Tag Archives: consumer protection

On Fairy Tales for the Subprime Era

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Practicum has posted my short article, The Emperor’s New Loans: A Cautionary Tale from the Subprime Era, today. It begins

A body of folk tales from the subprime mortgage era is now being written. Some are in PowerPoint. Some are in video format. Some appear in the guise of a non-fiction account.  After all, isn’t The Big Short just Jack the Giant Slayer—with the little guys not only ending up with the gold, but also with the big guys dead on the ground? And some stories, like the one below, are just plain old fairy tales.

You might ask why a complex financial crisis needs such folk tales. And I would tell you that they are necessary because they help us to identify the essence of the crisis. They can also make the significance of the crisis clear to non-experts. And they can help shape government responses to the last crisis in order to avert potential future crises. Luckily, noted storyteller Philip Pullman offers us some guidance on finding the essence of a story.

The rest of the article can be found here.

The Financial (Mis)Education of Lauren Willis

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Lauren Willis has posted Financial Education:  Lessons Not Learned and Lessons Learned.  This is a sobering, even depressing, overview of what we know about the efficacy of financial education.  This is an extremely important topic because the CFPB has identified financial education as a core part of its mission in its Strategic Plan (see Outcome 2.2).

Willis asks, “Does financial education work as hoped?” (125) She answers her own question:  “Empirical evidence does not support the theory. Some (but not all) studies show a positive correlation between financial education and financial knowledge or between financial knowledge and financial outcomes. But no strong empirical evidence validates the theory that financial education leads to household well-being through the pathway of increasing literacy leading to improved behavior.” (125)

Some of her her other important conclusions (based on a thorough review of the literature) include

  • “the only statistically significant effect of mandatory personal financial training on soldiers was that they adopted worse household budgeting behaviors after the training than before it.” (126)
  • “Youth who took a personal finance course in high school do not report better financial behavior several years later than youth who did not take the course.  Adults who attended public schools where they were required to take personal financial courses were found to have no better financial outcomes than adults who were not required to take such courses.” (126, citations omitted)
  • One “reason financial education is unlikely to produce household financial well-being is that consumers’ knowledge, comprehension, skills, and willpower are far too low in comparison with what our society demands.” (128)

Willis’ conclusions should caution against assuming that financial education is a proven method to reduce the impact of predatory practices in the consumer finance sector.  The CFPB has shown a willingness to test the efficacy of its approaches.  Hopefully it will do so with its financial education initiiatives too.