Democratizing Finance: Historical Analysis of Consumer Finance & Insurance, Slides of Marketing

Download Democratizing Finance: Historical Analysis of Consumer Finance & Insurance and more Slides Marketing in PDF only on Docsity! The Democratization of Finance: Consumer Finance docsity.com Trends in Democratization of Finance • Financial and insurance institutions began with intellectuals and wealthy class • Gradual spread of risk management institutions required marketing, spread of financial enlightenment, government support docsity.com Glitches in the Democratization of Finance • Lack of consumer financial sophistication invites their manipulation • Simple failures of judgment—behavioral finance • Consumer inexperience has compounded errors docsity.com Median Level of Assets First Income Decile, US Households with Heads Aged 51-61, 1992 • Financial Assets: 0 • Retirement assets: 0 • IRA: 0 • 401k: 0 • Pension: 0 • Vehicles: $300 • Home Equity: 0 • Home value: 0 • Total Wealth: $5000 docsity.com Median Level of Assets, Fifth Income Decile, US Households with Heads Aged 51-61, 1992 • Financial Assets: $3000 • Retirement Assets: 0 • IRA: 0 • 401(k): 0 • Pension: $4000 • Vehicles: $6000 • Home equity: $29000 • Home value: $45000 • Total wealth: $101234 docsity.com Saving Rate and 10-Yr. Treasury 1953-2003 Figure 3 Saving Rate and 10-Year Treasury Yield 0 2 4 6 8 10 12 14 16 1950 1960 1970 1980 1990 2000 2010 Personal Saving Rate Ten-Year Treasury Yield docsity.com Real Ten-Year Treasury Yield (Yield Minus Latest Annual Inflation) 1953-2003 Real 10-Year Rate 1953-2003 -6.00 -4.00 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 1950 1960 1970 1980 1990 2000 2010 Year R ea l R at e in P er ce nt docsity.com Bankruptcy as Ultimate Risk Management Device • Economic theory says that with diminishing marginal utility, the risk of extreme ruin is the most important consideration. • Without bankruptcy law, none of us could be assured of a decent income • Debtors were commonly jailed in US in early 19th century. docsity.com Bankruptcy Reform Act, 1978 • First major revision of bankruptcy law since 1938 • Lowered stigma of bankruptcy, relabeled “bankrupts” as “debtors.” • Allowed people to keep more • Made repayment schemes more attractive • Launched a boom in personal bankruptcies. • Bankruptcies have increased five-fold since 1985. docsity.com Personal Bankruptcies • US Personal bankruptcies reached 1.4 million in 1998, a record. Declined to 1.3 million in 1999 and 1.2 million in 2000, rose to 1.45 million in 2001, new record. • More bankruptcies than divorces. (1.2 million divorces in 1996) • With 104 million households in US in 1999, more than 1% of households declare bankruptcy each year. • Cumulative effect as years go by. docsity.com Personal Bankruptcies, US 1999-2003 0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000 1998.5 1999 1999.5 2000 2000.5 2001 2001.5 2002 2002.5 2003 2003.5 docsity.com Chapter 11—Reorganization • Primarily for businesses • Some individuals running small businesses may use Chapter 11 docsity.com Chapter 13–Adjustment of Debts of an Individual with Regular Income • Chapter 13 is a vehicle to repay part or all of debts over time, supervised by court- appointed trustee. • Keep all of property and receive a discharge of portion of debt docsity.com Choosing: Chapter 7 or 13? • Those with little assets choose Chapter 7 • Others try to make a deal with lien holder and choose Chapter 7. (protect house or car) • Failing that, and wishing to retain property, turn to Chapter 13. docsity.com Causes of Bankruptcies • Personal bankruptcies tend to be spurred by job loss, health problems, divorce. • Americans run up debts they can pay only if nothing goes wrong. • Many bankruptcies are by people who are “drowning in mortgage debt,” having bought too big a house. – Sullivan, Warren & Westbrook The Fragile Middle Class YUP 2000 docsity.com Credit Card Debt • SWW conclude that the biggest single factor in increase in personal bankruptcies in US has been growth of credit card debt.Average debtor in bankruptcy in 1997 had nine months’ income in credit card debt. – Credit card debt continues to be extended after initial application – Debt is incurred a little at a time – Payment schedules are different, can become ever more indebted while paying the minimum amount each month. docsity.com Credit Card Interest Rates • Average American had $5000 in credit card debt, paying an average interest rate of 16% in 1998. • Why do they pay such high interest rates? docsity.com II. Home Equity Insurance • Risks to values of homes greater than risks by fire • Oak Park Illinois, 1977 • Chicago Home Equity Assurance Program 1988 • Index-based insurance, Shiller and Weiss 1994 • Yale-Syracuse-NRC program, 2002 docsity.com III. Income-Linked Loans • Milton Friedman, Capitalism and Freedom 1962: individuals sell shares in their future earnings, but feared “irrational public condemnation” and feared it would be difficult to track people and enforce contracts • Changing times • Such loans should be based partly on income indexes, to reduce moral hazard docsity.com Income-Linked Personal Loans • Yale Tuition Postponement Option 1971-78 • Yale Law School Career Options Assistance Program 1988-today • David Bowie bonds, David Pullman 1997 • Australian Higher Education Contribution Scheme (HECS) is dominant form of student loans in Australia today docsity.com