to blog this conference, once things get going, I'll be back with something a bit more substantive.

A Week in the Life of Mortgage "Reform"

Here's a mortgage crisis chronology for this week, as reported by the New York Times and Washington Post.  Can you guess what these articles have in common?

On Sunday, Michelle Singletary's The Color of Money column discussed Treasury Secretary's Henry Paulson's recommendation to create a Mortgage Origination Commission that would promulgate standards for mortgage loan officers and would rate and report state efforts to license and regulate mortgage brokers.  In her view, a new Commission isn't needed.  Instead, she argues that what we need to do is send some of these people to jail.  Rather than have a commission talk about their fraudulent acts, she suggests that we need to criminally prosecute loan officers who have engaged in fraudulent lending activities. 

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.

Student Loans, and the Housing Crisis

I am honored to have been asked to be a guest blogger on Credit Slips.  Not only is this my first posting for the week, this is the first time I’ve ever posted anything to a blog anywhere.  With that warning, here goes.

Thanks to the metastasizing housing crisis, the Bush Administration is urging Congress to increase the government's participation in the private student loan market.  Rather than just guaranteeing loans, though, President Bush urged Congress in his weekly radio address this Saturday to approve quite broad legislation that is designed to encourage private lenders to continue to remain in the federal student loan program.