Finance: Consumer Finance
Yüklə 0,62 Mb. Pdf görüntüsü
|
| Lecture 24: The Democratization of Finance: Consumer Finance Economics 252, Spring 2008 Prof. Robert Shiller, Yale University Social (Governmental) Insurance • Progressive Taxes (US 1913) • Free public education and services • Social Security: OASDI, Old Age, Survivors and Disability Insurance (US 1935) • Health Insurance: Medicare, Medicaid (US, both 1965) US is only major developed country without comprehensive health insurance. • Workers Compensation (US before 1920)
Origins of Social Insurance • German social thinkers in 1870s: Lujo Brentano, Gustav Schmoller, Adolph Wagner. Stressed insurance principles. • Otto von Bismarck’s government: instituted sickness insurance (Krankenversicherung) 1883, accident insurance (Unfallversicherung) 1884, old-age insurance (Invaliden und Altersversicherung), 1889. • Unemployment insurance, UK, Lloyd George, 1911.
Government Insurance, continued • Aid to Families with Dependent Children (1935) abolished 1996, in reaction to accelerating “moral hazard” problem. • Unemployment insurance (US 1935) • Survivors Insurance (US 1939) Radical Financial Innovation Example II: Social Security • Germany, 1889 first national pension plan • Financial theory: concept of insurance (Versicherung), large risks, Lujo Brentano, Gustav Schmoller • Psychological theory: overconfidence, wishful thinking, hyperbolic discounting Schriften des Vereins für Sozialpolitik • Information technology making this possible: paper, typewriters, filing cabinets, German bureaucracy, pasting 11 million stamps on cards • Invention copied around the world, same social security principles in U. S. today Welfare Reform Act of 1996 • Republican bill, Clinton signed it because of pledge to “end welfare as we know it,” after vetoing two earlier bills • Ended Roosevelt’s “New Deal” after 60 years • Lifetime 5-year lifetime limit on welfare • Denies aid to immigrants who are not citizens • Unemployed childless adults limited to 3 months food stamps out of 36 months, immigrants get none. Hungry people helped by churches, charity Early US Bankruptcy History • Reacting to what they regarded as lenient state bankruptcy laws in colonies, US constitution, Article I, Section 10, prohibits states from “impairing the obligation of contracts.” • 1800, 1841, 1867, 1898 acts followed financial crisis that rescued multitudes of failed debtors. In 1840, there were half a million failed debtors. • 1841 law had a discharge provision, after surrendering all one’s assets, one could have a “fresh start.”
Bankruptcy Reform Act, 1978 • First major revision of bankruptcy law since 1938 • Lowered stigma of bankruptcy, relabeled “bankrupts” as “debtors.” • Allowed people to keep more • Made repayment schemes more attractive • Launched a boom in personal bankruptcies. • Bankruptcies have increased five-fold since 1985. Personal Bankruptcies • US Personal bankruptcies reached 1.4 million in 1998, a record. Declined to 1.3 million in 1999 and 1.2 million in 2000, rose to 1.45 million in 2001, new record. • More bankruptcies than divorces. (1.2 million divorces in 1996) • With 104 million households in US in 1999, more than 1% of households declare bankruptcy each year.
• Cumulative effect as years go by. Chapter 7 Bankruptcy • This is the liquidation form. • Debtors turn over all nonexempt property to trustee and are discharged from most debt. • Alimony, taxes, educational loans not discharged. • Can’t declare bankruptcy again for 6 years. • To read Chapter 7 (or others), go to Title 11 (Bankruptcy) of United States Code, http:// www4.law.cornell.edu/uscode/11/
Chapter 11—Reorganization • Primarily for businesses • Some individuals running small businesses may use Chapter 11 Chapter 13–Adjustment of Debts of an Individual with Regular Income • Chapter 13 is a vehicle to repay part or all of debts over time, supervised by court- appointed trustee. • Keep all of property and receive a discharge of portion of debt 2005 Consumer Protection and Bankruptcy Abuse Act • Clinton vetoed 2000 bill as too harsh. • Harsh new bills passed both houses March 2001, Bush indicated he would sign. • Reconciliation conference was scheduled for September 12, 2001, cancelled. • Pres. Bush signed final bill April 2005, prompting last minute rush to file for bankruptcy • Took effect October 17, 2005, foreclosure rates jump immediately • Time between bankruptcies raised to eight years from six • Chapter 7 now available only for households with incomes below their state median Informal Bankruptcy • Only 40% of credit card charge-offs are due to bankruptcies. (Amanda Dawsey, L. Ausubel) • Going bankrupt requires some planning, one has to save $1000 before lawyer will represent you. Down-and-outs don’t do it. Creditors may just give up— not worth it. • State laws allow creditors to garnish your wages, even if you never declared bankruptcy.
Causes of Bankruptcies • Personal bankruptcies tend to be spurred by job loss, health problems, divorce. • Americans run up debts they can pay only if nothing goes wrong. • Many bankruptcies are by people who are “drowning in mortgage debt,” having bought too big a house. – Sullivan, Warren & Westbrook The Fragile Middle
Bailouts without Bankruptcy • Home Owners’ Loan Corporation 1933. If you couldn’t afford to pay your mortgage, but were still dependeable, you go to HOLC. • HOLC goes to your lender, and seeks a reduction of your balance, say from $8000 to $6000. • HOLC would swap the lender $6000 of govt bonds for the new mortgage • Demanded a 15-year mortgage
Dodd-Frank Bill Pending in Congress • FHA would insure mortgages up to 90% of value of home • Private sector would do new loans at 90%, have FHA guarantee loans • Swapping debt for equity, equity that will stay with FHA realized upon resale of house. • Future of this bill is uncertain Continuous-Workout Mortgages • The mortgage workouts in Dodd-Frank bill could be done continuously (every month) for all home owners.
• Automatically adjust mortgage for changes in home prices, incomes, economic conditions • Dodd-Frank bill is in trouble because it smacks of bailout; my proposal is not a bailout • CWM proposal is in my forthcoming Subprime
Concluding Thoughts for Course • Democratization of finance will dramatically extend realm of financial technology to everyone, improving human welfare • This democratization is part of a long trend toward greater economic development • Financial careers have a good claim for social purpose, youthful idealism • Peter Unger’s Living High and Letting Die reveals complex moral dilemmas for all careers, dilemmas that all of us must confront, each in our own way. Yüklə 0,62 Mb. Dostları ilə paylaş:
|