Money as a Democratic Medium | Democratizing Money’s Power & Protection


SPEAKER 1: So hello, everybody. Thanks so much for coming– [SIDE CHATTER] –for the panel. This panel is moderated and
curated by Martha McCluskey. So Martha teaches at
Buffalo Law School. She earned a JD from Yale
Law School and an SJD with Distinction from
Columbia Law School. Before entering academia, she
was an attorney for the Maine Public Advocate Office. Her scholarship examines the
relationship between economics and equality in law, as well
as critical legal analysis of gender and race. Martha is working on a
book titled A Field Guide to Law, Economics and Justice. She is the co-editor
of Feminism, Media, and the Law, Oxford Press,
’97; the ClassCrits Project and Appeal, which
brings together, scholars in law, economics,
and other disciplines to develop a critical
legal analysis of economic inequality. MARTHA MCCLUSKEY:
And let me just– thank you. Thank you so much. And great to have you all here. And this panel itself
is an outgrowth of the appeal group, the
Association for the Promotion of Political Economy and Law. And so a lot of us
have come together, through many overlapping
ways, but particularly through that group. And you can find our website
at politicaleconomylaw.org. And we welcome you to sign up
and be on our mailing list. So I’m just going to
very quickly run down all our presenters here. First, Thomas
Herndon, Loyola Mary– THOMAS HERNDON:
Marymount University. MARTHA MCCLUSKEY: –Marymount
economist, and famous, as a UMass grad student, for
finding a spreadsheet error– [LAUGHS] in the austerity paper. THOMAS HERNDON: Actually,
from some economists here at Harvard. I was a little scared
some might show up. They might still hold a grudge. [LAUGHTER] MARTHA MCCLUSKEY: And Pamela
Foohey, a bankruptcy specialist and many other
things at Indiana. PAMELA FOOHEY: [INAUDIBLE]
The one in Bloomington. MARTHA MCCLUSKEY: OK. I always get them mixed up. OK. And so, a finance
and law person. And Kristin Johnson, also
finance and law, law faculty now at Tulane University
Law School, and expert on securities regulation
and many aspects of finance. And finally, Jennifer
Taub at Vermont Law School, expert on finance,
author of Other People’s Houses. Got the title right. Other People’s Houses,
on the mortgage aspect of the financial crisis. A wonderful book. I highly recommend it. And also, Jennifer is an
expert on white-collar crime and on the current federal
administration’s intersections with white-collar crime. And so you’ll often hear her on
CNN or in other public places, commenting on that. So with that, I’m going to
just leave it to the panelists. And we’ll have 10 minutes
each and hopefully time for discussion. So starting on that end. THOMAS HERNDON: Sorry, my
slides weren’t on that laptop. But here they are,
so no problem. And that’ll come up. So basically, I’m going to
present a paper today called “A Public Option As
a Mode of Regulation for Household Financial
Services in the US.” It’s a paper I wrote jointly
with my coauthor Mark Paul, who’s an assistant
professor at the New College in Florida. So the goal today is to discuss
the mechanism through which a public option could serve as a
mode of regulation for consumer financial protection. This falls under the
postal banking literature, and a lot of the postal
banking literature has focused on increasing
universal access and reducing
financial exclusion. We also think that’s
an excellent goal, and we detail it in the paper. Because I have 10
minutes, I’m going to focus on what I consider
one of our main value-added, in that, how can we use
public-private competition to regulate consumer
financial protection? So first, the features
of this public bank. One, it would be a
public bank that would, say, partner with
the post office to provide deposit and
transaction services, and then plain, vanilla consumer credit. We envision the full range of
consumer credit, from mortgages to auto loans and small-dollar
unsecured lending as well. And then, in addition,
we argue that it should manage an online
financial services marketplace where public
and private services would compete side by side. Really quickly, I’ll get
into the regulatory functions in a second. We argue that directly
providing services to households uses public-private
competition to regulate the distribution of risk, really
to shield households from risk. And the other
regulatory function is the marketplace,
in that we’re providing a service
to intermediaries, but you can condition
access to that service on meeting regulatory
goals, like consumer financial protection. And then, I’ll also discuss
how this was actually a large part of the
New Deal approach to regulating housing finance. It was very much
at the core of it. And for example, the
30-year fixed rate mortgage, it very much helped create
stable financial services for households during
the mid-century before deregulation. So before we get into
the regulatory features of the public option,
it’s very important to understand about how debt
contracts distribute risk, how that’s related to
consumer financial protection and macroeconomic stability. So debt contracts are
inherently distributional, in that they specify
the distribution of different forms of risk
between borrowers and lenders. For example, your typical
consumer debt contract has many, many forms of risk. Interest rate risk, right? That’s the risk that the
interest rate will change over the life of the loan. Credit risk, the risk of
default. Liquidity risk, right? That’s the risk that you’ll
need access to external finance during the life of
the loan, or you’ll have to refinance the loan. And then collateral risk, right? If it’s secured
lending, that’s the risk that, say, your house
will fall in value over the life of the loan. And finally, there’s
prepayment risk, right? What if someone
refinances and pays early, and the creditor doesn’t make
as much interest as they could? And so debt contracts
very much distribute this between borrowers and lenders. So if we consider the 30-year
fixed-rate mortgage, what’s been called the
“American mortgage,” it’s very much unique
in a lot of ways, in international and
historical comparison, because it provides a high
level of consumer protection by shielding
borrowers from risk. The fixed rate shields you
from interest rate risk. The long-term, fully
amortizing structure prevents you from needing
access to external finance during the life of the loan. Prior to the Great
Depression and the New Deal, they had what was known
as “bullet mortgages.” These were mortgages that
were not fully amortizing. So you typically had
between three to five years to make several
payments, but, at the end of those five-year
period, you would still owe something like half
the value of the loan. And so you would have to
take out another mortgage, in order to remain solvent. Though, of course, that’s a
very risky, financially fragile structure. And the large-scale defaults
in that risky structure played a large role in
the Great Depression. During the peak
of the Depression, half the mortgages
in the country were in default. I’ll get
more into that in a second. But the long story short
is, the mortgages created during the Great Depression
shielded those households from risk, right? Depository institutions would
have to hold that interest rate risk. There was some questions
around that during the ’70s. But there’s no liquidity risk. There was still collateral
risk on households. Also, we had the universal
ability to prepay, so that shielded households
from that risk too. Now, connecting this to
consumer financial protection. So first, here’s
predatory lending, the definition from the FDIC. They define it in
basically three ways. One is inducing a borrower to
refinance a loan repeatedly in order to charge high points
and fees each time the loan is refinanced. That’s very much concentrating
liquidity risk on borrowers. And that’s the main one I’m
going to focus on right now, but there’s two other things. One is just fraud as well. Some of my research is on that. Another one is making
unaffordable loans based on the assets of the borrower. But let’s look at
a concrete example here with payday lending to see
how payday lending concentrates liquidity risk on borrowers and
falls under the first category of the definition. So predatory lending,
it concentrates risks on households
and, really, the ones that are least able
to bear it, right? So the structure
of a payday loan is that you get a large loan
and you have to pay it off in a single payment, right? But borrowers who need this,
they can’t make that payment and still meet all their
bills for the next month, so they have to take out a
new loan at the end of that. And that’s why 80% of
the payday loan volume is repeat loans to
the same borrower over and over and over. And that’s how they get the
high fees on refinancing. And it’s very
financially fragile because what happens if the
borrower can’t get a new payday loan at the end of the loan? Then they can’t meet
any of their obligations and they go bankrupt. And the interesting
thing, too, is that if we look at who
are vulnerable to these, it’s the financially excluded. It’s those who
don’t have access to stable, affordable
financial services that shield them from risk. We see this all throughout
the housing market, as well, in the history of housing. So in the mid-century– three minutes. I’ll be quicker. In the mid-century–
yeah, I’ll just skip. So very much, is it’s the
credit-constrained borrowers who have risk
concentrated on them, but they’re the least
able to bear it. By definition, they
can’t self-insure against these risks. So how could we regulate this? How could we stop this problem,
the use of predatory services or different mortgage
innovations that redistribute risk back to borrowers,
compared to the 30-year fixed-rate mortgage? Well, one is just directly
providing services to households. You give them a
fallback position so they don’t have to take
out loans with a 400% interest rate on it, right? Another thing is
competition puts a quality floor in the market. And you give people
a fallback option and it allows you to
regulate from below, right? If we think about
the CFPB, they can forbid the provision
of services, but they can’t mandate
the provision of services. Also, due to the American
federalist structure, there’s a lot of different
banking regulators, and regulatory arbitrage
between them is a huge thing. However, with
competition from below, it doesn’t matter who
charters your bank. If you’re providing
these predatory services, they’re just not going to be
competitive with the safe, affordable public services. In addition, we could
provide services to intermediaries like the
online financial services marketplace, but
only allow services from the private sector that
met high consumer protection standards allowed on there. And then that would
both directly regulate the services in the
online marketplace, and then indirectly
regulate the services outside of that as well. And really quick, to finish
it up because I’m low on time, I would say that this is
essentially the most successful strategy that we’ve seen, I
believe, in housing finance in the 20th century. It was the core goal
of the New Deal. So for example, the
30-year fixed-rate mortgage I’ve talked about was
essentially pioneered by the government, right? During the Great Depression,
half the loans in the country are in default. The HOLC
buys them and refinances them into this new stable structure. And so that’s how
the government can pioneer and set the
terms of the market by providing services
to households. Moreover, actually
more of the strategy was providing services to
financial intermediaries, but conditioning access to
those services on the loans meeting
consumer-protection goals. The easiest one to think
about is FHA insurance. The FHA insured credit
risk on loans to banks, so it provided them a
service, took credit risk off their books. However, the loans
had to conform to these new stable
mortgages, right? And so, for example, there
was a 5% interest rate cap under the FHA loans
in the beginning, and so that acted as
a usury law, right? And so that’s the way it’s
both a carrot and stick. It’s the power of
the public option. And this was a key
component of the New Deal that underpinned stable
household finances. We propose to do this through
a new public bank, run in coordination
with the post office and online financial
services marketplace. And this will help
re-regulate everything from unstable mortgage
finance to predatory lending, and essentially, set
the terms of the market to shield households from risk
that’s concentrated on them through predatory products. [APPLAUSE] SPEAKER 1: Thanks for
sticking to the time limit. THOMAS HERNDON: Yeah. PAMELA FOOHEY: Perfect. Now we’re going to
plug me in, although I don’t know how to do this. THOMAS HERNDON: Oh sorry, it’s– PAMELA FOOHEY: It’s on the side. THOMAS HERNDON: Yeah, let me– PAMELA FOOHEY:
You took it apart. THOMAS HERNDON: I’m sorry. Let me plug it back in. Here you go. PAMELA FOOHEY: OK. So first, thank you,
Martha, for organizing this and also for letting me
into APPEAL, which I totally love, and I’ve found my home. Let’s see. SPEAKER 1: Go to Edit at the
very top menu, the grey menu, and then– THOMAS HERNDON: Go to View. SPEAKER 1: I meant View. Sorry. View. THOMAS HERNDON: Here,
I’ll take care of it. You can just talk. PAMELA FOOHEY: OK, so my
paper is about bankruptcy. It’s based on bankruptcy
data from the people who file bankruptcy. But it’s actually not
necessarily about bankruptcy. It’s more about
the lack of money that some people have, in light
of our fraying social safety net. So as I assume everyone
in this room knows, over the past couple of
decades, the social safety net has shrunk considerably. And it’s particularly
shrunk for older Americans, who are people we define
as people 65 or older. And so social security benefits
and eligibility has shifted. Medicare and Medicaid
benefits have decreased. Defined benefit
pension programs have been replaced by defined
contribution plans that people must
manage themselves. All of this shifts risk onto
the lives of all Americans, but particularly
older Americans, who then have to shoulder
that risk by taking out credit, which debt loads
over the past decades have confirmed. More older Americans
are taking out credit and they’re taking
out even more credit. Credit inevitably leads people
to file bankruptcy– some of them to file bankruptcy. And that is where
our paper begins. We report on older
Americans’ bankruptcy filings over the past several decades. And we rely on data from what’s
called the Consumer Bankruptcy Project, which is a long-term
project that was started decades ago, in part by
then-Professor Elizabeth Warren, that studies the
people who file bankruptcy. Right now, my co-investigators
on the project, and also the coauthors
on the paper, are Bob Wallace, who
is at Illinois, now Congresswoman-elect Katie
Porter, who is no longer on the project as of today,
who is also on leave at Irvine, and Deb Thorn, who
is a sociologist at the University of Idaho. So since the early 1990s,
scholars on this project have asked people for their
ages, which is not data that the administrative office
of US courts has ever reported and does not report. So the data in this
paper, over time, was developed by
asking people who filed bankruptcy, what’s your age? And of note, before
I get to the results, between the 1990s and now–
so over the last 25 years– we find an almost threefold
increase in the rate, within the general population,
at which older Americans are filing bankruptcy. We find an almost
fivefold increase in the percentage of older
Americans in the bankruptcy system itself. And the difference
in the numbers has to do with some of
the rate in bankruptcy filers within the population
of bankrupt people is taken up by the fact that the
American population generally has aged over the last 25 years. For one example, the
median older American who ends up in bankruptcy
enters the system with a negative wealth
of about $17,000. So they’re $17,000 in
the hole when they file. Their non-bankrupt counterparts
have a positive net wealth of about a quarter
of a million dollars, and that is what people survive
their retirement years on. And I mention the last
statistic because, again, even though this is a
paper about bankruptcy, it’s not actually
about bankruptcy. It’s about how America
treats and protects its senior citizens, and
how we have taken money away from them, effectively. And we refer to the
Consumer Bankruptcy Project as an early warning
system of bigger issues within households’
finances and society, hence the caution sign on this slide. And this is particularly
true about this paper. So before I get to
the results, really quickly on the methodology,
the current Consumer Bankruptcy Project is an ongoing
data-collection effort. Every three months,
we randomly poll 200 consumer bankruptcy cases,
both Chapter 7 and Chapter 13. And then we send a
questionnaire to debtors, which is where we get the
age data and other data from. The paper relies on now
four years of rolling data, so, 3,200 household
filings from 2013 to 2016. We have 910 questionnaires that
were returned, 895 of which have valid age data. We compare this data to
data from the 2007 Consumer Bankruptcy Project, which
was a national random sample, except that one was a snapshot
in time in which about 2,500 cases were polled over
a three-month filing period and, effectively, the
same questionnaire was sent to people. We also compare it
to the 1991 and 2001 iterations of this project. Because of limitations at that
time, in that there was not really the internet,
these iterations relied on samples from
bankruptcy courts in five states or judicial
districts in places that were both urban and
rural and thought to be nationally representative. In 1991, in fact, they took
a photocopier with them on the plane, and then hauled
it up the steps to get the data. And in 2001, now
Congressman-elect Katie Porter, I believe, walked around with
rolls of quarters in her pocket to photocopy stuff. So to the results, quickly. In the paper, we report about
older Americans’ bankruptcy filings in two ways. First, this graph
shows the filing rate of age cohort per 1,000 persons
in the US population over time. So starting in 1991, which is
the lightest bars, through now, which are the
darker bars, you can see the darker bars are getting
higher and longer as you move across the age cohorts. And you can see,
over time, there has been a sizable increase
in the age of filers. By percentage, in the age
range between 65 and 74, the increase is 204%. For 75-plus, it’s 345%,
which gets you to that almost threefold increase. And again, the increase in
the age of the general US population only
explains a small part of the increase in older
Americans within the bankruptcy system. And it is these
figures that show this because it’s by age cohort
in the general population. The other way that we report
the aging of bankruptcy is this graph, which shows the
percentage of older Americans within the bankrupt population. So the percentage
of people 65 or 75 or over within the
filing population. It’s increased massively
in the last 25 years. This graph works in
the exact same way. For 65 and over, the
increase is 479%. The graphs show the increase,
but then the question becomes why? Our data isn’t causal,
and we don’t ask people, why are you filing
bankruptcy in a way that we can make a causal
connection, but we do ask them, what led you to need
to file for bankruptcy? We give them a list
of common reasons. And those answers can shine
a light on the problems that older Americans face. So I have one table,
or one slide, for this. This slide lists
the reasons that were most often cited by
older Americans for why they ended up in bankruptcy. So 69% of them say
“decline in income.” This includes job loss or
from retirement drying up. This is about wages,
retirement, social security, all wrapped together. Older Americans also cite
medical expenses, 62%. The comments they
write to us suggest this relates particularly
to inadequacy in Medicare, and also social
security to meet their costs. They also cite missing
work for medical reasons. And you can imagine what happens
when an older American misses work, in terms of
keeping their job, and how that can
spiral out of control. They also cite pressure
from debt collectors at a rate of 72%, which
is not unique to them and is actually a subject
of a separate paper that’s coming out in Notre
Dame Law Review soon, called “Life in the Sweatbox,”
about how debt collection and debt collectors are pushing
people into the bankruptcy system, and how long people
struggle in the sweatbox before they file. So the final data slide. The effects of older
Americans’ struggle seems to be evident in the
financial characteristics when they file bankruptcy. So what we did on
this slide is pull out the key financials
for households, broken down by bankrupt under
65, bankrupt 65 and over, and then non-bankrupt
65 and over, which I think is the more
interesting comparison to older Americans in bankruptcy
and out of bankruptcy. The financial characteristics
between those two are simply striking. I’ll just highlight that
difference in wealth I started with in
the introduction. These people have
nothing to live on after they file
bankruptcy, which leads perfectly to my quick
conclusions for the last minute or so. So we think of the
Consumer Bankruptcy Project as this early warning system. The aging trends that
we’re reporting on now were noted in 2007 in an
article by my coauthor Deb Thorne, Teresa Sullivan,
and then-Professor Elizabeth Warren, in which they,
quote, “sounded the alarm.” This paper is meant
to amplify that alarm. It’s not only older
Americans who file bankruptcy who have debt issues. So between 1992
and 2016, which is the time I’m talking
about in the paper, the percentage of non-bankrupt
senior households with debt increased from 42% to 60%. The average debt
of those households increased from $6,000 to
$31,300 in comparable dollars. So you don’t even
have to inflate them. We did it for you, right? So people are
turning to bankruptcy because it’s the last remaining
part of the social safety net that they can turn to. But bankruptcy’s not a
retirement plan, right? The paper is not
about bankruptcy. Having people file
bankruptcy sooner, or more older Americans file, is
not a reasonable solution. And this paper and the
data is really about money and how we take care
of our older citizens, and the magnitude of the coming
storm of the broke elderly and what we need
to do for them now. So I’ll end there. [APPLAUSE] KRISTIN JOHNSON: So
this is– yeah, great. I don’t have slides. I typically do. I won’t have slides
today, though. I am, however, hopeful
that I can offer the next iteration, right? This panel’s been
perfectly organized thus far because,
to a large extent, I want to ask Thomas
lots of questions about the history of consumer
protection and mortgages, and I have tons of questions
for Pamela about the idea that we can imagine
credit in a new light, and we can also imagine, in
a population that’s aging, lots of concerns
about how they’ll navigate and manage credit. I would like to
talk a little bit about the future of finance. So to add the third leg
in the stool so far, I’d like to discuss
a series of projects I’m working on that relate
to the advent of data science and artificial intelligence
in financial markets. The introduction of data science
and artificial intelligence in financial markets
represents a seismic shift, I would argue, in the
development and execution of conventional equity
and debt trading securities, payment systems– think Zelle, Venmo, PayPal– and credit scoring
and lending practices. Today, data aggregation,
mining technology, and automated
decision-making promises to redefine financial
market intermediation. In a previous
paper, I spent lots of time examining the
introduction of algorithms and high-frequency trading
in equity securities markets. As Martha noted earlier,
it is my heart and my home. These trading strategies alter
the pace of financial market transactions,
initiating an arms race as market participants
compete to decrease the time that elapses
between the moment when a trader signals, right? I could do those
baseball signals. They would suck because I don’t
know anything about baseball. [LAUGHTER] But you recall them well
from Trading Places. Now we’re going back to who’s
aging in the population. If you saw the Eddie Murphy
movie Trading Places, you saw those baseball signs
and you recall an equity market whereby there was a securities
exchange and a securities exchange floor, where a floor
specialist would receive trades from broker-dealers
in the market and encourage them or facilitate
the execution of those trades. Automated trading challenges
long-established core principles in financial
markets’ regulation, such as disclosure,
transparency, and fairness. In the late 1960s, electronic
communication networks replaced antiquated
securities and commodities trading practices with automated
trade-execution technology. During the last few
years, developers have accelerated
the pace of change in securities and
commodities trading markets. I’m here to talk to you today
about a similar trend emerging in credit scoring and
credit lending markets. I’ll use my remaining
time to discuss the types of
artificial intelligence that are, interestingly
enough, transforming credit scoring and credit lending. And I’ll describe a few
very specific models. Before I launch into
the models, though, I’d like to talk just a
bit about what I mean by “artificial intelligence.” So very specifically,
algorithms have long been used in credit
scoring processes. If you have a FICO score, or
are familiar with Experian, Equifax, TransUnion, right? Anyone seeking to
use consumer credit or credit in a
number of contexts is familiar with
these platforms. I would describe them as
a form of financial market intermediation. They provide a service that
signals the creditworthiness of the consumer. They’ve used algorithms
to score our society– borrowing from Frank
Pasquale’s “Scored Society” with Danielle Citron– to score our society
for a number of decades. Today, algorithms are changing. They’re changing
dramatically and they’re changing the process of credit
scoring and credit lending. Machine algorithms today
automatically detect patterns in data. Upon discovering
patterns, machine learning applies these patterns to
predict future outcomes based on the supplied
data, of course. These methods engage in
complex decision making and applied logic to
resolve uncertainty. Instead of relying, as
we have historically, on data to tell us what
you’ve done in the past, algorithms today
will predict what you are likely to do in
the future in a way that transforms credit markets. Now, credit is increasingly
essential in obtaining necessities. Increasing numbers
of vendors require credit cards to complete
any number of consumer transactions, right? Processing a credit card or
having access to a credit card is often required to rent a car,
to purchase an airline ticket, to shop online. Without sufficient or,
often, good credit history, it may be difficult to qualify
for certain educational loans, credit cards, or a mortgage. As of March 2018, consumers
navigated, astoundingly, $1 trillion in credit card
debt, over $1.5 trillion in student debt, and almost
$9 trillion in mortgage debt. During the first
three months of 2018, household debt increased
by $63 billion. The numbers are staggering. And consumer lending has long
been a critical challenge, as Thomas described and as
Pamela described, as well, for consumers to navigate. I’d like to use
the remaining time to talk about the emerging or
future platforms for credit lending and credit scoring. And I’ll talk about three
very specific– or maybe two, depending on my time. I’m up to five minutes, now. I’m watching it
carefully, Martha. I’ll maybe only talk about two
so I can focus a little bit more on solutions in the end. But I’ve organized,
for the purposes of this paper, three prime
examples of how we’re witnessing a transformation
in consumer scoring and credit lending in light of the advent
of any number of technologies. So I’m going to start with
one domestic-based firm first, Atlanta-based GreenSky LLC. This firm offers consumer
credit online and has already extended credit to almost
2 million households and individuals. It is a quintessential
fintech firm. Note, non-banking
financial institution relying on technology to
offer something historically offered only by
financial institutions. Want to talk about some
safety net concerns. OK, we’ll come back to those
endogenous and exogenous consumer-oriented
risk-management concerns, as well as systemic risk
concerns, I’d proffer. And I’m hopeful to talk to
Pat McCoy later about some of these very specific issues. GreenSky is a quintessential
example of a fintech firm. It has a proprietary technology
that facilitates something called “point-of-sale
financing.” Essentially, that
just means a retailer will offer a portal
on their website that enables GreenSky, in a moment– literally, less
than 60 seconds– to ascertain whether
or not a consumer seeking to purchase something
online is a good credit risk. Or in other words, are
they creditworthy, right? GreenSky expressly
disavows any suggestion that it is a financial
intermediary, but in fact it is intermediating
a kind of finance, right? So GreenSky partners with banks. I’m sure you’re
wondering now exactly what their platform offers. It partners with banks. Upon the conclusion by GreenSky
that an individual consumer is creditworthy, the
banking institution standing behind GreenSky will actually
facilitate a transaction on behalf of– or extend credit to the
individual consumer. GreenSky boasts now 12,000
retailers and service providers, including large
corporations, as well as any number of small,
medium-sized enterprises or individual
family-owned businesses. GreenSky’s platform executes
the entire transaction cycle of credit arrangement. That’s underwriting,
documentation, or distribution of documentation,
funding, and settlement. The entire process of
underwriting a loan, GreenSky can execute from your
smartphone or mobile device in less than 60 seconds. Right. OK. I’ll offer just
a second example, and then I’ll move on to
talk about some correctives or interventions that are
critical in this market in a second. So the second I’ll
offer is Klarna. Klarna is actually
not a US-based, but an international
online platform. Klarna does a number of things
very similar to GreenSky. However, Klarna, even more
interestingly– and here’s where we’ll dig deep
or dive a little bit into what happens in the
process of machine learning as an algorithmic process
versus your conventional use of algorithms, or your
average if-then statement. In the context of
conventional algorithms or those that were used by FICO,
Experian, TransUnion, Equifax, historically, there might
be an if-then conclusion. If you’ve missed a certain
number of payments, if your credit history
is particularly weak or particularly limited,
no access to credit, right? A simple if-then statement
based on historical facts about your payment history. Klarna is one of the number
of emerging platforms that is using alternative data
to ascertain whether or not individuals ought to
qualify for credit. Among the types of alternative
data, we are now witnessing– and Klarna expressly uses– your email address or IP
address and your ZIP code. Thomas is already
thoughtful about the idea that this looks like redlining
in the mortgage industry that we saw– right? –decades ago. However, no, no, this isn’t
that, according to Klarna. [LAUGHTER] According to Klarna, we
can rely on this data to mitigate the
likelihood of fraud because, if you’re using
your own mobile device or if you’re sitting
in your own home executing transactions
from your IP address, that too should
be a point of verification as to who you are. And in fact, according
to the online retailers using these platforms,
it’s a better point of departure for confirming
that no fraudulent activity is taking place, right? So we can imagine, and
we’ll talk a little bit more about, other types
of alternative data that these platforms
may be using. I’d like to shift the
conversation for two seconds to the greatest concerns and
some of the interventions. So easily, you can imagine
that a number of concerns emerge from the use of
this alternative data, and also from this reliance
on machine learning and deep learning algorithms. And I’ll just borrow from
the literature, wholesale, at this point, to suggest
that a number of authors have carefully detailed the
likelihood that these processes will lead to a disproportionate
or a disparate effect in the context of particularly
vulnerable or marginalized borrowers. Those who have
historically been excluded, or at least faced the least
favorable borrowing terms in credit markets
are likely– again, in light of this
alliance between financial intermediaries
and technology platforms– to also remain in dire straits. So thanks, Martha,
I hear your tone. So one of the things
that I’m proposing, or that’s widely been proposed,
is reliance upon auditing firms to engage in a
process of auditing the algorithms that
are used by these technology-based platforms. I don’t find that
intervention, in and of itself, to be sufficient, in fact. I think, in part, one of the
major governance challenges for entities using these
types of algorithms– one of the major governance
risk management concerns, in my humble opinion– is that there’s a lack of
diversity among the programmers who are developing
the platforms, as well as those who are making
business decisions related to the credit
entities themselves, or the platforms themselves. So in a paper that I’m
publishing with George Washington Law Review, I
explore the significance of increasing the representation
of women and diverse persons in the programming
of these algorithms, as well as in the
governance process, the highest ranks of
the firms that are launching these applications. So I’ll pause there
and concede my time, or I’ll save remaining time
for Q&A, or questions for Q&A. MARTHA MCCLUSKEY: Thanks. [APPLAUSE] JENNIFER TAUB: Pamela,
can you pass me the– MARTHA MCCLUSKEY: Jennifer Taub. JENNIFER TAUB: This is– witness the ceremonial
passing of the laptop. KRISTIN JOHNSON: I love it. This couldn’t fit
better together. JENNIFER TAUB: I know. [INTERPOSING VOICES] JENNIFER TAUB: Where does this– thank you. Thank you, Full Screen Mode– KRISTIN JOHNSON:
Your eyes are great. JENNIFER TAUB: So much
for these bifocals. Thank you so much, Martha,
for organizing this panel. And I would also thank
Chris, or [INAUDIBLE],, for organizing this
whole conference. After hearing my
fellow panelists speak, I now almost want to just jump
into questions and comments for them, but I
promised to talk. And I think that I also
have a meta analysis of how what I’m about to say fits
what they’re going to say, but I’m going to skip
that and just tell you what I want to say. And then, maybe the
questions and the discussions will get to that. So the title my talk is
“Saving the Canaries, Protecting Consumer Borrowers
to Prevent Systemic Risk.” And like Pamela, I’m
talking about why we need an early warning system. And I’m also here to address
the most fundamental principles that we’re discussing
at this conference. So we’ve already
established, I think, the argument that
credit is money. And often, we talk
about access to credit, but it’s really important not
to think about credit access as the only
democratic principle. But also, this idea
that it’s not just having access to credit– this idea that if
we could only lend to people who have lower
credit scores, then they’ll have access to
things like higher education. They’ll be able to
pay medical bills. They will be able to
have access to housing. In fact, that’s not, I
believe, the solution. Because ultimately,
there are some things that used to actually be free. And if they were free again– I’m thinking about
higher education. In my lifetime, the
state of California had free higher education, and
we can go on and on and on. Other countries, we have
essentially free medical care. It’s the fact that things cost
too much that’s the problem. And continuing to rely on– in the society that we do–
rely on credit extension to solve those
particular distributional problems is a disaster. OK. But here’s the deal. My saying that is like
Polonius in Hamlet saying “Never a borrower
or a lender be,” right? We are borrowers,
we are lenders. So what is my suggestion
for what we should do inside of the existing system? And this is where
this key point– it’s important, which is the
question of who can deleverage, in our society, without
self-destruction, is a democratic concern. And by that, I’m talking
about, specifically, questions around
bankruptcy that Pamela has raised which,
as we have seen, when a business is
failing, it goes into a Chapter 11 bankruptcy. But that’s not the
language we use. We say this company filed for
protection under chapter 11 of the bankruptcy code, right? It can get a fresh start. Now, sometimes it’s
going to liquidate later, but the people who
ran that business, who were in charge, who oversaw
its demise, end up just fine, and the company’s assets, and
sometimes the company itself, survives. When a consumer
enters bankruptcy, whether it is a 7 liquidation
or a 13 restructuring, we don’t talk about it
that way and they don’t get to deleverage in the same way. And so I think that’s– everything I say after this,
I think that’s the key point. We need to think about, in
this society, deleveraging without self-destruction. OK, so what I’m working
on now is this paper on trying to create or
establish some sort of index, or several indexes, as a metric
for predicting systemic risk. And so I’ve got three
claims that back this up. The first claim is that
consumer borrowers are like canaries in a gold mine. And yes, I know,
it’s a coal mine that canaries were
sent into, but I’m talking about a gold mine,
like the financial system. And if you think about how
canaries were actually used, it was way before the high tech
that Kirstin is talking about. You would have the coal
miner go into the mine with a canary in a cage, like I
showed you on the first screen. This is actually a photo. I just flipped it
around because I liked the way it faced better. This is actually a
photo of a coal miner taking the canary in there. And the idea is
that, as you know, the canary is going
to detect lack of oxygen or excessive carbon,
I guess it would be, dioxides. And then, if the canary
looks ill, looks weak, dies, we know, let’s get the
humans out of there. And what we have
seen historically is that consumer borrowers
are the first to show the visible signs of
suffering from these emerging predatory and toxic
products that banks and other financial institutions
and non-financial firms offer. And the problem is– let’s assume, for a moment, no
one cares about the borrowers. They’re just like the canaries
and we don’t care about them. The idea is that they’re
going to help predict, perhaps, systemic risk. Because if something
is very popular, it’s going to grow faster
than we might expect. And this isn’t just a theory. This is also– there are
correlations that economists have shown between these
overburdened household balance sheets and financial
instability and systemic risk. OK, the second claim–
and I’ll get to those soon– second claim
is that we need further cross-disciplinary
studies of systemic risk and consumer
financial predation. And I’m glad that
the group APPEAL I work with, as well as this
conference and this panel– we do have one
economist on here. But often, lawyers
don’t speak with– legal scholars don’t speak
with financial economists. And it’s rare to have
legal scholars do the kind of empirical
work that Pamela is doing. It’s growing, but
it’s not yet the norm. So we need to work together
and have these conversations. And then the third
claim is that I want to develop what I’m calling
a “macro home economics.” You know, we think
of home economics– I once treasured
this book because– I don’t know why. I’m obsessed with money. And I had this book about– when I was a child, I never– when you run a household,
here’s how you can use your money more efficiently. And I remember these things
that they tell you as if it’s a micro problem, right? And this is the
same thing of, don’t have a latte because
then you won’t be able to pay for college. [LAUGH] And we’ve seen Helaine
Olen’s book Pound Foolish tries to debunk that. The problem isn’t the Starbucks
coffee you get once a week. The problem is that if
you have a health problem, you’re going to go bankrupt. So this idea that we need to
think about home economics as a macro issue. And so the idea of
this canary index, it would be trying to measure
househould balance sheet stress, like the stress
tests you put banks through. And also, as a result of this,
if we understand this better, maybe we can act in a
more counter-cyclical way and put policies in
place that get triggered, like, that take the air out of
the bubble from the ground up. So things like, we
need to fix consumer bankruptcy to allow consumers
to reduce principal, right? This is one of the big
missions of the book I wrote, Other People’s Houses. We need student loan debt,
which is now $1.5 trillion. We need, I think, five-year
plans to discharge student loans, whether it’s through
the bankruptcy court or a more beefed-up IBRP– Income-Based Repayment Programs. I actually think that,
higher education, there should be a
public option for that. Because until we
get there, we’ve got to deal with
the people already. There’s already– no matter
what we do in the future, there’s $1 trillion–
$1-plus-trillion of debt out there. OK. so how much time do I have left? OK. So I want to go
through– since I’m talking about
preventing systemic risk and I’m talking about
promoting financial stability and using consumers as
an early warning sign, I think I need to talk a
little about definitions. So what’s nice about these
words that get used all the time is there are no definitions. So “systemic risk” is used 34
times in the Dodd-Frank Act various places. There’s an important
systemic risk determination that needs to be made, there’s
collection of systemic risk data from private funds– like hedge funds. There’s systemic risk study
of insurance companies, there’s a whole thing about
swaps in systemic risk, but nowhere a definition
of what systemic risk is. Isn’t that lovely? So what does it mean? I’m not going to read
through this to you all, but Steve Schwarcz has a
definition, Andrew Lo– you might know these
names– have definitions. The Office of Financial
Research has some words. And just to quote Flood
and Lo, et cetera’s, paper, “because systemic risk is
not yet fully understood, measurement is
obviously challenging, with many competing and
sometimes contradictory definitions of threats
to financial stability.” So he’s kind of blending
these words together. There are different categories. Obviously, it shouldn’t surprise
you– macroeconomics, market, credit, solvency, and
leverage, funding and liquidity contagion– these
are the things that can be early warning signs. But where do consumer
debt fit into that? Fundamentally, I like
Steve Schwarcz’s definition of systemic risk, which
is, it’s what happens– it’s a fragile
system, and if there’s a triggering event, like an
economic shock, that there’s a domino effect and these can
lead to a chain of failures, OK? So that’s systemic
risk, but again, not a– I’m sorry, that’s systemic risk. Not a perfect
definition, but you get the idea that it’s like a
fault line that something can– problems can be followed from
that, [? knock ?] on problems. So this page here
comes from the paper from Andrew Lo and others,
from 2012, this working paper. And they have this
particular table. And in this table,
you can see, I’ve put these big arrows
to see they’ve listed all these factors, since
no one’s defined systemic risk. And they kind of weave in,
into forward-looking measures, consumer credit. OK. So, “financial stability,” even
better, this appears 94 times in the Dodd-Frank Act,
including the preamble. In fact, Title I is called
“The Financial Stability Act of 2010.” Even the FSOC, the Financial
Stability Oversight Council, was created, not defined. OK? So what does it mean? So many really good
definitions, just to say, people talk about
financial stability means having a financial system. A system of banks
and non-banks that can provide credit
intermediation. We often hear that. I like this definition
a bit better. The Federal Reserve
updated this in May. They think that
financial stability’s a financial system that meets
the needs of average families. That’s interesting, right? Did I get this? OK. So let’s talk about the
early warning signs. Earlier, I said there is a
correlation between consumer predation and consumers
acting like canaries getting sick, financially
dying, and the crisis. We have Pat McCoy,
who’s here today, and Kathleen Engel, who
wrote an amazing book called Subprime Virus, which
was published in 2010. But they were doing
work in 1999 and 2001, and they began to hear these
words “predatory lending” in Cleveland. And when they tried to
bring up these issues, they were greeted with derision. Similarly, [INAUDIBLE],,
who was a lawyer on the front lines in 2004,
saw consumers struggling. And she met with a
group of members– a group within the Fed. Some of the governors
are on this– consumer– attended some– the
consumer council meetings she was part of. And they just
basically told her, this is just
anecdotal data, right? And they said, our economic
models don’t see this. And they kept going back
and saying it’s anecdotal. And let me tell you, the
economic models are still not accounting for this yet. This is what I want to build. OK, sorry, time’s up,
but I’m still going to– a couple more things. So we heard about
[INAUDIBLE] earlier, so I just have a
lot of different– just trust me,
there’s many sources. I should give a lot of
credit to Amir Sufi and Atif Mian, whose work, the book House
of Debt, and their continuing work on the links between
household balance sheet stress and the crisis in the
past and going forward. Again, lots of cites here. OK, so let me just go– I’ll jump to the end. I have some more
on Minsky, here. What would the
canary index entail? The big question is,
is it one meta index– like Jane Austen’s [? Key ?]
to All Mythologies? No. I think you need to have a
series of different indicators. So what Pam is working
on is one piece of it. But what I want to make
sure we can look at is on a micro level. I don’t think you can just
look at averages, right? We have definitely two or
three or four Americas. So I’m thinking about assets and
liabilitiese relative to trends and relative to the age of the
borrower, historic costs, cash flow issues, their income,
the identities of the lenders, default, and
bankruptcy histories. All these different pieces. This should be forward-looking
and look at the implications for borrowers and lenders. So this index would say– somehow, it would–
it’s the idea of having the
Case-Shiller index, but looking at more
things than just housing and trying to predict how
stressed borrowers are, how maxed-out they are. So looking today, there’s $13
trillion in household debt, as of August 2018. This is just from the Q3 2018. This is from the Fed. And you can see this is the
non-housing debt and housing debt, and it’s growing. And this is also a lot of fun
from the Fed flow of funds. They don’t call it the
flow of funds anymore, but this is looking at household
net worth and the growth of domestic non-financial debt. And you see the percentage here. I’m just circling it. It’s creeping up,
so this is the time we want to think about this. Now, on the other hand,
there are folks– just to say the other side– that
say, this isn’t a big deal. Household debt,
relative to GDP, this is the number we
should be looking at. So there’s a lot
to consider here. So in conclusion, I
welcome people’s thoughts. I’m going to be working with– I’m going to develop this
into a conceptual paper, and then start trying to look
at what data we have available and try to build some
models with an economist friend of ours. But ultimately, I don’t think
looking at consumer stress is fighting the last war. I think every single
crisis, whether it originates in housing or
originates in the banking system, originates anywhere,
always affects consumers, always affects
housing, in the end, always affects people’s jobs. And again, my main
point here is who can deleverage
without destruction is a social justice issue. And what I think
we’re going to see with these indices is if
we see an early warning sign, what’s the next thing? We need to have policies in
place on the fiscal side, and really rethink
issues of what needs to be paid for in money
and what the state should actually provide to people. Because I think that will end
up being the only solution we have to these cycles. Thank you. [APPLAUSE] MARTHA MCCLUSKEY: OK,
I’m going to just offer a few comments before we
open it up to questions. And well, really,
these are questions that made me think about
how these papers intersect. And one is that the
theme of this panel is “Democratizing Money’s
Power and Protection.” And we know how much
protection and power as the public, the state,
gives to the private creditors at the top level. And so this looks down the
line, the hierarchy, and asks, I think, what are we doing to
really protect and give people power– ordinary people– power
through this hierarchy of trickle-down credit? And one question I have in
that is, in designing a system to democratize that
power and protection, how far are we going, or how far
should we go, in that design, to move from the model
that this conference is challenging us to do? The model of money based
on private, decentralized, so-called market transactions
to a truly democratic purpose and process? Because I come to money
through insurance regulation and doing insurance law. And so one of the
questions there is looking at how much
insurance regulation and regulating finance
uses, as the model, the private market,
so-called, and focusing on a commercial
transaction of financing. And so, to what extent
should we be perf– or are the different
presentations here pointing towards
how we could move away from trying to perfect
an idea of finance as a decentralized, private,
commercial transaction to something that really
changes the nature of getting access and power from finance? So that’s one question. JENNIFER TAUB: Do
you mind if I–? MARTHA MCCLUSKEY: Yeah. JENNIFER TAUB: So I don’t– I’m going to
challenge the premise. I don’t think there
is any private money. I don’t think any of the
financial intermediation, especially the shadow
banks and non-banks, can stand alone
from the sovereign. It just doesn’t happen. We can look at the
2008 crisis and, again, see who got bailed out and who
got the government backstops. And when they stepped in to save
the money market mutual funds, that tells you that that was the
closest thing we can think of, I think, to private money. But all these so-called
private transactions, first of all, as
contracts, require the state to back them up. But even so, there is
the full faith and credit of the US government to
step in and rescue them. So I think what I want
people to see and admit is that that backstop is
what creates the moral hazard on the lending side. And it seems incredibly unfair
that this is the game we play again and again and again. And the victims
of this, who then get blamed for overextending
themselves, end up poor. They end up having
their assets stripped. And it ends up generation
after generation. And this is how, I think,
it furthers the inequality. If we just admit that
the state is there, then maybe we can just
say, let’s just have the state just directly pay
for some of this stuff instead of having these middlemen
financial intermediaries making so much money off
of this process. MARTHA MCCLUSKEY: Yeah. KRISTIN JOHNSON:
If I can hop in. So one thing I didn’t talk
about– one of the models for scoring credit
lending in the paper that I’m working on uses
blockchain as a technology to offer financial
services intermediation, rather than relying
upon conventional financial intermediaries. So the argument
is that blockchain brings the promise of genuine
democratization of money, or we could have had an entire
MDM conference, arguably, with the blockchain people,
because they would have said we’re bringing it, you know? However, one of the
critiques I have in my paper is I’m not fully persuaded. So the entity that
I’m thoughtful about is called Bloom, Credit Bloom– B-L-O-O-M. They have a white
paper that they published that describes how they
intend to decentralize access to credit. And their promise
is that they will offer all the services of
financial intermediaries without any of the costs, right? Because this is part of that
blockchain revolution whereby the entities themselves
can come to be irrelevant and transactions on a
peer-to-peer network replace the necessity of
going to the platform that is the private money, which
is where all the fees are calculated and captured. The challenge, from
my perspective, having read their white paper
cover to cover multiple times, and shared it with, in
conversation, developers who are writing
blockchain protocol, we can’t ascertain immediately–
there is an opacity issue. We can’t ascertain immediately
how they are transitioning or converting the
decentralized data that they may have about consumers into
a conclusion about your credit score. So the first problem is, we
assume, actually– because we can’t see, in its
entirety, the protocol– we assume that,
somewhere in the model, they’re using algorithms. [LAUGHS] They just aren’t
telling us that that’s what they’re doing, right? So they gather the
data through some kind of decentralized process. But then, ultimately, they
have to score the people. In order for credit
scoring to work, people have to be
assigned a number– an A plus, a B plus,
an 800, a 740, a 500. You have to be assigned a score. And so the conclusion
is, even if they reconfigure the reputational– the data points that they
use to determine a score, there’s still a
process whereby they’re using a slightly
conventional mechanism to score folks and to
give access, if you will, to credit and capital. So there are a lot of
concerns about what is actually happening there. The second piece
is they are using some alternative forms of data. We have grave concerns
about the likelihood that those who have been
historically marginalized in these processes will
be further marginalized. In fact, Credit Bloom’s
exact description– and this is terrifying– of
what they intend to do to create a
credit score is to ask you to list your friends. And based on who you’re
associated with– this is in the white paper– Credit Bloom. You can google it. Based on who you’re affiliated
with, in terms of associates– and this could be determined
by Facebook friends, I don’t know, who you tweet. I am not sure at all. But can you already imagine
a grave number of concerns about the extent to
which you’re associated with non-creditworthy
folks, and as a result, you are less
creditworthy, right? That’s the actual–
they’re actually arguing on behalf of this
reputational assignment of a credit score. JENNIFER TAUB: So you’re going
to dump me now, as a friend? [LAUGHTER] KRISTIN JOHNSON: No. But I imagine there are
people we would all dump. [LAUGHTER] Unfortunately. So grave concerns about
the genuine democratization of credit via blockchain. PAMELA FOOHEY: Can I just
pick up on Jennifer’s comment? Both at the end of your
talk and what you just said at the end of your answer,
about the government directly paying and how this is
a social justice issue, the conclusion of our paper
is it’s not about bankruptcy. What history has
shown is that you need the government to step
in to either provide some of the services, or
to regulate in a way so that people have enough money
to pay for their basic needs. And I think the older
Americans filing bankruptcy is the canary in your gold mine. And what they’re saying is, we
need the stuff we used to have. It’s not an access-to-credit
issue because, by the time they file bankruptcy,
what you see is that they had tons
of access to credit. Yes, they cashed out
their retirement accounts, but they put all of
their medical expenses on credit cards, and then
on a different credit card. And then they put a
loan on their home, and then they got a
lien on that loan, and it just spiraled
out of control. And it’s really about how much
everything costs in relation to how much money we effectively
are giving people through money as this democratic medium. THOMAS HERNDON: All right. So a couple of points. Just to step back and
take a broader view, a lot of why I recommend a
lot more public institutions directly providing credit,
a lot of it goes back to, I think, Keynes’s vision
of socializing credit as a way to stabilize
the economy, and just the
socialization of credit or the “Euthanasia
of the Rentier.” And I think it’s a lot– if they’re public institutions,
there’s a lot greater role for public oversight as well. A couple other points. I think Jenn’s point about
having some mechanism for deleveraging that doesn’t
destroy the [? bar ?] is incredibly important. And it also ties
in, in some ways, to Pam’s point about
how credit policy really cannot replace incomes policy. And that goes back to the
keynote we had this morning. The person talking
about the pension funds in Holland, and how a lot of
the financial deregulation was this compromise
between labor and capital. They’re like, all right,
we can’t get extra incomes for the workers in the
’70s, but let them make more returns on their stocks. In the US, we saw
a lot of that, too, as Greta Krippner’s
book Capitalizing on Crisis talks
a lot about that, too, how asset price inflation
made up for a lack of income. And I think that’s
a huge danger, and that’s probably one of
the biggest fears I have, actually, about my
proposal, as well. Really, this credit can’t
substitute with incomes. And really, if that
happens, you’ll see what Jenn is talking about. We’re going to have a huge
amount of deleveraging that’s going to
have to occur and we have to think about the
mechanisms through which that occurs. So the way it happened in ’08,
in the privately securitized market, which is some of my
other research I’m looking at, there was $600 billion
lost to foreclosure, right? That’s how the
deleveraging occurred. If we think about the voluntary
loan modifications in that, and even the ones that
took place under HAMP, they didn’t
deleverage borrowers. They resulted in a $20 billion
net increase to borrower debt, right? They punished borrowers. And that’s terrifying. And if we do debt
forgiveness, that’s kind of like a redistribution
after everything bad happened, where it’s
much better to get rid of it on the front end. One other question I
would ask, though, is, a lot of these algorithms and
the different fragmentation of who is doing what role in the
financial services market had a huge role in contributing
to ’07, ’08, especially with conflicts of interest, right? So perhaps, if one of
these fly-by-nights is doing underwriting for
a credit card company, and the credit card’s
holding the credit risk, maybe that’s one thing. But what if
securitization’s involved? Then you have all these
perverse incentives, conflicts of interest, right? I imagine the underwriting
company gets a fee on the volume of underwriting. And if someone’s securitizing,
they get a fee for originating. So I’ll be gone, you’ll be
gone, and let’s all– right? That’s how that shit works. Uh, sorry, that’s
how that stuff works. [LAUGHTER] And so that’s a serious,
serious issue that I would be– KRISTIN JOHNSON:
Can I just comment? We’re both– [INTERPOSING VOICES] First, when Thomas
was presenting and he was working through
what I would describe as the “micro risk
management concerns” that are transactional that really
feed into the systemic risk management concerns
that Jennifer described, I just felt more at
home than anywhere else. This is like Christmas
and Thanksgiving all rolled into one for me. [LAUGHTER] Because my earliest scholarship
was on systemic risk, and I followed Steve Schwarcz
like a little mini-apostle, right? Because I thought he
really has touched upon something that,
as a policy matter, will continue to be
a challenge for us if we can’t get
our arms around it. And it’s, what are
the triggers, right? So Steve says we’re looking for
something that really triggers a contagion, that triggers
a domino effect of losses across the market. And notwithstanding the
conversation prior to 2010 around this question
of systemic risk, which is why it shows up so
frequently in the Dodd-Frank Act, there was no political
will to actually attempt to define and address it. There was so much
political will to address, as you described also in
your talk, the problems of the last crisis. So we have “say on pay” in the
Dodd-Frank Act, which I’m sure resolved all of nothing
that related to everything Thomas just mentioned and
he described in his paper. So if we walk through
the interest rate risk, we walk through
the solvency risk, the liquidity risk, if we walk
through credit or counterparty risk, we’re talking about–
at the transactional level, or even just the fragmentation
across the market and the idea that we had Alan Greenspan
sit before multiple panels of Congress, in other
instances, and essentially say credit derivatives
are wonderful products because they make for
a more healthy economy by allowing us to deal with
risk in a whole new way. Rather than a
single entity having to house that risk on
their own balance sheet, they can share the risk
with others, right? Like another kind of Christmas. Not really. And so at the end of the
day, I think these two issues are really critical. And I actually would
say, I was very conservative in my
expressions of what I think about what’s
happening in the context of the development
of algorithms, the reliance of this
segmentation within the market and the fragmentation
of the market. I think there’s something
tremendously terrifying there. And I present this
paper, and I often describe it as, I bring the
apocalyptic predictions, which I don’t think are positive. And Jennifer drove
it home, I thought. JENNIFER TAUB: I have
a stepping-back comment to make, just to be clear, which
ties into something Chris Desan said this morning. So first, here, when
I’m talking about firms, I’m talking about
financial firms. I want to really distinguish
between private operating firms that make things for a moment. So hold that thought. This morning, Chris was talking
about, during the Civil War, the use of greenbacks to
get “volunteers,” in quotes, instead of coercive
conscription, right? And that just made me think
quite a bit about money as a way to force
people– get people to do stuff– get out of bed, right? We know this idea. This is why private
firms like to have it because you get
people to do what you want them to do, right? So I understand that and I
really do believe in money as an incentive. I’m not trying to make a– how do I say this? That’s a description,
not a normative claim. Money does work as– it has an
incentive power in that way. So I want to take it
a step further, which is, if we’re organizing a
society and we look around and we say– and you hear these
complaints all the time– people are not getting
the education and training they need. Folks aren’t getting–
we don’t have– we have a shortage
supply of doctor– all these different
things that we say. And so I think if the
state’s willing to pay volunteers to go to war– and we do it now. We pay people to fight. We pay to be ready to– Why don’t we pay people
to go to college? I would take it a step further. Instead of free
higher education, why don’t we pay
people to do that? And that’s not meant to
be a radical comment, but let’s really think about,
how is the government using the money that it creates? And if we start– if we thought
about this very differently, why aren’t we paying people to
have good health by providing their health? What does it mean to have
a functioning society? If money is an incentive,
why is the government taking away all its power
to incentivize people to behave in the way it
wants them to behave by going into the private sector half? Why are we only using the stick? You screwed up, you go to jail. You screwed up, you go to jail. We don’t have rehab for you. Why don’t we pay
instead of punish? I mean, it just seems so– I must not be the first
person saying this. Anyway, go. Jami, Tell me. [LAUGHTER] AUDIENCE: You know, I
was actually thinking, I start off with Martha’s
comment about democratization, and then [INAUDIBLE] Thomas. And then, Jennifer, you
said something [INAUDIBLE].. MARTHA MCCLUSKEY: Could you
speak up a little bit more? JENNIFER TAUB: I’ll
repeat his question. AUDIENCE: Look. OK, so, public banking. I thought that public banking
is something like a public works program, in the sense that– a public works program, a
jobs program, how it does it, it increases the bargaining
power of labor, right? So this, I think,
comes to, I think, Jennifer, your
point that we have capital in the job markets. But then, either you don’t have
a jobs program, which means that workers are completely– the bargaining
power’s completely in favor of employers. Or you have that and that
increases the bargaining power, right? So a public banking
system, I think, would be one way of
democratizing credit. In other words, it would put
pressure on private bankers to not engage in certain things
that they do now because there is a much more
efficient and just [? consumer. ?]
[? Anyway, ?] public banking system [INAUDIBLE]. So I think that
comes to your point. Why doesn’t it happen? And I think it
doesn’t happen because of massive corporate
power, right? Which is beating back
against the state against the public sphere. I mean, we did have
higher education which was free and all this, right? So I think that,
thinking back about– democracy is also about
creating seriously confronting corporate power
and its massive influence in shifting the
seesaw in favor of the wealthy and corporations,
as opposed to the society. And that’s, I
think, [INAUDIBLE].. I had one question for
you, Jennifer, [INAUDIBLE] suggestion. In terms of your
canary, have you looked at any of Wynne Godley’s work? OK. So– JENNIFER TAUB: Can you
say the name again, Jami? AUDIENCE: W-Y-N-N-E Godley– G-O-D-L-E-Y. There is a– so he’s done– he did a–
the late Wynne Godley. He passed away a few years ago. But he’d done a lot of work
on household debt-to-income ratios. And he was already
talking about it in the 1990s, that this was
reaching unsustainable levels. So, in terms of early
warning indicators, there are two comments I have. One is that particular
chart that you put of the stuff that was used– household debt to GDP– JENNIFER TAUB: Yeah. AUDIENCE: I don’t think it’s
particularly good, right? Because you’re talking about
apples and oranges over here. It should be household
debt to household income. JENNIFER TAUB: Exactly. MARTHA MCCLUSKEY: Oh, OK. AUDIENCE: So that leads
me to my third point– and I’m sorry if [INAUDIBLE]– but there is a
well-known relationship in macroeconomics that
if you’re a household and you’re running a deficit,
so you’re spending more than you’re earning, if the
interest rate of your debt is greater than the
growth of [INAUDIBLE],, your debt-to-income is going
to shoot up unless, of course, [INAUDIBLE] unless the
debt compounds [INAUDIBLE].. [INTERPOSING VOICES] But that’s an indicator
that’s not being used. JENNIFER TAUB: Thank you. AUDIENCE: It’s a good indicator. JENNIFER TAUB: Thank you. THOMAS HERNDON: Can
I respond to that? KRISTIN JOHNSON:
And I actually– [INTERPOSING VOICES] JENNIFER TAUB: Can
we [INAUDIBLE]?? THOMAS HERNDON:
Oh, OK, yeah, sure. AUDIENCE: I guess I had
some comments and then a question, also. Jennifer, I might give it
a different [INAUDIBLE] incentivized
behavioral [INAUDIBLE].. How do we facilitate
people with [INAUDIBLE],, not presuming that they’re
doing things behaviorally problematic to begin with? And then the case
for public banking, I think it’s really [INAUDIBLE]
in Phishing for Phools by Akerlof– THOMAS HERNDON: Absolutely. AUDIENCE: –and Shiller, where
they talk about the profit motive inherently
leads the finance sector, in particular, to want
to extract, want to deceive. That is their motivation. THOMAS HERNDON: Absolutely. AUDIENCE: He probably
stopped short from advocating public banks because his wife
was the Federal Reserve chair. [LAUGHTER] Otherwise, he probably
would have advocated it. And then, with regard
to credit scores, they should be federalized. KRISTIN JOHNSON:
Oh, interesting. AUDIENCE: And I
guess you all agree, but it should have the
transparency of government, as well as the
accountability of government. And data sovereignty issues
are clearly relevant when it comes to who gets to
profit from the information that I offer– KRISTIN JOHNSON: That’s right. AUDIENCE: And Ruha Benjamin
at Princeton University, she’s done a lot of
work about algorithmic– people are arguing– KRISTIN JOHNSON: Yeah,
I’ve seen pieces. AUDIENCE: You’ve seen it. KRISTIN JOHNSON: Yeah. Yes, please. AUDIENCE: Robots are aracial. The robots [INAUDIBLE]
aren’t racist. So using robots as
a learning mechanism to come up with
ways to rate people is a way to mitigate
some of our racism. However, the robots
replicate our behavior. They learn from a
platform that we’ve established that a robot– there’s evidence that the robots
themselves are behaving racist, also. JENNIFER TAUB: That’s right. AUDIENCE: And then
another point is, rather than the framing
around access to capital, as opposed to access to credit– KRISTIN JOHNSON:
Oh, that’s great! AUDIENCE: –maybe that
changes the narrative. And then here’s my little
push-back, a little bit, with regards to
[INAUDIBLE] element. So [INAUDIBLE] we can protect– and I get the graphs about
[INAUDIBLE] growth rate. But part of it is they started
at the lowest position, relatively, compared
to some other groups. So if we look at
absolute numbers, it– we should protect everybody. I guess the question is,
why focus on the elderly? In an absolute sense, they might
not have the largest increase, and they might be
at the lower end. And they are one group that at
least has, although inadequate, social security. KRISTIN JOHNSON: Can we
respond really quickly now? MARTHA MCCLUSKEY: Yeah. KRISTIN JOHNSON: I just
wanted to say one tiny thing– and Jami left– that was related
to the public bank suggestion. It also goes to Derek’s
comment, as well. Thank you so much
for the several– they’re all really helpful. And it’s simply this. This goes to the
rent-seeking on the part of financial institutions. They will never go away. So when you talked about
the public banking option, as a former Goldman
Sachs employee, as a former vice president
and associate general counsel at JP Morgan, I have to
admit and acknowledge they will not be disappearing. I don’t really see
that happening. And even to the
blockchain revolutionist, Don Tapscott, in his book
Blockchain Revolution, describes this
democratization of access to capital that
blockchain will bring. And then, almost as
an aside and quickly at the very end of a chapter,
he notes, uh, and, by the way, the largest financial
institutions have already gotten
together and they’re working on organizing a
privatization of blockchain. So what was meant to
be, by definition, a permissionless ledger– that was the idea of blockchain. A digital ledger technology that
everyone could participate in. Anyone who could log onto
a computer or connect could access to blockchain,
could freely access the data– no limitations, no fees. Permissionless ledger is part
of the description of what blockchain was meant to be. The banks are now creating
permissioned versions of the ledgers. In other words, they’re
hijacking the technology. And before we will ever
perfect it as a society, they will have perfected
it because there are rents to be collected
and they will not leave that money on the table. PAMELA FOOHEY: Can I respond
to the older-American things? So in terms of– maybe I misheard you, but
shouldn’t older Americans have the most? The people who file
bankruptcy, they– older Americans need
to have a cushion to live on in their retirement. And so they should
have built their wealth into their retirement. And the older Americans
who don’t file bankruptcy seem to have enough
to survive if they were living 10 years ago. And now they don’t. And we are focusing on
them because they show up in bankruptcy in
such dire straits, and that the percentage
of them filing increased within the bankruptcy
population and in relation to their growth within the
American population so quickly. And older Americans,
as a percentage of the general
American population, are going to continue to
increase as a percentage. And so, in coming years,
what we see happening now is only going to increase
in magnitude overall. And then we as a
society either are going to have to decide to help
them and do something about it or just leave them
on the street to die. And that’s why we picked
on that data point now. MARTHA MCCLUSKEY: Yeah. Let’s get to some
more questions here. Yeah, in the middle. AUDIENCE: I was thinking more
about the former post office bank. Two things, specifically. What kind of services
it did offer, and why is it [? charging ?] as a
bank by the federal government to act like a bank, like
a banking [INAUDIBLE]?? Because you know
there’s a whole movement now for public banks at the
state and municipal level. But you’re talking
about people’s banks. So what [INAUDIBLE]? THOMAS HERNDON: Should
I just answer that now? MARTHA MCCLUSKEY: Yeah. THOMAS HERNDON: OK, so the
US Postal Savings system was, if I remember right, it was
roughly 1917 or ’14-ish, up till it finally withered
away in the, I want to say, the mid-’60s. But by then, it had been
defunct for a while. It was interesting. It arose, in some ways, as a
discussion about an alternative to deposit insurance. But after deposit
insurance happened, people used the
commercial banking system. But really, I think
the real issue– so, one, it wasn’t like the
State Bank of North Dakota. It only targeted households. But it had competitive
restrictions on it that basically rendered it obsolete. And this kind of
gets into my issue with some of the new
postal banking proposals. They specifically want to
provide banking services to the unbanked, only to the– they don’t want to compete
with commercial banks, only serve those
who are excluded. But I think that public-private
competition is, one, an incredible regulatory lever. And two, it was the
competitive restrictions on the USPSS that caused
it to be obsolete, right? You had limits on how much
savings you could hold there. And they would pay you
less of an interest rate than you could get
at a commercial bank. Indeed, they even held their
savings at the commercial bank. And so, because of those
competitive restrictions, and then after
deposit insurance, it just kind of
withered away and it wasn’t a big factor after
the New Deal, essentially. But that’s very different. So the State Bank
of North Dakota, right, that would
be the government putting its tax
receipts in its own bank so it could generate credit. Rather than, say, like in LA– I’m from LA right now–
and they’re talking about, hey, why don’t we have
all our tax receipts held in our own bank
rather than Wells Fargo? And for reasons,
that makes sense. A couple other points I want
to circle back to really quick. I was trying to wait for
Jami to get back in the room, but this connects
a lot of things, so I might as well say it. So one of them– whither social democracy, right? What happened– SPEAKER 1: Here he comes. THOMAS HERNDON: –to
our– there we go. So great. I was just going to circle
back to some of your points. So the question, like– [LAUGHTER] –whither social democracy? What happened to even the bare
minimum social safety nets that we’ve had that kind of
leveled the bargaining power between labor and capital? And really, in my view, it’s
the Kalecki problem, right? Technically, it’s
not a bridge too far to set up these
public institutions. But it’s something
Kalecki talked about, and Minsky as well. What happens to the relative
bargaining power between labor and capital when you maintain a
full employment program, right? It becomes much more
even, and then you lose discipline on the shop floor. And that’s why businesses
have opposed consistently full employment programs. That’s Kalecki’s famous
article “Political Aspects of Full Employment,” 1943. AUDIENCE: [INAUDIBLE] exactly
this point, by the way. THOMAS HERNDON: Yeah, it’s true. And it’s the thing that is
always in the back of my head. This is a beautiful
idea, but yes, it’s going to take a change
in the balance of power. Another thing about
household debt. So one, I think– this is something I should
have said earlier too. But it is an incredible
canary in the coal mine because busts that follow
large run-ups in household debt are always the worst, right? [INAUDIBLE] has a
great paper on that, as well the IMF
shows this and shows why debt forgiveness
is actually really good from a macroeconomic
perspective. Also about the household
debt-to-income ratio, this is very important. It’s the Fisher effects, right? That your debt-to-income
ratio depends not only on how much you borrow
in a given year, but inflation, the
interest rate, and the rate of growth of your income. So if we look at
US history, there’s a marked change in
the Fisher effects facing households
from roughly 1950 up to 1980, and 1980 up to 2002. A [INAUDIBLE]
paper, [INAUDIBLE],, I want to say 2016. I could be wrong on the date. But what they showed is,
interestingly enough, in the postwar
period, 1950 to 1980, essentially, households
were able to run deficits but still have their
debt-to-income ratios fall through time due to essentially
negative real interest rates. It was also how the
US paid for the war. We never– we ran deficits
in the ’60s and ’50s, but debt-to-GDP fell. the Hall and Sargent
paper shows that. Even a Reinhart paper
shows that, as well. But, 1980 to about
2000, households actually often ran surpluses,
but their debt-to-income ratios increased through time because
of the Great Moderation, right? High interest rates, low
inflation, low income growth. That killed households’
debt-to-GDP ratio. Now, 2002 to 2007,
that was different. They did borrow quite a bit. That’s the housing boom. So that’s an incredible– and that gets into
the point of– the Capitalizing on
Crisis point, right? Greta Krippner, credit cannot
replace incomes policy. It just can’t. Finally, Phishing
for Phools, right? That’s incredibly– so
a lot of my research is estimating the effects of
mortgage fraud on foreclosure. Mortgage frauds caused by the
big financial institutions, some you worked with
there in my data set. I have 40% of the privately
securitized loan market. And yes, if consumer
financial protection abuses are profitable, people
are going to do it really big. And it doesn’t take
a long time, right? ’02 to ’07 was the
housing bubble. That’s five years. And that destroyed a
generation of wealth and just crushed the economy
for more than a decade– well, a decade, now. That’s a different question. Then the question of,
does Goldman always win? On some sense, yes,
Goldman always wins and they’re not
going to go away. However, public-private
competition from below makes that a lot harder. I don’t think we’re going
to compete them out of– and even– these were
serving [INAUDIBLE].. Goldman’s serving
corporations to the extent that Goldman robs
AT&T. But if they rob the whole working class,
that’s a little bit more, right? And this makes it a lot harder. This makes it
quite a bit harder. For entities like
Goldman, I would just say, I think we should have put more
of their executives in jail. That’s a criminal-justice issue. [INTERPOSING VOICES] KRISTIN JOHNSON: You and
Jennifer can go back and– THOMAS HERNDON: Kick
door on the boardroom. Treat the executives like
low-level drug offenders, and this would all
be over, right? Throw them in jail for 20 years. JENNIFER TAUB: You
didn’t say this panel was going to be about that. [LAUGHTER] THOMAS HERNDON: And maybe
I shouldn’t have said that, but no, that’s kind of been– it would make a great
Hollywood movie. Can you imagine a SWAT
team jumping off the roof, fast-roping down
to the boardroom? AUDIENCE: If you had public
banks, you could [INAUDIBLE].. THOMAS HERNDON: Exactly! AUDIENCE: The moral
hazard goes away. THOMAS HERNDON:
Exactly, absolutely. And really, that
was actually some of the big arguments for
a public banking system before deposit insurance. Get rid of the moral hazard. MARTHA MCCLUSKEY: Yeah. We’re almost out of time. Maybe we could– KRISTIN JOHNSON: Just
take the question? MARTHA MCCLUSKEY: I guess
one more question, or maybe two questions, and
then we can just– yeah, a couple of questions
at once, and then we’ll have final comments. AUDIENCE: So I was just
going to ask about– Thomas was talking about
public banking as a consumer protection– or a postal bank as
a consumer protection measure. And I was thinking specifically
about data collection and whether adding relatively
simple standardized products that are relatively
easy to pay off for people from a
variety of incomes and balance sheet positions
reduces the need for the– as Kristin was talking about,
more and more scoring methods and ways to bank the
unbanked and go after people, rather than just subsidizing
credit and providing easy products that you
don’t have this surveillance mechanism that’s necessary. You can have [INAUDIBLE]. That might be another advantage
of having a postal banking system. THOMAS HERNDON: Yeah, I
think information discovery is an incredible thing. Also, discovering the true
cost of what small-dollar, unsecured lending would be. Moreover, from an infrastructure
perspective, it would– maybe we can’t
replace– it’s not– you can’t replace incomes
policy with credit policies, but you could do
cross-subsidization like they do in every other
infrastructure thing, right? Like the post office. There are just some
routes delivering mail to that– it will never be
profitable to send a letter out to Nome, Alaska. You know, it just
doesn’t– or somewhere out in the middle of Wyoming. They knew that since
the very beginning, but they knew there’d
be profitable routes and that could subsidize
the unprofitable routes. Same thing with buses and
any of the universal service requirements on any
of our infrastructure. So we could do that with
a public bank, right? We could find out
the true cost, right? Payday lending doesn’t
cost 400% interest rates. That’s stupid and it
could be quite a bit less. And if it still wasn’t
decent enough, well, on financial services
to the middle class or the whoever else, you could
charge slightly higher interest rates and have cross-subsidies. And from an infrastructure
perspective, that’d be really useful. MARTHA MCCLUSKEY: OK, let’s
go to the last question and then we can
have final comments. AUDIENCE: With
respect to Pamela, with respect to
foreclosures and bankruptcy, of course people have to know
that they have the option of foreclosure– of
bankruptcy and foreclosure, which a lot of people don’t. I advise some people, and a
couple of people I’ve advised didn’t know that there
was a bankruptcy option. And the court
doesn’t necessarily go and let them know,
either [INAUDIBLE].. So I would love to know, in
the last three categories of your ages, such as the– I forget what the– over 65 or
whatever it is, and 50 to 55, whatever the last two categories
[INAUDIBLE],, how many of those people drop off the curve that
didn’t file for bankruptcy that could have filed,
and perhaps even are in the [? box ?] cities
and tent cities in the Chicago or in San Francisco? Thousands on thousands of people
that have just dropped off the face of the earth
because they weren’t aware of the [? process? ?] I’d love to know that. I don’t know how you– you’d have to figure out how
to go and include that kind of data in your survey. PAMELA FOOHEY: So if we’re
going to final comments, maybe my final comment can
be in response to that. So in terms of age
brackets, I can’t give you an estimate because I don’t
know of anything broken down. But there have been
papers from economists that show 15% of Americans
generally could economically benefit from filing bankruptcy. And I bet it’s
about 15% of older Americans that are in the same
sort of financial problems– not necessarily mortgages,
specifically, but it’s all tied together. So the answer is a
whole lot of people don’t file for
bankruptcy potentially because they don’t know about
it, or they’re too stigmatized AUDIENCE: Or they give up. PAMELA FOOHEY: Or they give up. And who knows what
happens when they give up? But this question is actually– the other paper I mentioned,
called “Life in the Sweatbox,” about how people– how we think people figure out
that bankruptcy is an option. And it’s actually
the foreclosure proceeding that we think
triggers a financial problem is a legal problem, and
then they start thinking, oh, there’s that
word “bankruptcy.” Maybe I should look into it. And debt collection and debt
buying, and then rebuying, and then having
different debt collectors contact people, we
think, has pushed different subsets of
people to file bankruptcy, over the last 10 years. So I’ll end there. MARTHA MCCLUSKEY: OK, any
other comments to wrap up? We’ve said a lot. Thank you all. [APPLAUSE]

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