A Little More on Consumer Finances

As a last followup before vacation to the previous post.

Financial Literacy

Do check out John Carney’s Sorry America: You’re Probably Doomed To Financial Illiteracy. He links to an older post by Matthew Yglesias pointing out that one problem with financial illiteracy is illiteracy – if people have terrible reading comprehension and can’t do basic math, we can’t expect them to navigate a mortgage.

This is incredibly important, but we can over read this. I am terrible at science, having never excelled at biology or chemistry. So I outsource my medical needs to a doctor. I’m terrible at confrontation and reading long legal documents, so I have a lawyer who can represent my legal needs. I’m not a dumb person, I’m just not smart at those things. And right now it is very difficult to get conflict-of-interest free financial advice, so it is worth looking further into Shiller’s idea of subsidizing conflict-free financial advice.

Subprime Student Loan Racket

Richard Serlin convinced me some time ago that private student loans are one of the most dangerous things for anyone to be around, especially our young people, and the more I read about the subject the more depressed I get.

So the story from The Washington Monthly, The Subprime Student Loan Racket, is heartbreaking. Whenever we talk about education, there’s always talk about abstractions: is it just signaling, a negative thing that should be taxed? is it ‘keeping up the race with technology’? etc.

The Washington Monthly story is a real example of educational failure: A 43 year old woman wants to career transition to become a nurse. We need nurses in this country. Maybe Martine Leveque would have made a good one. Maybe not. But regardless she ends up in a type of debt servitude having nothing to show for it, and with loans that can’t be discharged and that she can barely pay the interest for.

Lucky Ducky, Buyer Beware

I mentioned the idea that the Right might try to pin the blame on the subprime crisis on non-recourse loans in the previous entry – “AEI’s Peter Wallison has discussed preempting nonrecourse mortgages…” I haven’t mentioned it before because I was really hoping it would become a talking point for the Right. I still do! If it does, I’m going to commission another Lucky Ducky cartoon from the guy who does Tom The Dancing Bug (if you are unfamiliar with the meme, take the minute to click on that link; here’s one of the comics), where the dog sees Lucky Ducky and his family getting evicted and throws a fit that Lucky Ducky gets to enjoy not being in debt peonage for years after the eviction for defaulting on a NINJA 2/28 subprime loan that someone gave him for no money down.

Yes, yes, I know in Europe the mortgages are all recourse, but they have a radically different system from front-to-back. Here’s Soros on the Danish Model. But that’s much more in the Public Utility model of a financial system. Good or bad, it’s not what we’ve been doing.

I’m of the idea that this scenario should be “Let The Buyer Beware” – in this case the buyer is the buyer of credit risk – no person “buys” a mortgage, the bank buys your risk. That’s how the rate is set. There’s some risk here that can’t be diversified away; the question is who is better at identifying and holding this risk. Many states have decided that the lender is better off holding it than the seller, who is terribly bad at identifying it.

As Mark Gimein put it: “The loss was something that lenders could have anticipated at least as easily as borrowers…The reason that the [non-recourse] act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the [non-recourse] rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth.”

That strikes me as perfectly reasonable. I’m not a homeowner, but then again, I’m not currently spending the rest of my life paying off the bondholders of all the stocks in my 401(k) that have gone bankrupt. And I love incentives for good underwriting. So take it for what it is worth.

Regardless, if you want to know why progressives are fighting so hard to prevent federal law from preempting state laws when it comes to the CFPA, maybe this will explain why. As I think through the agency, I seriously consider it coming into being January 2013, just in time for President Sarah Palin to announce Peter Wallison as the first Director of the Consumer Financial Protection Agency. And I can only assume the Agency’s motto will be “It’s Lucky Ducky Hunting Season.”

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5 Responses to A Little More on Consumer Finances

  1. gabe says:

    I love those Lucky Ducky comics, they’re the essence of the WSJ editorial page.

  2. Ed says:

    I try to emphasize this as much as possible in the context of political science, but in some states (Georgia being one) the rate of functional illiteracy among adults is over 20%.

    One in five! A lot of our problems make sense in that context; people who can’t read a USA Today story about Brett Favre aren’t going to be able to do much. One can argue that this has always been the case (and indeed, literacy is better now than ever) but our society is exponentially more complex today. People in 1870 couldn’t read for shit, but no one was asking them to sign car title loan paperwork or vote on balanced budget amendments.

    We eggheads tend to have a hard time wrapping our heads around this, but a lot of people in this country (not to mention the world) simply lack either the tools or the capability to acquire and understand a basic argument.

  3. Neil D says:

    After watching the Frontline credit card program and reading the subprime student loan racket story, I am ashamed to be an American. We claim to be the virtuous society – exceptional even. Maybe that was true once and maybe we are still better than other countries, but we’ve got nothing to be proud of.

    Financial illiteracy would not be such a problem if it weren’t for the fact that the standard American business model is customer exploitation rather than customer service. I think that’s what’s changed for the worse in the last generation.

    I don’t know how to change that. One would hope that government could provide brake on such things, but the student loan story leaves me skeptical that anything could be done to reign in abuses. The GOP would scream “Socialism” and “nanny state” and the Democrats would just argue amongst themselves some more.

    Very depressing indeed.

  4. Art says:

    “I’m not currently spending the rest of my life paying off the bondholders of all the stocks in my 401(k) that have gone bankrupt”

    Sure, there’s little recourse to your ownership of common stocks of bankrupt companies, but your stocks did not provide the benefits of living in them, raising children in them, giving your children the zip code to attend the school system you had in mind when you bought, a safe neighborhood to stash your stuff and park your car, or house you close to your work before you default on your bondholder lender. This is not an apples-to-apples comparison. Unless you think the dividends (that a doomed company should not have been paying) are the securitized version of all of these things.

  5. Pingback: Consider » Blog Archive » The Tragedy Of For-Profit Colleges

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