Adjustable rate mortgages and the mortgage crisis
Purpose – The purpose of this paper is to closely examine adjustable rate mortgages (ARM) made in Northwest Louisiana in order to provide a greater understanding of the causes of the high rate of defaults and potential foreclosures currently being experienced in Louisiana.Design/methodology/approach – The paper examines detailed information for all ARM recorded in a three‐month‐period.Findings – The paper finds that at least half of the loans have highly unfavorable terms with about a third having initial rates that are at least 3 percent higher than prime mortgage rates; these initial rates are likely to increase dramatically during future adjustment periods. Many borrowers also face high interest penalties if they pay back their loans before the first adjustment period. Also notable is the fact that only 7 percent result in foreclosure. While many borrowers receive unfavorable loans, relatively few loans are held for more than six years; a probable explanation is that the borrowers realize they have agr...
Product Literacy and the Economics of Consumer Protection Policy
I suffer from overoptimism bias. I know this, yet I accepted the invitation to write a commentary on product literacy and consumer protection for this special issue. After devoting over twenty-five years to consumer protection research and law enforcement at the Federal Trade Commission (FTC), the topic was in my wheelhouse. Surely, I could meet a deadline that seemed reasonably far away. But I also suffer from hyperbolic discounting, so I procrastinated. When I finally sat down in earnest to write this essay, panic set in, because I realized that the concept of product literacy is not well defined. Now what? Relying on my overoptimism, I decided to create my own definition. This exercise forced me to confront vexing questions about competing theories of consumer behavior and their implications for consumer policy. Consumer policy development depends fundamentally on the policy maker's view of consumer behavior. Policies will differ depending upon whether consumer decisions are viewed as rational, irrational, or somewhere in between. Yet, theories regarding rational consumer choice are in a state of flux, largely due to the growth and popularization of behavioral economics. Popular books such as Nudge have placed behavioral economics front and center in consumer policy circles (Thaler and Sunstein 2008). It is now fashionable inside the Washington DC Beltway to point to behavioral research suggesting that consumers do not maximize wealth, are overly optimistic, or procrastinate due to hyperbolic discounting, as proof that policies based on rational consumer models are insufficient to protect consumers (Kobayashi et al. 2012). This conclusion is then frequently used to argue that new policies should be implemented to protect people from their irrational selves. For example, some argue that mandating information disclosures from sellers is not enough--because consumers do not pay enough attention to them--and that disclosure regimes should be supplemented with or replaced by more prescriptive remedies, such as product bans or product preapproval mechanisms (Ben-Shahar and Schneider 2011; Posner and Weyl 2012). Although the future of consumer policy will be shaped by prevailing views of consumer rationality, there is surprisingly little serious debate among scholars from different disciplines or subdisciplines about the evidence for and against different models of consumer decision making. There are notable exceptions, but even when meaningful debate occurs it is often clouded by confusion over the precise meaning of key terms. What does it really mean for a consumer to be rational, or irrational, or reasonable? Discussion in behavioral circles tends to focus on whether people behave rationally, in the sense that people maximize an unconstrained or partially constrained utility problem. Evidence that people do not behave according to simple utility maximization models is often seen as evidence that people are not rational. What I find perplexing is why the standard for rationality in behavioral discussions tends to be based on utility maximization or wealth maximization constrained only by limited financial resources. I find this perplexing because the economics of consumer behavior, as taught in graduate school over thirty years ago, was based on a much more realistic model of consumer choice. When I explain this at conferences I encounter surprise by practitioners and scholars who are fluent in behavioral economics. Consumer economists have long understood that consumers face real time constraints, wealth constraints, and household production constraints, including decision-making and information-processing constraints. In this essay, I define product literacy and discuss where the concept fits within the law and economics of consumer protection. In so doing, I attempt to clarify what it means to be a rational consumer vs. a reasonable consumer vs. an irrational consumer. These different views of consumer behavior matter, because they can lead to different policies with different implications for consumer choice and consumer welfare. …
Mutiny Echoes: India, Britons, and Charles Dickens's A Tale of Two Cities
This essay asks what, if any, import the Indian ““Mutiny”” of 1857 had on A Tale of Two Cities (1859), Charles Dickens�s fictionalized account of the French Revolution. Begun shortly after the Indian uprising started, Dickens�s historical novel appears studiously to avoid any mention of events on the Indian subcontinent, even though these events preoccupied and enraged the author. Few scholars have attended to the question of A Tale of Two Cities and the ““Mutiny,”” but when they have, scholars have looked for analogies between India and Dickens�s account of the French Revolution. In this essay, by contrast, I examine A Tale of Two Cities in a larger context——of Britons9 response to the Uprising, of Dickens9s short stories and essays in Household Words in the years before the ““Mutiny”” and immediately after, of Dickens9s disenchantment with aspects of British culture, and of his need to articulate a national identity grounded in action. I argue that the events in India were the match that ignited Dickens9s already established midcentury interests in national identity, nobility, and masculine heroism. I do not wish to suggest that A Tale of Two Cities is an Indian ““Mutiny”” novel, but rather that it is a novel about the ““Making of Britons,”” an important endeavor for an author who was intensely dissatisfied with the Britain that he saw around him.