tag:theconversation.com,2011:/fr/topics/subprime-crisis-13708/articlesSubprime crisis – The Conversation2021-06-03T20:12:08Ztag:theconversation.com,2011:article/1619062021-06-03T20:12:08Z2021-06-03T20:12:08ZVital Signs: ASIC’s crusade against activist short sellers will be bad for regular folk<p>The Australian Securities & Investment Commission issued <a href="https://asic.gov.au/regulatory-resources/markets/short-selling/activist-short-selling-campaigns-in-australia/">an information sheet</a> this week regarding so-called “activist short selling”. </p>
<p>The document outlines a number of “better practices” it wants short sellers to adhere to, and some “actions that we may take” if they don’t. </p>
<p>Translation: “Hey hedge-fund folks, do this stuff or we’ll make life difficult for you.”</p>
<p>The problem is not that the corporate regulator can’t do so. It is that these “better practices” are likely to lead to less efficient markets. </p>
<p>In short (pun absolutely intended), this is bad idea.</p>
<h2>What is activist short selling?</h2>
<p>Short selling involves selling a security (like a share of stock in an exchange-listed company) you don’t own. The way this is typically done is to borrow that security from someone who does own it, with a promise to return it at a later date.</p>
<p>The idea is that when the security goes down in price, you can buy a replacement security for the person you borrowed from at a cheaper price than what you sold theirs, thus pocketing the difference.</p>
<p>Basically it’s a bet that the price of something is going to go down. For an alternative explanation see this scene from <a href="https://en.wikipedia.org/wiki/The_Big_Short_(film)">The Big Short</a>, the 2015 film about the housing bubble and subprime mortgage crisis that led to the Global Financial Crisis of 2007-2008.</p>
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<figcaption><span class="caption">Short selling explained by Margot Robbie in ‘The Big Short’.</span></figcaption>
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<p>Activist short selling involves taking a short position and then publicising it. This could be through media interviews, social media posts or otherwise providing detailed accounts of concerns with the target entity.</p>
<p>Perhaps the best example of this was investor George Soros’ <a href="https://www.forbes.com/sites/steveschaefer/2015/07/07/forbes-flashback-george-soros-british-pound-euro-ecb/?sh=11aa23b76131">1992 bet against the British Pound</a> (and other currencies) he rightly thought were overvalued against Germany’s Deutsche Mark and were being propped up by central banks like the Bank of England.</p>
<p>ASIC itself says its research indicates “activist short selling campaigns tend to target entities with complex and opaque corporate structures and accounting practices, or poor disclosure”.</p>
<p>So short selling can help discourage such practices. That’s a good thing. Yet ASIC wants to discourage shorting. What gives?</p>
<h2>Short selling improves market efficiency</h2>
<p>Why was there a housing bubble in the US in the early 2000s? </p>
<p>There were many causes, including absurdly lax lending standards and outright fraud by those issuing loans and the creation of complex financial products such as synthetic collateralised debt obligations (synthetic CDOs). </p>
<p>For an explanation of these see this, also from the Big Short, by Nobel prize-winning University of Chicago economist <a href="https://www.nobelprize.org/prizes/economic-sciences/2017/thaler/facts/">Richard Thaler</a> and the almost-as-famous actor and recording artist Selena Gomez.</p>
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<figcaption><span class="caption">Thaler and Gomez on synthetic CDOs.</span></figcaption>
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<p>But there was also little that those who believed the housing market was dangerously overvalued could do to “bet against” it. </p>
<p>Eventually, as Michael Lewis’ book <a href="https://wwnorton.com/books/9780393072235">The Big Short: Inside the Doomsday Machine</a> (on which the movie is based) recounts, a handful of unusual characters managed to get Wall Street to create a specialised instrument called a “credit default swap” to let them do so.</p>
<p>Had there been an easy way to short the housing market earlier, the bubble might never have gotten out of control. The horrific crash of 2008 that caused the greatest financial crisis since the Great Depression might have been avoided.</p>
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Read more:
<a href="https://theconversation.com/explainer-what-is-short-selling-9337">Explainer: what is short selling?</a>
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<h2>A check on ‘animal spirits’</h2>
<p>Why would short selling have helped?</p>
<p>Short selling punishes speculation by putting a check on out-of-control markets.
It motivates investors to keep an eye on fundamentals, not just get carried away with what John Maynard Keynes labelled “animal spirits” – the impulses that help drive speculative bubbles and busts.</p>
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Read more:
<a href="https://theconversation.com/from-tulips-and-scrips-to-bitcoin-and-meme-stocks-how-the-act-of-speculating-became-a-financial-mania-158406">From tulips and scrips to bitcoin and meme stocks – how the act of speculating became a financial mania</a>
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<p>There’s only so much that can be done with the housing market, which is inherently difficult to bet against.</p>
<p>But Australia’s corporate regulator wants to restrict short selling in the stock market, in which it’s relatively easy to take a short position.</p>
<p>ASIC is obviously aware of the argument that short selling improves market efficiency, but has chosen to discount it. It has opted for rules that push Australia closer to European countries rather than the US – the largest, most liquid, and most important capital market in the world.</p>
<h2>Australian short sellers are being told to stop</h2>
<p>The corporate watchdog has outlined a number of “actions” it might take if short sellers don’t play ball:</p>
<ul>
<li>engaging with market operators (such as the Australian Stock Exchange) on the timing of trading halts</li>
<li>examining trading activity of short sellers, particularly “short and distort” campaigns</li>
<li>assessing if a short seller has conducted a financial service in Australia and holds the necessary licence</li>
<li>testing the veracity of claims and how conflicts of interest are disclosed</li>
<li>where an activist short seller is based abroad, engaging with their “home regulator”</li>
<li>taking action for breaches of the law.</li>
</ul>
<p>Many of these may sound mild but are in fact quite extraordinary. They constitute a (very) thinly veiled message that overseas hedge fund managers should knock it off with activist shorting in Australia.</p>
<p>This combines, to a remarkable degree, ugly nativism and regulatory capture – the phenomenon by which a regulator, even without malicious intent, comes to represent the interests of those it regulates, rather than the public good. (The theory of regulatory capture <a href="https://www.jstor.org/stable/3003160?casa_token=5wNw2MzeMCgAAAAA:LXphlOQWQ5nnt7DUjpK_gduPouVMEv1yie0_mONLBgCZghaAZKB0KraXdZi4G2Rng7jSmNJuR2dUFwkOnaggCQc-w406bzysj34IqdrmzWd459RI1uyrjA&seq=1">was pioneered by</a> another Chicago economist and Nobel winner, <a href="https://www.nobelprize.org/prizes/economic-sciences/1982/stigler/facts/">George Stigler</a>.) </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-when-watchdogs-become-pets-or-the-problem-of-regulatory-capture-111170">Vital Signs: when watchdogs become pets – or the problem of 'regulatory capture'</a>
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<h2>Bubbles are bad for regular investors</h2>
<p>Who will breathe easier as a result of ASIC’s new guidelines? Companies with opaque accounting practices, inadequate corporate disclosures and even those that may be acting unlawfully.</p>
<p>The losers are equally easy to identify. Some rich hedge fund folks in Greenwich, Connecticut, sure. But also the Australian public, whose superannuation funds are invested in Australian markets.</p>
<p>We all have a big interest in ensuring the informational efficiency and market transparency. Bubbles are bad for regular investors. Regulations and securities laws play a crucial role in achieving those goals. So do activist short sellers.</p>
<p>ASIC should reconsider its stance. It will only serve to damage the credibility of Australian securities markets, the Australian public, and their own reputation as a wise regulator.</p><img src="https://counter.theconversation.com/content/161906/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is president-elect of the Academy of the Social Sciences in Australia.</span></em></p>Activist short selling plays an important role in keeping financial markets accountable and efficient.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1582972021-04-01T19:03:43Z2021-04-01T19:03:43ZVital Signs: swaps, options and other derivatives aren’t just for the financial elite<figure><img src="https://images.theconversation.com/files/393045/original/file-20210401-15-5jhw6s.jpg?ixlib=rb-1.1.0&rect=0%2C580%2C4000%2C2083&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Paulus van Dorsten/Shutterstock</span></span></figcaption></figure><p>One of the biggest trends in economics over the past 40 years has been so-called “financialisation” – whereby an increasing proportion of GDP in advanced economies comes from the financial sector. </p>
<p>This has involved the development of ever more sophisticated “financial instruments” such as swaps, options and other derivative securities. </p>
<p>The global mobility of financial capital has also given banks and hedge funds massive piles of money with which to make leveraged bets on everything from stock prices to the fourth derivative of the volatility of South American currencies — which is (I kid you not) a contract on the rate of change on the rate of change on the rate of change in currency value.</p>
<p>As Harvard economists Robin Greenwood and David Scharfstein <a href="https://www.aeaweb.org/articles?id=10.1257/jep.27.2.3">have noted</a>, in 1980 the financial sector accounted for 4.9% of US GDP. By 2007 it was 7.9%. Since 1980, they note, the financial sector’s share of GDP has increased at 13 basis points a year, compared with 7 basis points a year over the 30 years prior.</p>
<h2>The dark side of financialisation</h2>
<p>Financialisation’s dark side is known to anyone who has seen the movie The Big Short.</p>
<p>The financial sector went from being “boring” in the 1970s and early 1980s to being a playground for clever, sometimes unscrupulous traders driven by huge incentives and the prospect of paydays in the tens, or hundreds of millions.</p>
<p>Given some of the ugly and venal behaviours we have seen, it is hardly surprising there has been a huge backlash against big banks and hedge funds. Too often these behaviours have brought the global financial system to the brink.</p>
<p>As far back as 1998 a rinky-dink little hedge fund (backed by two Nobel Prize-winning economists, <a href="https://www.nobelprize.org/prizes/economic-sciences/1997/scholes/biographical/">Myron Scholes</a> and <a href="https://www.nobelprize.org/prizes/economic-sciences/1997/merton/biographical/">Robert Merton</a>, Long-Term Capital Management, believed it had an unbeatable system to play these markets. Instead it turned US$1 billion into US$125 billion of toxic derivatives bets, almost bringing down financial markets around the world. </p>
<p>Then there are the collapses of Bear Stearns and Lehman Brothers due to the subprime mortgage crisis, which precipitated the global financial crisis of 2008.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/lessons-from-the-2008-financial-crisis-for-our-coronavirus-recovery-today-recovery-podcast-series-part-six-142203">Lessons from the 2008 financial crisis for our coronavirus recovery today – Recovery podcast series part six</a>
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<h2>The bright side of financialisation</h2>
<p>But it’s not all bad news. A <a href="https://www.aeaweb.org/articles?id=10.1257/mac.20180429&&from=f">new paper</a> by MIT economists Felipe Iachan and Alp Simsek with Plamen Nenov at the Norwegian Business School explores the idea that financial innovation can provide investors, small and large, with more choice, with positive results for their savings decisions and investment returns.</p>
<p>Before the advent of mutual funds, it was very hard (and expensive) for small investors to invest in the stock market. The advent of such funds increased stock-market participation in the US from about 10% of households in the 1950s to more than 50% by the end of the 1990s.</p>
<p>In Australia, effective stock-market participation is now even more pervasive due to our superannuation system, whereby almost anyone who has had a full-time job has stock investments. </p>
<p>What does this mean for the amount of savings, and for asset prices?</p>
<p>You might think that increased portfolio choice would decrease savings — and you’d be in good company. </p>
<p>The traditional literature in financial economics predicts just that. The logic is that people save to protect themselves against risks — such as losing their job because the industry in which they are employed is battered by international competition or technological change. </p>
<p>By investing in stocks, they hedge that risk by exposing themselves to other industries and firms. If the industry in which they work turns down their stock market investments might be going up.</p>
<p>As a result of this more efficient saving, households don’t need to do as much saving as if they were holding piles of cash or government bonds. Because those savings aren’t as diversified. So savings should go down and interest rates should go up, all else equal. </p>
<h2>Contradicting evidence</h2>
<p>But, as the authors of this new paper point out, the evidence is that “while there is a well-known negative trend in saving rates since the 1980s, the trend has been much weaker for participants”. </p>
<blockquote>
<p>Put differently, stock-market participants have increased their saving relative to non-participants since the 1980s. </p>
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<p>And that’s controlling for wealth, so it’s not about how much people have to invest but in what, and how much, they invest.</p>
<p>They go on to offer a framework in which investors who hold different beliefs about asset returns can express those beliefs more effectively when financial innovation provides them with a greater choice of investment products.</p>
<p>This isn’t just a matter of theory — elegant though the authors’ theory is. The empirical evidence suggests this “choice channel” explains two important facts about investment returns in recent years. </p>
<p>First, stock market participants save more than non-participants. Second, “similar households seem to receive more dispersed portfolio returns in recent years”.</p>
<h2>Pros and cons</h2>
<p>There has been plenty of justified criticism of the financial sector in recent years. Risky and unseemly things have been done, hurting regular folk a great deal.</p>
<p>But we shouldn’t forget new and better financial products can also help small-time investors. Perhaps the leading example is index funds that allow them to hold a diversified portfolio of the whole stock market at very low cost — a fee of, say, 0.05% a year, rather than the 1% commonly paid stock pickers for inferior performance.</p>
<p>This is why the option of a low-cost index fund should be at the heart of Australia’s superannuation system.</p><img src="https://counter.theconversation.com/content/158297/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The dark side of ‘financialisation’ is well-known. But it’s not all bad news.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1198892019-07-18T11:58:27Z2019-07-18T11:58:27ZBetting on speculative geoengineering may risk an escalating ‘climate debt crisis’<figure><img src="https://images.theconversation.com/files/282704/original/file-20190704-51312-1v5vsr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Vladi333 / shutterstock</span></span></figcaption></figure><p>The opening of the Oscar-winning film The Big Short, a comedy-drama on the global financial crisis of 2007-2008, begins with a <a href="https://quoteinvestigator.com/2018/11/18/know-trouble/">famous quote</a>: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”</p>
<p>This phrase captures one of the main <a href="https://doi.org/10.1080/08913810902952903">reasons</a> why the US housing bubble popped in 2008, triggering the worst economic recession since the 1930s. The movie portrays an eccentric hedge fund manager discussing the idea of betting <em>against</em> subprime <a href="https://www.investopedia.com/terms/m/mortgage_bond.asp">mortgage bonds</a>. The investment bankers, at first, reply politely: “Those bonds only fail if millions of Americans don’t pay mortgages. That’s never happened in history.”</p>
<p>But it happened. And as a consequence, many people worldwide have suffered severely, and the enduring effects still haunt us, politically and economically, even <a href="https://www.penguin.co.uk/books/56199/crashed/9781846140365.html">a decade later</a>.</p>
<p>In a new paper published in <a href="https://doi.org/10.1080/14693062.2019.1623165">Climate Policy</a>, we argue that a similar tragic “debt crisis” could unfold for climate change. The “debt” would be measured in <a href="https://www.cicero.oslo.no/en/carbonbudget-for-dummies">excess carbon emissions</a>, which will keep accumulating until we reach net-zero. In this scenario, the bankers are those who assume that the debt will be paid back by removing carbon from the atmosphere. </p>
<p>But such a bet will be necessary if we recklessly embark on the strategy of reducing emissions slowly and removing carbon later, while in the meantime using speculative technology to block out heat from the sun. Among climate scientists and policy analysts, this is the so-called temperature “overshoot and peak-shaving” scenario.</p>
<h2>‘Overshoot and peak-shaving’</h2>
<p>In December 2015, the world adopted the <a href="https://theconversation.com/five-things-you-need-to-know-about-the-paris-climate-deal-52256">Paris Agreement</a> and pledged to limit global temperature rise well below 2°C – if not 1.5°C – above pre-industrial levels. Despite that, global CO₂ emissions continue to <a href="https://doi.org/10.1038/d41586-018-07585-6">rise</a>.</p>
<p>The slow and uneven pace of global emissions reductions is increasing the likelihood of <a href="https://doi.org/10.1126/science.316.5826.829b">“overshoot” scenarios</a>, in which warming will temporarily exceed 1.5 or 2°C, but will later fall to the target temperature through the large-scale deployment of <a href="https://www.carbonbrief.org/explainer-10-ways-negative-emissions-could-slow-climate-change">negative emissions technologies</a>. These remove CO₂ from the atmosphere by, for example, planting trees or scrubbing it through chemical filters and burying it deep underground.</p>
<p>But the world would still need to adapt to the <a href="https://doi.org/10.1038/nclimate3179">impacts of increased warming</a> during the overshooting period. Because of this concern, the idea of so-called “<a href="https://doi.org/10.1098/rsta.2016.0454">peak-shaving</a>” has also emerged among some scientists who want to avoid such an overshoot by temporarily using solar geoengineering.</p>
<p><a href="https://www.carbonbrief.org/explainer-six-ideas-to-limit-global-warming-with-solar-geoengineering">Solar geoengineering</a> means dimming sunlight itself. In theory, the Earth could be cooled very quickly by, for example, spraying sulphate aerosols in the upper atmosphere.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=443&fit=crop&dpr=1 600w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=443&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=443&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=557&fit=crop&dpr=1 754w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=557&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=557&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Small particles in the upper atmosphere could reflect a few percent of incoming solar radiation.</span>
<span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/File:SPICE_SRM_overview.jpg">Hughhunt</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The concept of an “overshoot and peak-shaving” scenario is therefore based on the temporary use of solar geoengineering, combined with large-scale deployment of negative emissions technologies.</p>
<p>In this scenario, the two technologies are in a mutually dependent relationship – solar geoengineering is used to keep the temperature down for the time being, while negative emissions technologies are used to reduce atmospheric CO₂ to the point where solar geoengineering is no longer needed. </p>
<h2>Emissions debt and temperature debt</h2>
<p>But this <em>assumed</em> reciprocity may not work as intended. Here, the notion of debt is useful. As the sociologist <a href="https://doi.org/10.1111/1467-954X.12442">Lisa Adkins</a> suggests, the logic of debt rests on a promise to pay (back) in the future. In this sense, both overshooting and peak-shaving can be seen as acts of “borrowing” or “creating debt”.</p>
<p>Overshooting avoids reducing carbon emissions today by effectively borrowing emissions from the future (creating “emissions debt”), with a promise to pay back that debt later through negative emissions technologies.</p>
<p>Peak-shaving is borrowing global temperature (creating “temperature debt”) through the temporary use of solar geoengineering to cancel excess warming until the point when no further borrowing, of either sort, is needed.</p>
<p>In such an outcome the world will take on a double debt: “emissions debt” and “temperature debt”.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=221&fit=crop&dpr=1 600w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=221&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=221&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=278&fit=crop&dpr=1 754w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=278&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=278&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Emissions debt results from the near-term excess of CO₂ emissions in the overshoot compared to the non-overshoot scenario, while temperature debt results from the temporary masking of warming committed by excess emissions above the target temperature.</span>
<span class="attribution"><span class="source">Asayama & Hulme</span></span>
</figcaption>
</figure>
<h2>The analogy with housing loans</h2>
<p>The fact of being indebted may not sound so bad. (Almost everyone has a debt of some kind in their everyday life, right?) But the key question is: can we duly pay off this “climate debt”? How credible is the promise?</p>
<p>Here, the analogy with housing loans is most useful for properly rating the riskiness of such debt repayment.</p>
<p>Given that overshoot allows slow rates of emissions reductions by “promising” that delays can be compensated later through carbon removal, this looks a bit like borrowing an adjustable-rate <a href="https://www.investopedia.com/terms/s/subprime_mortgage.asp">subprime mortgage</a> loan. Peak-shaving, on the other hand, is more like borrowing <a href="https://www.investopedia.com/terms/s/secondmortgage.asp">additional loans</a> for “home improvement”, which maintains house values – (keeps global temperature constant during the overshooting period). </p>
<p>Since most negative emissions technologies are still <a href="https://theconversation.com/why-we-cant-reverse-climate-change-with-negative-emissions-technologies-103504">speculative</a> or under development, overshoot should be rated like a <em>subprime</em> loan with a high risk of default. Just as American homeowners weren’t able to keep paying their mortgages after all, so negative emissions technologies may never be an effective enough way to take carbon out of the atmosphere.</p>
<p>This doesn’t sound like a secure, feasible investment. The failure to keep the overshoot promise of later repayment would lead to endless peak-shaving. Solar geoengineering would become an ongoing necessity – an unpayable massive “climate debt” accumulating year-by-year.</p>
<h2>Framing matters — let’s not blind ourselves</h2>
<p>Concerns over crossing so-called “tipping points” – paving the way toward a “<a href="https://theconversation.com/hothouse-earth-heres-what-the-science-actually-does-and-doesnt-say-101341">hothouse Earth</a>” – may push some people towards accepting overshooting and peak-shaving. But because this is a <em>speculative</em> scenario, it matters how we <a href="https://doi.org/10.1080/17524030903529749">frame</a> it. </p>
<p>Some scientists say that solar geoengineering is like a <a href="https://www.seas.harvard.edu/news/2019/03/finding-right-dose-for-solar-geoengineering">drug to lower high-blood pressure</a> – an overdose is harmful, but a “well-chosen” and limited dose can lower your risks, helping you have a healthier life.</p>
<p>They suggest that solar geoengineering is not a substitute for cutting emissions but a <a href="https://doi.org/10.1098/rsta.2016.0454">supplement</a> for containing global temperature increases. But this works only if negative emissions technologies are rolled out very swiftly on a massive scale.</p>
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Read more:
<a href="https://theconversation.com/blocking-out-the-sun-wont-fix-climate-change-but-it-could-buy-us-time-50818">Blocking out the sun won't fix climate change – but it could buy us time</a>
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<p>The housing loans analogy sheds light on an important assumption that is implicitly built into such a scenario, namely that overshooting is simply like borrowing money (for example, a mortgage) and that people pay back mortgages. This was also the unquestioned assumption in the run up to the US housing market crisis and it created the <a href="https://doi.org/10.1093/rfs/hhp033">systemic failure</a> to notice the growing risk of the bubble bursting.</p>
<p>We shouldn’t fool ourselves into believing that a similar “debt crisis” will not happen for managing the risk of climate change. Beware the dubious promises of “overshoot and peak-shaving” technologies – they may well turn out to be risky subprime loans.</p>
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<img alt="" src="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=140&fit=crop&dpr=1 600w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=140&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=140&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=176&fit=crop&dpr=1 754w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=176&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=176&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=Imagineheader1119889">Click here to subscribe to our climate action newsletter. Climate change is inevitable. Our response to it isn’t.</a></em></p><img src="https://counter.theconversation.com/content/119889/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shinichiro Asayama receives funding from the Japan Society for the Promotion of Science, Grants-in-Aid for JSPS Research
Fellow (17J02207). </span></em></p><p class="fine-print"><em><span>Mike Hulme does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The world economy collapsed when homeowners couldn’t repay subprime mortgages. We’re now making a similar bet on ‘repaying’ carbon emissions.Shinichiro Asayama, Visiting Scholar at Department of Geography, University of CambridgeMike Hulme, Professor of Human Geography, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1180812019-06-10T19:54:48Z2019-06-10T19:54:48ZCredit ratings: old risks and new challenges for financial markets<figure><img src="https://images.theconversation.com/files/277206/original/file-20190530-69051-1c2iec6.jpg?ixlib=rb-1.1.0&rect=0%2C167%2C3029%2C1991&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Office of the Moody's Corporation ratings agency.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-nysept-4-2010-lettering-1325833637?src=qfgprk1n3TgZdNhW2-5vSA-2-42">Daniel J. Macy</a></span></figcaption></figure><p>In 2019, Moody’s Corporation, the holding company of Moody’s Investors Service, is celebrating its <a href="https://www.moodys.com/Pages/atc001.aspx">110th birthday</a>. Being the first rating agency and creator of a completely new industry, Moody´s is still successful today – in 2017, it generated $1 billion net income. However, since its foundation, the financial system has dramatically changed, and important issues have been raised about credit-rating agencies (CRAs) and their business model.</p>
<p>Even though Moody’s, Standard & Poor’s (S&P) and other CRAs have a successful past, today they face critics and the future of credit ratings has to be considered. Following the financial crisis in 2008 and the European debt crisis, criticism on CRAs rose. According to the <a href="https://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf">Financial Crisis Inquiry Commission</a>, CRAs were “key enablers of the financial meltdown” in 2008. The sovereign downgrade of major Eurozone economies additionally <a href="https://www.cfr.org/backgrounder/credit-rating-controversy">“accelerated the Eurozone’s sovereign debt crisis”</a>.</p>
<h2>A long history</h2>
<p>The concept of the credit rating scale was already introduced in 1909 and has not been changed over the last decades, even though the financial market has. The simplicity of the scale, which combines letters and numbers in a <a href="https://www.moodys.com/sites/products/AboutMoodysRatingsAttachments/MoodysRatingSymbolsandDefinitions.pdf">range from Aaa (the best) to C (default)</a>, is easily usable by the market. The rating scales differ slightly between the agencies, but generally more letters followed by lower numbers express a better rating. Moody’s ratings between AAA and Baa3 are considered as investment grade and have a low probability of default while ratings from Ba1 have a “junk” status and higher probabilities of default. The classification can be understood even without a deep knowledge of finance, one reason why it remained so successful over decades.</p>
<p>The importance of credit ratings has increased due to changes in the regulation. In 1975 the Security and Exchange Commission (SEC) issued new rating-based rules which established bank and broker-dealer capital requirements. The SEC additionally required that these ratings must have been issued by Nationally Recognized Statistical Ratings Organizations (NRSRO). Seven rating agencies were originally approved as NRSRO and today their number includes only three more.</p>
<p>The market is dominated by Moody’s and S&P. Their combined <a href="https://www.sec.gov/ocr/reportspubs/annual-reports/2017-annual-report-on-nrsros.pdf">US market share is approximately 83% (Moody’s 34.2%, Standard & Poor’s even 48.9%)</a>, with similar figures for <a href="https://www.esma.europa.eu/press-news/esma-news/esma-reports-annual-market-share-credit-rating-agencies">Europe</a>. Thanks to their long experience, they have a unique expertise in evaluating firm risk and new agencies struggle to compete with this knowledge. In addition, both companies have a solid reputation in the financial markets and the usage of smaller agencies could be interpreted as suspicious. Fitch Ratings was able to establish itself as the third biggest party, with a market share of around 13%. Fitch’s credit rating is especially important when the ratings of Moody’s and S&P differ from each other because it serves <a href="https://www.jstor.org/stable/41419673">as a tiebreaker</a>.</p>
<h2>New payment models… thanks to the photocopier</h2>
<p>Another significant change for the rating industry occurred in the beginning of the 1970s. In the original business idea, the investors needed to know the default probability and therefore they were charged for the service. However, when the prices for photocopy machines dropped, the <a href="https://www.washingtonpost.com/archive/business/2002/01/31/do-rating-agencies-make-the-grade/9482b73e-5199-40b2-985f-8f3c3084b8f4/?noredirect=on&utm_term=.934ff964c8fc">issued rating reports could be copied easily</a> and be accessible to all investors free of charge. Rating agencies had to change the payment model: bond issuers became the ones that had to pay, as they were required by law to have issuer ratings.</p>
<p>Referring to the new “issuer pays” model, Lynn Stout, Professor of Corporate and Securities Law at the University of California states: <a href="https://www.wsj.com/articles/SB10001424052748703814804576036094165907626">“When the people being watched get to choose their watchdog, they’re not going to choose the toughest animal around”</a>. Regulators tried to change this payment model, whose problems become even more prominent in times of stress, such as financial crises. In addition, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2002186">research found</a> that the difference in ratings between “issuer pays” and “investor pays” is more pronounced when the conflict of interest is particularly severe.</p>
<h2>Should issuers or investors pay?</h2>
<p>The “issuer pays” model might lead to “rating shopping”, a situation in which the issuer contacts different agencies and chooses the one with the most favourable rating. Especially when the asset is complex to evaluate and ratings differ, the issuer has an incentive to choose only the best rating. This happened, for example, with CDOs (Collateralized Debt Obligations) tranches and triggered the financial crisis in 2008. Agencies rated risky bonds with good ratings in an attempt to <a href="https://ftalphaville.ft.com/2008/10/23/17359/rating-cows/">gain more business</a>. The “issuer pays” model is still the predominant type of payment and Moody’s, S&P and Fitch use this model, while only three of the 10 recognized agencies apply the “investor pays” model. For example, the rating agency Egan-Jones, founded in 1995, entered the market and is increasing its market share continuously thanks to this concept.</p>
<p>Another concern on CRAs consists of the rating analysts. The exact methodology of how CRAs evaluate the creditworthiness of issuers is a firm’s secret to avoid copies. The credit risk is evaluated through the <a href="https://www.moodys.com/sites/products/ProductAttachments/Exhibit2.pdf">application of quantitative and qualitative factors</a>. Therefore, ratings express the CRA’s opinion and are dependent on the analysts themselves. Research recently found subjectivity in ratings issued by the same firm. <a href="https://www.sciencedirect.com/science/article/pii/S0304405X1630006X">Analysts can be optimistic or pessimistic and this can be reflected in their decision</a>. This consequently leads to a rating bias that can have serious consequences. As an example, during the financial crisis analysts were often too optimistic while analysing default risk and the market followed their advices.</p>
<p>The last and probably the main challenge for CRAs lies in the changes of regulations which are due to the arising scepticism on their regards. In the last decade, several regulatory changes affected the rating industry. The most important one was the Dodd-Frank Act, signed into US law in 2010 in response to the financial crisis. The Dodd-Frank Act increased the liability for issuing inaccurate ratings and <a href="https://www.sciencedirect.com/science/article/pii/S0304405X14002347">made it easier to sanction CRAs in case of material misstatements or fraud</a>.</p>
<h2>Market data is the key in future</h2>
<p>Currently, CRAs are backed by the need of the financial markets because companies need to have at least one credit rating issued by a NRSRO in the case they want to issue a bond. CRAs indicate the opinion of the creditworthiness of firms, in particular of bond issuers. What happens if this would no longer be the case? In the past 20 years, alternative market instruments have provided similar information. Several researchers show <a href="https://www.emeraldinsight.com/doi/abs/10.1108/JRF-09-2016-0119?fullSc=1&journalCode=jrf">that credit default swaps (CDS) spreads can be used to extract implied credit ratings</a>.</p>
<p>CDS data help to get more information about the issuer from a market perspective. Implied credit ratings have the advantage to be independent of analysts and are based on the opinion on the bond market participants themselves. The question is whether these market implied ratings – or other new instruments – will replace the CRA’s traditional ratings. The Big Three – Moody’s, S&P and Fitch Ratings – have already established market-based ratings, using data from the CDS market. A better integration between market data and the judgement of analysts could in the future lead to more balanced ratings.</p><img src="https://counter.theconversation.com/content/118081/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Florian Kiesel ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Standard & Poor’s, Moody’s, and other ratings agencies have a long and storied history, but today they face significant criticism and the future of ratings themselves are under challenge.Florian Kiesel, Assistant Professor of Finance, Grenoble École de Management (GEM)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/939002018-04-19T10:50:24Z2018-04-19T10:50:24Z2008 financial crisis still seems like only yesterday for single women<figure><img src="https://images.theconversation.com/files/214856/original/file-20180414-570-i6t6p1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A woman walks by the New York Stock Exchange. </span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>For many Americans, the financial crisis that plunged the global economy into recession a decade ago may seem like a distant memory. </p>
<p><a href="https://www.federalreserve.gov/releases/z1/20180308/z1.pdf">Household net worth</a> – the difference between assets and debts – reached a record US$98.7 trillion in the last quarter of 2017, up from $56.2 trillion in 2008. </p>
<p>Yet net wealth, by itself, masks a lot of information that could signal troubling trends. For example, this measure doesn’t tell us which households are getting richer. It also doesn’t reveal how much borrowing is fueling these ostensibly swelling balance sheets. </p>
<p>More specifically, it doesn’t show that for households headed by women, particularly poorer ones, the financial picture is still very cloudy. That’s in part because, as my soon-to-be-published research shows, low-income single women borrowed a lot more than single men in the years leading up to the crisis. And their indebtedness relative to their income and wealth remains far more elevated than is the case for pretty much everyone else.</p>
<p>This is especially worrying because female-headed households are vulnerable to begin with – and so are at risk again if <a href="https://theconversation.com/recent-stock-market-sell-off-foreshadows-a-new-great-recession-92471">another crisis looms on the horizon</a>. </p>
<h2>Why debt matters</h2>
<p>To understand why debt is so integral to household financial health, it’s helpful to look at what happened during the 2008 financial crisis. </p>
<p>Overall household debt grew dramatically in the early 2000s, driven in large part by the <a href="https://files.stlouisfed.org/files/htdocs/publications/review/06/01/ChomPennCross.pdf">subprime mortgage</a> boom. This borrowing eventually reached levels that proved to be unsustainable and, after interest rates began rising in 2004, forced millions into <a href="http://money.cnn.com/2006/09/13/real_estate/foreclosures_spiking/index.htm?postversion=2006091508">foreclosure</a>.</p>
<p>While things have recovered, the significant gains in net worth are illusory, in part because <a href="https://www.washingtonpost.com/news/wonk/wp/2017/12/06/the-richest-1-percent-now-owns-more-of-the-countrys-wealth-than-at-any-time-in-the-past-50-years/?utm_term=.ba02d0976df1">they have gone disproportionately</a> to the richest households. Moreover, they have been financed through a lot more borrowing.</p>
<p>Total household debt reached <a href="https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2017Q4.pdf">a record $13.15 trillion</a> at the end of 2017, up about $2 trillion since the most recent trough in 2013. Nonhousing debt like credit cards and student loans made up most of the increase. </p>
<p>To understand why net worth is misleading, consider two households with identical net worth of $10,000: One has $15,000 of assets and $5,000 of debts, while the other has $10,000 of assets and no debts. </p>
<p>Whether the $5,000 turns out to be unsustainable or not depends on the household’s ability to service the debt and pay down the principal. If its income becomes insufficient, the debt will accumulate, and eventually the family will have less and less money for the necessities of life – as occurred during the financial crisis. </p>
<p>Sustainable debt can quickly become unsustainable if a household suffers what economists call a “shock,” or any unexpected change to the family’s ability to make ends meet, like losing a job or caring for a sick relative. And some households are more vulnerable, or <a href="https://economics.mit.edu/files/5998">financially fragile</a>, than others. </p>
<p>Unpredictable shocks can push such households over the edge.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/214855/original/file-20180414-540-xpgtw0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Households that are financially fragile are more vulnerable to unpredictable shocks such as medical bills or job loss.</span>
<span class="attribution"><span class="source">kudla/Shutterstock.com</span></span>
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</figure>
<h2>The feminization of poverty</h2>
<p>Female household heads are particularly at risk to shocks because of their greater economic insecurity and may be more likely to use high-cost borrowing to make ends meet. </p>
<p>For a start, single women’s median wealth is <a href="http://www.mariko-chang.com/AFN_Women_and_Wealth_Brief_2015.pdf">one-third that of single men</a>. And single women – mothers in particular – <a href="http://poverty.ucdavis.edu/sites/main/files/file-attachments/policy_brief_stevens_poverty_transitions_1.pdf">have more frequent and longer poverty spells</a> and <a href="https://statusofwomendata.org/explore-the-data/employment-and-earnings/employment-and-earnings/">higher unemployment rates</a> than other households. They also experience <a href="https://www.americanprogress.org/issues/economy/reports/2017/04/27/431251/single-women-face-greatest-risk-economic-insecurity/">high levels of economic risk</a> from shocks such as divorce and unexpected care obligations. On top of all this, the social safety nets such as federal welfare programs that used to support female-headed households <a href="https://www.thenation.com/article/the-american-social-safety-net-does-not-exist/">have been weakened</a>. </p>
<p>Economists have also pointed to evidence of a “<a href="http://www.tandfonline.com/doi/abs/10.1080/10511482.2011.615850">feminization of high-cost credit</a>,” particularly among women of color. That’s because low-income single women’s economic vulnerability and historically limited access to traditional credit products have made them <a href="https://www.journals.uchicago.edu/doi/full/10.1086/675391">targets for predatory subprime lending</a>. In a 2006 sample of mortgage borrowers, more than <a href="http://www.tandfonline.com/doi/abs/10.1080/10511482.2011.615850">half of mortgages</a> owned by black single women were subprime, compared with 28 percent for non-Hispanic white single male borrowers. </p>
<h2>Pushed into the red</h2>
<p>My research, which will be published in the Forum for Social Economics, shows that female-headed households experienced a concerning increase in two major forms of borrowing leading up to the financial crisis: mortgage and educational debt.</p>
<p>Controlling for other household characteristics such as household size and marital status, I examined differences in the growth of average mortgage and student debt among single female- and male-headed households in three time periods: the late 1990s, the credit expansion of 2002 to 2007, and the post-crisis period of 2008 to 2013. I also compared differences between incomes below and above the median, which varied from $24,000 in 1995 to $35,000 in 2007.</p>
<p>My most significant finding is that average mortgage debt for households headed by lower-income unmarried, divorced or widowed women increased substantially during the credit expansion – rising from about $9,800 to $16,600 after adjusting for other household characteristics – while similar households led by single men showed no statistically significant change during the period. This gender gap persisted during the recovery; debt for men and women changed very little through 2013. </p>
<p><iframe id="hvXdF" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/hvXdF/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>One explanation is that lenders saw poorer single women – and <a href="http://www.tandfonline.com/doi/abs/10.1080/10511482.2011.615850">women of color in particular</a> – as a largely untapped market in their rush to originate all the high-interest loans that they could. <a href="https://consumerfed.org/pdfs/WomenPrimeTargetsStudy120606.pdf">Other research</a> has found that women were more likely than men to receive subprime mortgages. </p>
<p>In terms of student debt, I found that the average single woman borrowed an extra $2,000 or so during the lead-up to the crisis, compared with an increase of only $775 for men. This was particularly prevalent among younger single women. After the crisis, when many people went back to school because there were so few jobs, female-headed households increased their student debt by an additional $3,400 on average, while men borrowed an additional $2,800. </p>
<p><iframe id="N1F4t" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/N1F4t/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>One reason for this is likely that <a href="https://iwpr.org/publications/single-mothers-overrepresented-profit-colleges/">single mothers</a> are overrepresented at for-profit colleges, where students are <a href="https://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf">three times more likely</a> than their peers at nonprofit universities to hold costly private loans. Another is that <a href="https://www.aauw.org/research/deeper-in-debt/">more women</a> were studying at college.</p>
<p>One important caveat to my data. My data show only averages over time, not how the fortunes of particular borrowers changed. In other words, I can only show trends, not whether individual households are in fact better or worse off than they were at different points in time.</p>
<h2>Wealth and financial fragility</h2>
<p>Of course, debt isn’t always a bad thing. Many households use debt to acquire assets to improve their financial situation down the road.</p>
<p>Homeownership is an <a href="https://www.nbcnews.com/feature/in-plain-sight/american-dream-home-whats-middle-class-without-house-n296346">important way</a> to build wealth, so it’s not altogether a bad thing that a record share of unmarried women <a href="https://www.nytimes.com/2017/09/28/realestate/most-unmarried-homeowners-are-women.html">owned their own homes in 2006</a>. Similarly, educational investments lead to long-run payoffs that far exceed tuition costs: Someone with a college degree <a href="https://www.aeaweb.org/articles?id=10.1257/jep.26.1.165">is estimated</a> to earn one and a half times as much as a high school graduate. </p>
<p>Still, there are good reasons to question whether all that pre-crisis borrowing really improved households’ financial health. In my own research, I found that lower-income women’s debt-to-wealth ratio doubled from the late 1990s to 2013. It turns out, the wealth created by the surge in female homeowners simply vanished when the housing bubble popped. </p>
<p>Today, as borrowing again crescendos, there are good reasons to worry that the next bursting of a debt-driven bubble is right around the corner. And when it happens, once again many low-income single women and their dependents will be among the worst hit.</p><img src="https://counter.theconversation.com/content/93900/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Melanie G. Long does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Single women borrowed heavily in the run-up to the financial crisis, ensuring they suffered the most in its fallout. Will history repeat itself?Melanie G. Long, PhD Candidate in Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/820192017-08-07T14:03:29Z2017-08-07T14:03:29Z‘The day the world changed’ – a former trader on how the credit crunch kicked off<figure><img src="https://images.theconversation.com/files/181230/original/file-20170807-25565-i55vam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>When I received a phone call from a trader colleague at Merrill Lynch on August 9 2007, I was in the middle of chopping wood in the Swedish countryside. As always, I had my mobile on me in case of an emergency. </p>
<p>I answered the call to a frenzied account of an extraordinary development in the financial markets. My colleague kept repeating that things were “crazy” and “completely mad”. At the time, there was nothing in what he said that made me worried about my trading position, let alone the global financial system. Rather, it was the market prices, quotes and numbers that he listed that did not make sense at all. </p>
<p>Put together, it seemed as if all banks, suddenly, had become desperate for cash. The reason soon became apparent: French bank BNP Paribas had barred investors from accessing money in funds with subprime mortgage exposure, <a href="https://www.ft.com/content/9a4cabc4-464d-11dc-a3be-0000779fd2ac">citing</a> a “complete evaporation of liquidity”. It was the start of the credit crunch. </p>
<p>A financial crisis tends to be associated with fears of a bank run. Picture long queues outside banks, such as during the Great Depression following the 1929 Wall Street crash. If customers desperately begin to withdraw their deposits from a bank, it can quickly turn into a self-fulfilling prophecy. If you think that others will become afraid that the bank will run out of cash, it might be rational to empty your own savings account first. And so, for many, scenes of long queues outside branches of UK bank Northern Rock <a href="http://www.telegraph.co.uk/news/uknews/1563266/The-Northern-Rock-crisis-explained.html">in September 2007</a> is still their earliest memory of the credit crunch and the global financial crisis.</p>
<p>Before the fear of a bank run spreads to the public, however, the atmosphere on the trading floors has already changed. Trading turns into a situation in which the hot potato is passed around from trader to trader, from bank to bank. Lending money is a risky business and nobody wants the borrower to default. As a precaution, banks desperately try to borrow money from the others before they stop lending. Nobody wants to get burnt by being left holding that hot potato. </p>
<p>Parts of the money markets had already begun to dry up with the demise of the US sub-prime mortgage market <a href="http://www.nytimes.com/2007/02/23/business/worldbusiness/23bank.html">around February 2007</a>. Some hedge funds and lenders had reported serious losses – and this malaise had spread to European markets. Then followed <a href="http://www.reuters.com/article/us-bnpparibas-subprime-funds-idUSWEB612920070809">the news</a> that BNP Paribas had frozen €1.6 billion of funds, citing US subprime mortgage sector problems. </p>
<p>BNP had always played a big role in the trading community and had made markets in everything I traded: foreign exchange, bonds and interest rate derivatives. They were also French – and the French banks were famous for hiring the best programmers and mathematicians as analysts and traders. If they did not know how to value their portfolios, who did? When I received the phone call, the news flash had just happened and the game of musical chairs had begun.</p>
<p>Being a short-term interest rate trader had not been particularly glamorous before August 9 2007. Our desk traded a range of instruments that were important for the financial system, but not interesting and complex enough to represent the forefront of financial innovation. Other trading desks enjoyed considerably more prestige. Then everything was turned upside down. </p>
<p>Suddenly, the spotlight fell on us. Everything we did had a direct link to the money market between banks and the benchmark linked to it, <a href="https://theconversation.com/the-scandal-might-be-over-but-libor-ethics-remain-fundamentally-flawed-77412">LIBOR</a>, so our desk evolved into a place people turned to in order to get an idea of what was going on with the market. Which bank was rumoured to be in the worst shape? Which bank seemed most desperate to borrow? Which bank had been ordered to throw in the towel and temporarily suspend its market-making activity? Which bank had refused to deal with which other bank for fear of insolvency? </p>
<p>The rest is, of course, history: the collapse of the bank Lehman Brothers in September 2008 and the most severe financial crisis since the Great Depression (not to mention the <a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">LIBOR scandal</a>). Even today, central bankers, regulators and other policy makers talk about measures that ought to be taken to avoid another “Lehman moment”. What they refer to is a situation in which the entire global financial system is on the brink of total collapse. </p>
<p>August 9 2007 will not go down in history as the day the world ended. Rather, to cite the former <a href="https://www.theguardian.com/business/2011/dec/01/credit-crunch-pinpointed-august-2007">Northern Rock boss Adam Applegarth</a> it will be remembered as the “day the world changed”.</p><img src="https://counter.theconversation.com/content/82019/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexis Stenfors is the author of Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History.</span></em></p>Recalling August 9 2007 – the start of the credit crunch and global financial crisis.Alexis Stenfors, Senior Lecturer in Economics and Finance, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/803532017-07-11T01:05:35Z2017-07-11T01:05:35ZWhy we need to save the Consumer Financial Protection Bureau<p>Republicans in <a href="https://www.forbes.com/sites/jimhenry/2017/05/30/congressional-critics-gunning-for-consumer-financial-protection-bureau/#24b1e09167ab">Congress</a> and the <a href="https://consumerist.com/2017/03/20/white-house-wants-authority-to-fire-consumer-protection-chief/">White House</a> have been very blunt about their desire to gut the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a> (CFPB). </p>
<p>The agency was launched in 2011 in the aftermath of the financial crisis as part of the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>. The goal was to protect consumers from deceptive or misleading practices in the financial industry. </p>
<p>So what would you miss if the CFPB suddenly disappeared?</p>
<p>In short, a lot, including a <a href="http://thehill.com/policy/finance/341313-consumer-bureau-releases-rule-to-prevent-banks-credit-card-firms-from-blocking">just-issued rule</a> that would prevent financial companies from using arbitration clauses to prevent people from having their day in court. </p>
<p>We base this conclusion on the work the three of us have done in recent decades. One of us (Sovern) has been writing about consumer law for more than 30 years, while the other two direct a <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">legal clinic that represents elderly consumers</a>. We’ve seen the worst of what financial companies can do, and we’ve also witnessed how the CFPB has begun to reverse the tide. </p>
<h2>Life before CFPB</h2>
<p>If you are one of the more than 29 million consumers who have collectively <a href="https://www.consumerfinance.gov/">received nearly US$12 billion</a> back from misbehaving financial institutions because of the CFPB’s efforts, you already know its value. But even if you are not, you have probably benefited from the bureau’s existence.</p>
<p>Before Congress created the bureau, there was no federal agency that made consumer financial protection its sole mission. Rather, consumer protection was rolled into the missions of a bunch of different agencies. And, as we saw during the financial crisis, regulators often gave it a back seat.</p>
<p>Congress, for example, gave the Federal Reserve the <a href="https://www.federalreserve.gov/reportforms/formsreview/RegZ_20080730_ffr.pdf">power to bar unfair and deceptive mortgage lending</a> in 1994. Yet the central bank considered consumer protection a backwater and didn’t use that power until 2008 – too late to prevent the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>. Congress took it away two years later when it passed Dodd-Frank.</p>
<p>The Office of the Comptroller of the Currency (OCC) regulates banks but was so preoccupied with ensuring lenders were safe that it failed to protect consumers from their predatory subprime mortgages – so much so that it prevented states from doing so too. And the Federal Trade Commission, which is tasked with fighting deceptive business practices, lacked the power to prevent such <a href="https://www.federalreservehistory.org/essays/subprime_mortgage_crisis">dangerous lending</a>.</p>
<p>This meant consumer protection on financial matters fell through the cracks. </p>
<p><a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">Wells Fargo’s recent fraud scandal</a> is a case in point. In the early 2000s, Wells Fargo employees <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2017/board-report.pdf">began opening fake accounts</a> in clients’ names without permission, leading in some cases to <a href="https://www.wsj.com/articles/wells-fargo-is-trying-to-fix-its-rogue-account-scandal-one-grueling-case-at-a-time-1482855852?mg=prod/accounts-wsj%20rt5y7u6">lower credit scores</a> and a variety of fees. The bank <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961347">ultimately opened millions of fraudulent bank and credit card accounts</a> before the scheme came to an end last year. </p>
<p>But as early as 2010, before the CFPB was set up, regulators at the OCC were increasingly aware of what was happening at Wells Fargo thanks to hundreds of <a href="https://theconversation.com/why-companies-like-wells-fargo-ignore-their-whistleblowers-at-their-peril-67501">whistleblower complaints</a>. The OCC even confronted the bank yet failed to take any action despite many red flags, according to an <a href="https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-wells-fargo-supervision-lessons-learned-41917.pdf">internal audit</a>. </p>
<p>It wasn’t until the <a href="http://freepdfhosting.com/29677883a9.pdf">Los Angeles city attorney</a> and the <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">CFPB became involved</a> years later that Wells Fargo took forceful action to stop the fraud. The regulators <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo a total of $185 million</a> and forced it to refund fees it had charged customers and hire an independent consultant to review its procedures. </p>
<p>More importantly, they sent a clear message to other financial institutions: Cheat consumers and you will face the consequences.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer Financial Protection Bureau Director Richard Cordray testifies on Capitol Hill in 2013.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>Protecting consumers</h2>
<p>Since its inception, the bureau has acted repeatedly to stop financial institutions from harming consumers. </p>
<p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>. It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. It protected borrowers from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/">unlawful student loan servicing practices</a>. It <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">made lenders repay</a> consumers they discriminated against. It <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-recovers-more-than-1-million-for-servicemembers-veterans-and-their-families/">recovered money for veterans</a> who complained of abusive financial practices. </p>
<p>When the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, companies that might previously have ignored negative feedback paid attention. Financial institutions have responded to complaints to the CFPB <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">more than 700,000 times</a>, often by providing a remedy to the consumers.</p>
<p>Besides protecting consumers, however, Congress had a second motive in creating the bureau: to help prevent the kind of mortgage lending that helped cause the Great Recession. </p>
<p>To that end, the bureau has adopted <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">rules</a> that help consumers to understand their mortgages – something that often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531781">wasn’t possible</a> under the previously misleading mortgage disclosures. It also issued <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/">regulations</a> to prevent consumers from taking out mortgages that they couldn’t repay. And after borrowers take out a mortgage, <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z-mortgage-servicing-final-rules/">CFPB servicing rules</a> establish the procedures servicers must follow when communicating with borrowers, correcting errors, providing information and dealing with loan modification requests.</p>
<p>Two of us have personal experience with one of the bureau’s new mortgage rules, which powerfully illustrates the value of the CFPB.</p>
<p>In 2014, Alice, a client of our law school clinic, was struggling to pay the mortgage on her home – which she had refinanced a few years earlier – after a stroke forced her into retirement. <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">Our clinic</a> helped her apply for a modification of her loan. </p>
<p>But within weeks, instead of acknowledging Alice’s application, the loan servicer summoned her to court to begin foreclosure proceedings in violation of <a href="https://www.law.cornell.edu/cfr/text/12/1024.41">CFPB servicing rules</a>. Fortunately, our clinic was able to rely on those rules in getting the foreclosure action dismissed. Alice got her loan modified and remains in her home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Demonstrators tried to draw attention to the subprime mortgage crisis back in early 2008.</span>
<span class="attribution"><span class="source">AP Photo/Matt Rourke</span></span>
</figcaption>
</figure>
<h2>Protecting the vulnerable</h2>
<p>This reveals how the bureau is particularly important to protect vulnerable consumers, like the elderly, who are frequently targeted by fraudsters and predatory lenders because of their cognitive and other impairments and because they often have accumulated substantial assets. The CFPB is the only federal agency with an office <a href="https://www.consumerfinance.gov/educational-resources/resources-for-older-adults/">specifically dedicated</a> to protecting the financial well-being of older adults. </p>
<p>The bureau has brought cases against companies that attempted to take advantage of seniors by, for example, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-new-york-department-of-financial-services-sue-pension-advance-companies-for-deceiving-consumers-about-loan-costs/">misrepresenting the interest rates</a> on pension advance loans or <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-reverse-mortgage-companies-deceptive-advertising/">deceptive advertising</a>. In 2015 alone, consumer complaints to the CFPB brought relief to <a href="https://data.consumerfinance.gov/dataset/Consumer-Complaints/s6ew-h6mp">more than 600 older Americans just through debt collection problems</a>.</p>
<p>The bureau has also worked to prevent financial abuse of the elderly, estimated to cost seniors <a href="https://www.truelinkfinancial.com/research">as much as $36 billion annually</a>. The CFPB has educated <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-advisory-and-report-for-financial-institutions-on-preventing-elder-financial-abuse/">financial institutions</a>, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-assisted-living-and-nursing-facilities-protect-seniors-from-financial-abuse/">nursing facilities</a> and <a href="https://www.consumerfinance.gov/about-us/newsroom/director-cordray-remarks-on-money-smart-for-older-adults/">others</a> about recognizing and stopping elder financial abuse and exploitation.</p>
<h2>Consumer protection in peril</h2>
<p>Given Alice’s ill health, the consequences for her might have been disastrous if she had been thrown out of her home. But now she – and all of us – face the loss of the CFPB’s aid. </p>
<p>The CFPB <a href="http://www.latimes.com/business/la-fi-cfpb-cordray-hearing-20170405-story.html">is under attack</a> from Republican members of Congress who <a href="https://banks.house.gov/media/press-releases/banks-votes-choice-act-roll-back-dodd-frank-law">believe more in bank protection</a> than consumer protection. Some members have <a href="http://pubcit.typepad.com/clpblog/2017/02/ratcliffecruz-bill-would-eliminate-the-cfpb.html">proposed eliminating the agency altogether</a>. </p>
<p>The House of Representatives <a href="https://financialservices.house.gov/choice/">has passed a bill</a> that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">its complaint database</a> from public view. In other words, it would force the bureau to sit idly by as financial institutions <a href="http://www.newsweek.com/your-bank-lying-you-619814">lie to consumers</a>. </p>
<p>Nearly every American has or will have a loan or bank account, a prepaid card, credit card, a credit report or some combination of those, and so has dealings with a financial institution policed by the CFPB. But <a href="http://press.princeton.edu/titles/10267.html">few of us read the fine print</a> governing these things or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432">can understand it when we do</a>. That gives the companies that write these agreements the ability to draft them to suit their own interests at the expense of consumers. </p>
<p>Similarly, we do not always know when a financial institution takes advantage of us, just as Wells Fargo customers did not always know that it had opened unauthorized accounts that lowered their credit scores. </p>
<p>Consumers need protection from misbehaving companies. If the bureau is eliminated or significantly weakened, all consumers will suffer.</p><img src="https://counter.theconversation.com/content/80353/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Along with three co-authors, Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates. </span></em></p><p class="fine-print"><em><span>Ann L. Goldweber is affiliated with NACA as a member.</span></em></p><p class="fine-print"><em><span>Gina M. Calabrese is affiliated with the National Association of Consumer Advocates, New Yorkers for Responsible Lending, and the Association of the Bar of the City of New York (Chair, Committee on the Civil Court).</span></em></p>Republicans are hoping to eliminate or at least defang the only federal agency tasked solely with protecting consumers from financial abuses. What would we miss if they succeed?Jeff Sovern, Professor of Law, St. John's UniversityAnn L. Goldweber, Professor of Clinical Education, St. John's UniversityGina M. Calabrese, Professor of Clinical Education, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/749442017-03-24T16:24:04Z2017-03-24T16:24:04ZYou’ve got to fight! For your right! … to fair banking<figure><img src="https://images.theconversation.com/files/162366/original/image-20170324-12149-1m8kj1x.jpg?ixlib=rb-1.1.0&rect=729%2C259%2C3954%2C2531&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/miniature-people-on-coins-finance-concept-501126454?src=f7b_jGM45GFzRlwdF5aDNw-1-51">noppawan09/Shutterstock</a></span></figcaption></figure><p>British governments have been trying to improve financial inclusion for the best part of 20 years. The goal is to make it easier for people on lower incomes to get banking services, but this simple-sounding target brings with it a host of problems. </p>
<p>A <a href="https://www.parliament.uk/business/committees/committees-a-z/lords-select/financial-exclusion/news-parliament-2015/minsiters-evidence-/">House of Lords committee</a> will shortly publish the latest report on this issue, but the genesis of financial inclusion policy <a href="https://www.parliament.uk/financial-exclusion">can be traced back</a> to the late 1990s as part of the Labour government’s social exclusion agenda. The scope and reach of this strategy has since expanded beyond a focus on access to products and now seeks to improve people’s financial literacy to help them make their own responsible decisions around financial services.</p>
<p>The goal of increasing the availability of basic banking has become a tool for tackling poverty and deprivation worldwide, among governments in the global north and global south and among key institutions. In 2014, the World Bank produced what it described as the world’s most comprehensive <a href="http://www.worldbank.org/en/programs/globalfindex">financial exclusion database</a> based on interviews with 150,000 people in more than 140 countries.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=448&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=448&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=448&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=563&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=563&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162357/original/image-20170324-12145-klj82f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=563&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Retaliation?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/mobiledisco/6069211542/in/photolist-abvbfm-afji9j-rmLUcr-63Pa5j-j2ieie-9iZxG1-9twb2J-Nwgnh-fJPAR-oNvXV5-5KHy6n-6kJmHQ-6zYi6s-72EFpf-4TcP8C-nRiZ1c-5KHwKK-5wrddH-9ja96J-9twb17-dH69DB-dodqFA-4Hz6ah-6epiZW-grCpLb-4Hz5rm-6CN8Nq-4d6Vqv">mobiledisco/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Muddy waters</h2>
<p>However, broad and enthusiastic acceptance of such policy efforts has prompted doubts about the simplistic narrative of inclusion and exclusion. This way of thinking does not capture the complexities of the links between the use of financial services and poverty, life chances and socio-economic mobility. It also ignores the sliding scale of financial inclusion, from the marginally included – who rely on basic bank accounts – through to the super-included with access to a full array of affordable financial services. </p>
<p>You can see the complexity and contradictions clearly in innovations such as <a href="http://news.bbc.co.uk/1/hi/business/7073131.stm">subprime products</a> and <a href="https://theconversation.com/uk/topics/payday-lending-5686">high-cost payday lenders</a>. They have made it increasingly difficult to draw a clear distinction between the included and the excluded. Mis-selling scandals and concerns over high charges have also shown us that financial inclusion is no guarantee of protection from exploitative practices.</p>
<p>Even the pursuit of better financial education offers a mixed picture. Critics <a href="https://www.routledge.com/Debtfare-States-and-the-Poverty-Industry-Money-Discipline-and-the-Surplus/Soederberg/p/book/9780415822671">have raised concerns</a> that this shifts the focus away from structural discrimination and towards the individual failings of “irresponsible and irrational” consumers. There is a grave risk that we will fail to tackle the root causes of financial exclusion, around insecure income and work, if policy follows this route.</p>
<p>In the midst of this focus on customers, the government’s role has been reduced to supporting those <a href="https://www.moneyadviceservice.org.uk">education programmes</a> and cajoling mainstream banks, building societies and insurers into <a href="https://theconversation.com/banking-shake-up-relies-too-much-on-customers-shopping-around-63743">being more inclusive</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162361/original/image-20170324-12132-ze5438.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Vested interests. The Square Mile in London.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/mikepaws/10657936013/in/photolist-heNH4t-dA54HX-5zw2U-dJzeAF-7sFLdJ-aBm9AH-9STYST-53wHep-ekR4jf-cHZn1C-qKtram-K5cZDU-8HUDf-aeyLfj-aq2BdD-ahtNwe-6HFJoU-986W2T-qFuT8W-dAaxdu-bAixTj-4cLR9L-fKu9zy-7RD78C-dQBZPj-5vNkF1-nQkp38-9ojk7-5LA3A4-fmtbHY-8y4xPZ-Etgosw-5u18Ud-8tMPwD-8LCNW2-b9ydf6-5yVhsD-dazQkG-fPxGqz-zre7M-oYnMVT-3wStQ-bz7jEf-ahM4qb-8mkQi2-b9ydZH-b9yekz-8Mjbpv-5tRa5X-9htwiK">Michael Garnett/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>Given the central role that financial services play in shaping everyday lives, a hands-off approach from the state is inadequate. It fails to address the injustices produced by a grossly inequitable financial system. Our <a href="http://www.coventry.ac.uk/research/research-directories/current-projects/2016/financial-citizenship-building-financial-security-capability-and-inclusion-in-communities/">recent research</a> examined how the idea of financial citizenship might offer a route to improvements. In particular, we looked at the idea of basic financial citizenship rights and the role that might be played by UK credit unions, the organisations which, <a href="https://www.gov.uk/government/news/credit-union-38-million-expansion-deal-signed">supported by government</a>, seek to bring financial services to those on low incomes.</p>
<p>The idea of establishing rights was put forward by geographers <a href="https://www.jstor.org/stable/622654?seq=1#page_scan_tab_contents">Andrew Leyshon and Nigel Thrift</a> in response to the growing lack of access to mainstream financial services. The goal would be to recognise the significance of the financial system to everyday life and set in stone the right and ability of people to participate fully in the economy.</p>
<p>That sounds like a laudable aspiration, but what could a politics of financial citizenship entail in practice?</p>
<p>Drawing on the work of political economist <a href="http://www.ilcuk.org.uk/index.php/publications/publication_details/financial_citizenship">Craig Berry</a> and researcher <a href="http://independentresearcher.academia.edu/ChrisArthur">Chris Arthur</a>, we argue that the policy debate should move on to establish a set of universal financial rights, to which the citizens of a highly financialised society such as the UK are entitled regardless of their personal or economic situation.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/eHQ7wvWzUW0?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<ol>
<li><p><strong>The right to participate fully in political decision-making regarding the role and regulation of the financial system</strong>. This would entail, for example, the <a href="http://positivemoney.org/">democratisation of money supply</a> and of the work of regulators. Ordinary people would have to be able to meaningfully engage in debates about the social usefulness of the financial system.</p></li>
<li><p><strong>The right to a critical financial citizenship education</strong>. Financial education needs to go beyond the simple provision of knowledge and skills to understand how the financial system is currently configured. It should provide citizens with the tools to be able to think critically about money and debt, as well as the capability to effect meaningful change of the financial system.</p></li>
<li><p><strong>The right to essential financial services</strong> that are appropriate and affordable such as a transactional bank account, savings and insurance. </p></li>
<li><p><strong>The right to a comprehensive state safety net of financial welfare provision</strong>. This could include a real living wage to prevent a reliance on debt to meet basic needs and could go all the way through to the provision of guarantees on the returns that can be expected from private pension schemes. </p></li>
</ol>
<p>Establishing this set of rights would be a major step towards enhancing the financial security and life chances of households and communities. The weight of responsibility would shift from individuals and back on to financial institutions, regulators, government and employers to provide basic financial needs. As one example, just as people in the UK are given a national insurance number when they turn 16, so the government and the banks could automatically provide a basic bank account to everyone at the age of 18. </p>
<p>The UK credit union movement does make efforts towards these goals, but it cannot fully mobilise financial citizenship rights largely due to its limited scale and regulatory and operational limitations. For the rights to work, they will need the support of the state, of financial institutions, regulators and employers. That would enable the country to build something less flimsy than the loose structure we have right now, which piles blame onto the consumer and relies on voluntary industry measures to pick up the slack.</p><img src="https://counter.theconversation.com/content/74944/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey Appleyard receives funding from Arts and Humanities Research Council, Barrow Cadbury Trust and the Money Advice Service. </span></em></p><p class="fine-print"><em><span>Shaun French receives funding from the Australian Research Council. In the past he has received funding from the Economic & Social Research Council, the Wellcome Trust, and the British Academy. </span></em></p>Banking in a highly financialised society like Britain could be seen as akin to a fundamental human right.Lindsey Appleyard, Research Fellow, Coventry UniversityShaun French, Associate Professor in Economic Geography, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/548742016-02-25T11:07:14Z2016-02-25T11:07:14ZSubprime gets bad rap in ‘Big Short’ but is key to easing housing affordability crisis<p>Anyone who’s dug into the 2008 financial crisis knows the role that bundling and selling subprime housing loans played in bringing the world to the brink of economic collapse – out-of-control behaviors well-depicted in the movie “The Big Short.” </p>
<p>But one thing I hope “The Big Short” doesn’t do is further tarnish the image of subprime lending.</p>
<p>Despite their poor reputation, such loans remain a key tool in easing the <a href="https://theconversation.com/news-flash-affordable-housing-crisis-is-hurting-all-of-us-except-the-well-heeled-43895">housing affordability crisis</a> and expanding the availability of mortgages to low-income Americans seeking to realize the dream of homeownership. They also can help policymakers cope with the growing ranks of the homeless. </p>
<p>I’ve been studying the world of subprime in recent years, and these are some of the lessons from my current and past research. First, we need to fix the subprime mortgage market, so that the ways in which it contributed to the financial crisis aren’t repeated.</p>
<h2>Shocking levels of homelessness</h2>
<p>Los Angeles, New York and other cities in America are struggling to cope with the problem of homelessness and the lack of affordable housing. </p>
<p>On a single night in January 2015, more than 560,000 people nationwide <a href="https://projecthome.org/about/facts-homelessness">were homeless</a> – meaning they slept outside, in an emergency shelter or in a transitional housing program. Almost a quarter were children. Meanwhile, homeownership <a href="http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs-sonhr-2015-full.pdf">is hovering at 20-year lows</a>, while about half of renters struggle to pay their landlords. </p>
<p>Last fall, Los Angeles Mayor Eric Carcetti asked the City Council to <a href="http://www.latimes.com/local/lanow/la-me-ln-homeless-funding-proposals-los-angeles-20150921-story.html">declare</a> “a state of emergency” on homelessness and committed US$100 million to solving the problem, suggesting that subsidies would play a role. </p>
<p>But a focus on rental subsidies to solve homelessness and other affordable housing issues has adverse consequences, as evidenced by New York’s experience. </p>
<p>Its cluster-site housing program, in which privately owned apartment buildings are used to house homeless families when the city’s shelters are full, relies on such subsidies. But because the city typically pays market rents (or more), many landlords <a href="http://therealdeal.com/2014/06/30/homeless-housing-program-to-undergo-cuts/">responded</a> by pushing out regular (and low-income) tenants in favor of this steady stream from the government. </p>
<p>Such programs reduce the overall supply of affordable units, crowding out other groups in need. As more affordable housing units are allotted to the homeless, there are fewer available for low-income residents who don’t qualify for those programs and are at risk of becoming homeless themselves.</p>
<p>Fortunately, Mayor Bill de Blasio aims to <a href="http://www.nydailynews.com/new-york/manhattan/de-blasio-phase-cluster-sites-house-homeless-article-1.2484896">phase out</a> the costly program over the next three years. </p>
<p>While there are many other approaches to tackling homelessness, they rely on addressing an important underlying problem: the housing affordability crisis. It may seem improbable, but subprime lending could help ease the housing affordability crisis.</p>
<h2>The role of subprime lending</h2>
<p>The relationship between homelessness and the strains in the housing rental market is <a href="http://www.jstor.org/stable/2117507">well-known</a>: when there are more rental vacancies available, homelessness decreases (I survey the academic findings on the topic <a href="http://www.springer.com/us/book/9783319153193">here</a>).</p>
<p>This suggests that if we reduce home affordability problems, we can effectively reduce homelessness.</p>
<p>A powerful tool to help ease the housing affordability crisis is subprime mortgage lending – defined as loans made to borrowers with credit scores below 640. </p>
<p>The idea is simple: by helping more low-income tenants qualified to take out a subprime mortgage become homeowners, there’ll be more affordable rental housing available for everyone else. More supply on the market helps reduce average rents, which in turns helps more of those pushed to the streets afford a roof over their heads with less government aid. Thus this makes the policies still based on rental subsidies more effective. </p>
<p>However, this idea cannot be implemented until we fix the subprime mortgage market. As you can see from the graph below, the market has not yet recovered from its collapse in 2008.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=384&fit=crop&dpr=1 600w, https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=384&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=384&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=482&fit=crop&dpr=1 754w, https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=482&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/112815/original/image-20160224-16455-u5aoxe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=482&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The subprime market has yet to recover from its collapse.</span>
<span class="attribution"><span class="source">Inside Mortgage Finance</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>One of the reasons the market collapsed was that investors lost confidence in the ability of loan originators and regulators to use credit scoring models to accurately assess a borrower’s creditworthiness – remember the <a href="http://www.thestranger.com/blogs/slog/2016/01/27/23486025/local-economist-on-the-big-short">NINJA loans</a> (no income, no job, no assets)? </p>
<p>This market won’t be back up and running at full strength – and able to help address the affordability crisis – until these credit-scoring models improve and mechanisms are put in place to ensure loan quality remains adequate.</p>
<h2>The FHFA sets new goals</h2>
<p>There has been some movement to get the subprime market moving again.</p>
<p>The Federal Housing Finance Agency (FHFA), an independent federal agency that regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, recently <a href="https://webcache.googleusercontent.com/search?q=cache:R_ZP5i_cNsEJ:https://www.fhfa.gov/SupervisionRegulation/Rules/RuleDocuments/2015-2017_Enterp_Housing_Goals_Final_Rule_to_Fed_Reg_FOR_WEB.pdf+&cd=1&hl=en&ct=clnk&gl=us">set goals</a> for the next two years meant to expand the availability of mortgages to low-income buyers. </p>
<p>This policy will keep its focus on helping a small segment of borrowers with incomes no greater than 50 percent of their area’s median income to purchase or refinance a single-family home. </p>
<p>But many affordable housing advocates expressed concern that these targets do not go far enough. The Woodstock Institute – a leading research and policy nonprofit organization focused on fair lending, wealth creation and financial systems reform – for example, <a href="http://www.woodstockinst.org/policy-document/comment-letter-federal-housing-finance-agency-urging-them-strengthen-2015-2017">argued</a> that the policy won’t do enough to promote affordable and sustainable home ownership for low-income families. </p>
<h2>How to bring back subprime</h2>
<p>Even with the FHFA embracing the idea of expanding the availability of subprime mortgages to low-income buyers, their perceived role in the 2008 crisis and bringing down the housing market may cause justifiable resistance from the general public as a means of tackling the affordability crisis. </p>
<p>And one cannot blame this reaction, as it was the average American taxpayer who bailed out the reckless financial system, brought down by greedy bankers and weak politicians and regulators. </p>
<p>So how we can encourage more subprime lending while avoiding a repeat of 2008? In my <a href="http://works.bepress.com/luque/18/">recent research</a>, I suggest a few ways to do this. </p>
<p>One of the reasons subprime loans became such a problem in the run-up to the crisis is just the sheer volume (see the boom in subprime lending from 2001 to 2005 in the above graph). This expansion <a href="http://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/">was fueled</a> by the generous homeownership subsidies given to low-income households. </p>
<p>One way to help prevent this is to vary the size of the homeownership subsidy countercyclically to control the amount of credit flowing into the economy and prevent overborrowing during expansionary periods. It would be higher at times when the housing market contracts, and lower when it’s booming. </p>
<p>Another problem was that lenders had an incentive to originate mortgages to borrowers who couldn’t afford them because <a href="http://www.emergingstar.ca/blog/index.php/2015/11/21/the-economic-crisis-of-2008-a-simplified-analysis-of-its-causes-mechanism-and-lessons-learnt-part-one/">all the risk was passed along</a> to banks and other investors through collateralized mortgage obligations (CMO) and other sophisticated financial instruments. </p>
<p>The Federal Reserve in conjunction with other regulators could reduce this risk by carefully monitoring how many mortgages lenders keep in their own portfolios. When the share lenders hold increases, they have more incentives to better screen borrowers and thus originate better mortgages.</p>
<p>Lastly, the so-called <a href="https://www.fdic.gov/bank/analytical/cfr/mortgage_future_house_finance/papers/Chang.PDF">adverse selection problem</a> on the part of the mortgage originator in the secondary market should also be taken into account. This problem occurs when the mortgage originator has more information about the quality of mortgages that are securitized than the secondary market investors who snap up the CMO. That allows the originator to keep the low-risk mortgages in its own portfolio while distributing the high-risk mortgages to investors. </p>
<p>Improving existing <a href="http://works.bepress.com/luque/18/">credit scoring models</a> is crucial to ameliorating this problem. Also, the Fed should more carefully monitor the quality of mortgages that are sold to investors and share its information with them. At the very least, that would reduce the investors’ information disadvantage with respect to originators.</p>
<p>Accompanied by the right means to regulate the housing market, we can support subprime while avoiding the disastrous outcomes highlighted in “The Big Short.” And we can create an environment in which making low-cost mortgages available to people helps resolve the problem of unaffordable housing and homelessness.</p><img src="https://counter.theconversation.com/content/54874/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jaime Luque does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Hollywood flick recalls subprime’s role in the 2008 financial crisis, but, by helping more low-income households buy a home, the loans can help ease the affordability crisis and homelessness.Jaime Luque, Assistant Professor, Real Estate & Urban Land Economics, University of Wisconsin-MadisonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/409382015-05-05T08:32:25Z2015-05-05T08:32:25ZThe dreams deferred by Baltimore’s mortgage crises set the stage for unrest<figure><img src="https://images.theconversation.com/files/80303/original/image-20150504-8376-7uohy2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The subprime mortgage scandals hit Baltimore hard. </span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-56658289/stock-photo-modern-house-with-crooked-foreclosure-sign-in-suburbs.html?src=u9iUxKUWPmC-iHUXPXmdWA-1-19">Steve Heap/Shutterstock</a></span></figcaption></figure><p>On the steps of the city courthouse, a monument to equality and the rule of law, Baltimore residents have learned how dreams can be brutally deferred. </p>
<p>There, the property of the city’s poor and working families has been, by order of the court, <a href="https://www.youtube.com/watch?v=z_UIOWxNr0Q">auctioned </a>to the highest bidder. </p>
<p>When examining the tensions that erupted in Baltimore in the last two weeks, the consequences of losing homes should not be minimized as a factor in the sense of outrage and injustice.</p>
<p>Foreclosures in the wake of the subprime mortgage scandal of 2008 have been the end game in predatory lending schemes that plundered the single modest asset held by many black Baltimoreans: their homes. </p>
<p>In a 2012 settlement reached with one lender, <a href="http://www.wbaltv.com/money/Baltimore-residents-to-get-2-5M-from-Wells-Fargo-settlement/15502466">Wells Fargo</a>, some 1,000 black and Latino residents of Baltimore received $2.5 million <a href="http://www.nytimes.com/2012/07/13/business/wells-fargo-to-settle-mortgage-discrimination-charges.html?_r=0">in restitution </a>for having been charged higher fees and interest rates than those assessed to their counterparts in predominantly white communities. The University of Baltimore’s Baltimore Neighborhood Indicators Alliance <a href="http://foreclosures.bniajfi.org/filings-ratified-sales.php">research</a> has found that, between 2008 and 2009, foreclosure filings in Baltimore increased by over 38 percent. Between 2009 and 2012, more than 14,000 such proceedings were brought against the city’s homeowners.</p>
<h2>Past as prologue: What has happened on the steps of the halls of justice</h2>
<p>Could the columned memorial that overlooks Monument Square talk, it would tell how too much of what happens on the courthouse steps today is not new. </p>
<p>The courthouse’s 19th century records evidence how, for more then 150 years, justice has been denied those seeking that most of American of dreams: to own a home.</p>
<p>Two centuries ago, Maryland was a slave state. Still, by the 1850s there were fewer enslaved people living in Baltimore, no more than 1,000. Instead, the city was home to the largest community of free African Americans in the nation. Some 25,000 black Baltimoreans made their homes in what was the nation’s third largest city.</p>
<p>Activities at the courthouse suggest how their lives were framed by grim facts. Many watched as their loved ones and neighbors were auctioned off as human chattel, before the abolition of slavery finally ended such sales. My own research into the period’s court dockets and newspapers found how Baltimore’s judges sentenced free black men and women to enslavement, selling them to bidders who gathered at the courthouse door. It was nothing out of the ordinary when, for example, a city sheriff sold William Manorkey and Ellen Sey out of the state as slaves after each was convicted of larceny in July 1858. </p>
<p>In the decades before the Civil War, home ownership was rare among black Baltimoreans, as reflected in US Census data. Wages were too low and work too unsteady to enable most families to purchase even a small alley house. </p>
<h2>The story of Jonathan Trusty resonates through the decades</h2>
<p>Jonathan Trusty defied the odds. The record of his story can be found in filings from the Baltimore City Courthouse, held in the State Archives in Annapolis. The 55-year-old dockworker amassed just enough to buy “a two-story and attic Brick dwelling, with a Back Building” on Bethel Street. The tiny property was home to Trusty, his wife, their eight children and two grandchildren. </p>
<p>In 1854, Trusty fell on hard times. It is hard to determine what precisely happened. His petition for debt relief suggests that Trusty slowly incurred a bundle of small obligations, a total of $133.87½ to 36 creditors. He aimed to use a state bankruptcy law to set things straight. The court would inventory his property and satisfy creditors to the extent possible. Trusty had but one asset, his home.</p>
<p>Trusty’s creditors were an organized group that acted together to ensure his home was sold. There is the distinct sense from the records that they pressed Trusty to file for insolvency. And they kept pressure on the court. A court-appointed trustee took control of Trusty’s house and land. An auction was set for the afternoon of January 14, 1855, just six weeks after his initial filing. That day, the family’s Bethel Street home sold for $460, more than enough to make Trusty’s creditors whole. Proceedings in the city courthouse wiped out Trusty’s debts and restored some fraction of his reputation. (I will be telling the story of Trusty in my book, Birthright Citizens: A History of Race and Rights in Antebellum American, now under contract with Cambridge University Press.)</p>
<p>But the loss of his family home certainly felt less than just. Trusty’s story reminds us that today’s Baltimore is shaped, in part, by nearly two centuries of policy and custom that have kept too many black residents on the city’s economic margins.</p>
<p>Today, the organized actions of creditors still animate the Baltimore City courthouse as many African-American families lose their main assets – their homes – through predatory lending practices that end in foreclosures.</p>
<p>This drama still begins with notices published in local newspapers, such as the <a href="http://publicnotices.thedailyrecord.com">Daily Record</a>, and on the internet.</p>
<p>At the announced day and time, an auctioneer positions himself at the top of the courthouse steps. At his feet sit milk crates filled with files. In his arms is a clipboard stacked with documents. Sometimes a small crowd gathers around. Other times, only an interested few. The song of the auctioneer – staccato words strung together in a distinct cadence – ends as the word “sold” punctuates the refrain.</p>
<p>Homes are for sale on the courthouse steps. Insolvent debtors, today’s defaulted mortgage holders, can watch as their homes are sold to the highest bidder. Dreams are deferred. In April we watched them explode.</p><img src="https://counter.theconversation.com/content/40938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Martha S. Jones receives funding from the American Council of Learned Societies, the National Humanities Center, and the American Historical Association. </span></em></p>Predatory lending and the subprime mortgage crises as well as a history of economic injustice fueled the Baltimore protests.Martha S. Jones, Associate professor of history and Afroamerican and African Studies; Affiliated Faculty of Law, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/408502015-04-30T13:31:12Z2015-04-30T13:31:12ZThe next government will need to heed housing, if we’re to avoid another financial crisis<figure><img src="https://images.theconversation.com/files/79593/original/image-20150428-3084-1c7fj7d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's a game with high stakes. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/59937401@N07/5857838458/sizes/l">Images_of_Money/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The housing market has been an important part of the policy debates during the general election campaign. The central focus has been on the number of extra houses that each party plans on building, and the nature of the funding and support for these new houses. But as yet, there has been little discussion about how the housing market – and the suggested policies – will affect the wider economy, and effect that extra housing and funding will have on the welfare of the population.</p>
<p>There has been <a href="http://core.ac.uk/download/pdf/17200.pdf">much said</a> about the interaction between housing wealth (how much housing in total is worth to the economy), loans and economic stability. Given <a href="http://economicpolicy.oxfordjournals.org/content/25/62/267.abstract">the crucial role of mortgages</a> in the 2008 global financial crisis, these should be matters of great concern for all potential governments. </p>
<h2>Lessons from the crisis</h2>
<p>Many have argued that one of the main causes of the financial crisis was US legislation, which was enacted to encourage the main housing finance institutions to provide more mortgages to people who struggled to get them. This was known in the USA as the sub-prime sector. These people were basically borrowers who had a high chance of defaulting on the loan, and wouldn’t be offered mortgages under normal circumstances. </p>
<p>When interest rates were low and house prices were rising, there wasn’t a problem. But when interest rates increased, house prices began to fall, and much of the sub-prime sector struggled to meet the interest payments. As a result, many of the assets based on the sub-prime housing market fell dramatically in value, and so precipitated the financial crisis in 2008. </p>
<p>There are many lessons from this crisis, but above all it is clear that the housing market and its associated financing play a key role in the stability of an economy. It also suggests that excessive intervention in the housing market is potentially dangerous, and that any sizeable intervention needs to be accompanied by careful monitoring. </p>
<h2>Influencing the economy</h2>
<p><a href="http://oxrep.oxfordjournals.org/content/24/1/1.abstract">A number of studies</a>, have found a strong link between the housing market and the economy as a whole, especially with regard to levels of consumption. In general, as house prices (and therefore housing wealth) increases, so does consumer confidence and access to loans. This in turn leads to increases in consumption. But the relationship is not quite this straightforward: for instance, <a href="https://www.nottingham.ac.uk/economics/cpe/publications/Disney-Henly-Jevons.pdf">there is evidence</a> that a rise in house prices leads to an increase in consumption, but when house prices fall, there isn’t an equivalent fall in consumption. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79594/original/image-20150428-3067-s26f0p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Higher house prices leads, in a roundabout way, to higher inflation.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&searchterm=house%20for%20sale&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=114295234">from www.shutterstock.com</a></span>
</figcaption>
</figure>
<p>Another concern is that increasing house prices can indirectly lead to inflation, through the increase in demand brought about by rising housing wealth. Essentially, if house prices rise, individuals feel more wealthy, and so increase their consumption of goods and services. This increases demand for those goods, which in turn increases their prices and leads to a rise in inflation. As a result, housing wealth is an important consideration for the Bank of England, when it is determining the interest rate. Whether or not central banks should react to changes in house prices, and potentially change interest rates as a result of excessive movements in them, is the <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm?sourc">topic of much debate</a>. </p>
<h2>Housing bubbles</h2>
<p>Another feature of housing, is that like other asset markets, it is liable to forming speculative bubbles, where house prices rise sharply above the fundamental value of the house. Arguably, this occurred before the financial crisis, and the collapse of the bubble in the UK added to the economic problems then experienced by the UK economy. Of course, it is not just central banks that need to keenly observe house price movements: governments also need to monitor them. This is partially because they can use fiscal policy, such as taxation, to control house prices. But it is also because of the important social implications of homelessness and inadequate housing.</p>
<p>The housing market also has a role to play in the regulation of the financial system, if, for instance, the authorities decide to set limits on the amounts of mortgages with respect to household income. Since the financial crisis, there has been a move towards what is termed “<a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130301.pdf">macroprudential policy</a>”. This means that the central bank monitors the financial sector as a whole, rather than institution by institution. This could include monitoring total mortgage debt, house price changes, levels of speculation in the housing market and levels of home ownership. </p>
<p>Although this is mainly the responsibility of the regulator, it is also important for any government: it is governments that need to produce the necessary legislation to control the financial system, where required. Another important question involves the success (or otherwise) of policy instruments. For example, would possible caps on loan‑to‑value ratios, have any influence on household gearing, credit growth or house prices? Although we are still in the early stages of developing macroprudential policy, it will be an important consideration for all future governments.</p><img src="https://counter.theconversation.com/content/40850/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Morley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We’ve heard all about building houses and help for first time buyers, but when it comes to housing, the whole economy’s at stake.Bruce Morley, Lecturer in Economics, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/346372014-12-01T10:47:45Z2014-12-01T10:47:45ZWhat will the next financial crisis look like – and are we ready?<p>The subprime crisis and the subsequent failure of Lehman Brothers came as such a shock – and the <a href="http://business.cch.com/images/banner/subprime.pdf">repercussions</a> were so severe that when the time came to mount a response, policy makers were as surprised as the rest of us and woefully unprepared.</p>
<p>In the six years since Lehman’s collapse, much effort has gone into thinking about the next crisis and about how to strengthen financial rules and practices so that the fallout is contained. Has this effort been productive? Will the repercussions of the next crisis be less damaging?</p>
<h2>Another banking crisis?</h2>
<p>The answer, as with many things economic, is: it depends. It depends in particular on the form the next crisis takes. Most obviously, that crisis could be sparked by the collapse of a large bank, similar to <a href="http://www.theguardian.com/business/2008/dec/28/markets-credit-crunch-banking-2008">bank failures</a> in the US and other countries in 2007 and 2008. Banks are highly leveraged, and information about their underlying condition can be difficult to obtain. This means that they are always at risk of going bust. </p>
<p>Governments have therefore focused on making the banking system <a href="http://www.bbc.co.uk/news/business-20811289">more robust</a> and better able to withstand the failure of a large financial institution. Banks are now required to hold more capital so that they have a larger cushion to absorb losses from the collapse of one of their number. They are now subject to liquidity requirements to ensure that they have adequate resources if the interbank market, on which they borrow overnight, dries up. </p>
<p>Regulators have taken steps to remove the expectation of a taxpayer bailout and reformed compensation practices in the hope that this will deter excessive risk taking. Bank failures will still happen, but these are among the reasons to hope that their repercussions will be less severe. </p>
<h2>Another euro crisis?</h2>
<p>Alternatively, the next crisis could be sparked by doubts, like those of 2012, about the <a href="http://www.theguardian.com/business/debt-crisis">survival of the euro</a>. An election in one or another European country could bring to power an opposition party committed to abandoning the euro. </p>
<p>Greece’s opposition left wing party, Syriza, is <a href="http://www.policy-network.net/pno_detail.aspx?ID=4763&title=Syrizas-run-for-government-and-the-next-Greek-crisis">likely to form</a> the next government in Athens if parliamentary elections are held next spring. Marine Le Pen is currently a leader in the French opinion polls and has vowed to take the country out of the euro in her first day in office. </p>
<p>If one country was seen as about to leave the euro, the expectation would quickly develop that others would follow. The result could be panicked runs on banks and financial markets Europe wide.</p>
<p>Here, leaders are clearly better prepared than in 2012, before European Central Bank President Mario Draghi <a href="http://www.thisismoney.co.uk/money/news/article-2844695/ECB-president-Mario-Draghi-vows-takes-prevent-euro-decline.html">vowed</a> to “do whatever it takes” to maintain the integrity of the euro area. In a panic, we now expect the ECB to immediately flood financial markets with cash. It would buy every security in sight if doing so was necessary to hold the eurozone together. An isolated exit from the euro would still be disruptive. But there is reason to think that the fallout could be contained.</p>
<h2>A crisis of geopolitics?</h2>
<p>The next crisis could also be sparked by a geopolitical event: worsening conflict in Ukraine or the Middle East, or a naval clash between China and another country bordering the South China Sea. These kinds of events inevitably disrupt financial markets. </p>
<p>But they are more likely to create problems for other countries than for the United States, which remains the world’s only <a href="http://seekingalpha.com/instablog/12713201-rossaldridgelasvegas/3491705-world-liquidity-makes-us-stocks-only-safe-haven-confirmed-by-ross-aldridge-in-las-vegas-nevada">true haven</a>. Geopolitical turmoil is likely therefore to create flight toward US markets, not away.</p>
<p>But there is also the danger of a crisis originating in the United States itself. The US is seen as a haven because its financial markets are so liquid – because it is possible, in other words, to buy and sell government and corporate securities at low cost in virtually unlimited quantities. </p>
<h2>Making things worse</h2>
<p>But recent financial reforms like the Volcker Rule and changes in capital requirements for banks have made it more expensive for US financial institutions to hold inventories of bills and bonds. Consequently, if there is a sudden movement out of those instruments by the same money managers that have the movement in, their prices could implode. </p>
<p>Liquidity premiums – the extra yield investors demand to own a security when it can’t be converted easily into cash – would explode, and exchange-traded funds with positions in such assets could find themselves unable to redeem their shares. Officials like Mark Carney, governor of the Bank of England, have been warning of this danger in the hope that warnings will lead investors to be better prepared. Perhaps those warnings will have some effect. Time will tell.</p>
<p>But these, to <a href="http://www.brainyquote.com/quotes/quotes/d/donaldrums148142.html">invoke</a> Donald Rumsfeld, are the “known unknowns.” These are the crisis risks we perceive and for which we are attempting to prepare because they resemble crises past. </p>
<p>There have been bank failures before. The eurozone had a near-death experience in 2012, as I describe <a href="https://global.oup.com/academic/product/hall-of-mirrors-9780199392001?cc=us&lang=en&">here</a>. The sudden surge in yields of which Carney warns would resemble the liquidity crisis that resulted from the failure of the mega-hedge fund Long-Term Capital Management in 1998. These types of crises are likely to be manageable precisely because they have a history.</p>
<p>More dangerous are Rumsfeld’s “unknown unknowns,” the financial crises that come from unanticipated sources. History provides no guidance about their form; all we know is that there will be some. And the other thing financial history tells us for sure is that their impact will be severe.</p><img src="https://counter.theconversation.com/content/34637/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barry Eichengreen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The subprime crisis and the subsequent failure of Lehman Brothers came as such a shock – and the repercussions were so severe that when the time came to mount a response, policy makers were as surprised…Barry Eichengreen, Professor of Economics and Political Science, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.