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JoseFuentesSecondPaper 3 - 12 Dec 2008 - Main.JoseFuentes
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-- JoseFuentes - 12 Dec 2008
Second Paper | | | | |
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< | Few Americans care about their privacy. Well they care, but just not enough to do anything about it, like rejecting loyalty reward programs. But surely they care about their financial information, which is “some of the most sensitive, personal information imaginable.” Yet most consumers are surprised that “most companies actually rent or lease customer data to third parties . . . .” Although the Gramm-Leach-Bliley Act provides consumers with “[[http://www.privacyrights.org/fs/fs24-finpriv.htm][some minimal rights to protect [their] financial privacy, . . . the burden is on [them] to assert [their] rights]]” through an opt-out mechanism. Unfortunately, it “appears that although consumers are generally concerned about the loss of financial privacy, only about 5 percent have taken the low-cost step of opting out.” | >
> | Few Americans care about their privacy. Well they care, but just not enough to do anything about it, like rejecting loyalty reward programs. But surely they care about their financial information, which is “some of the most sensitive, personal information imaginable.” Yet most consumers are surprised that “most companies actually rent or lease customer data to third parties . . . .” Although the Gramm-Leach-Bliley Act provides consumers with “some minimal rights to protect (their) financial privacy, . . . the burden is on (them) to assert (their) rights” through an opt-out mechanism. Unfortunately, it “appears that although consumers are generally concerned about the loss of financial privacy, only about 5 percent have taken the low-cost step of opting out.” | | |
So why should Americans care about the loss of their privacy? Aside from incurring personal costs (like price discrimination at Amazon.com), the absence of privacy externalizes costs to the American community. Indeed, this article argues that the absence of privacy contributed to U.S. recession of 2008 (the “Recession”). For the sake of brevity, I won’t describe the details of what caused the Recession. It suffices to say that many commentators agree that the sub-prime mortgage crisis triggered the Recession. (See also Aditiblogs.com and Examiner.com) | | | As for the second effect, the absence of privacy allowed financial institutions to peddle more credit products through aggressive marketing, which led to debt traps. Once the consumers were stretched to their spending limits, they began defaulting on their mortgages. As mentioned earlier, the sudden and widespread defaults caused the sub-prime mortgage crisis. | |
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< | The debt trap was created by extracting consumer surplus via (l)enders (who) found new ways to squeeze more profit from borrowers. The extraction was facilitated by [[http://www.nytimes.com/2008/07/20/business/20debt.html?_r=1][sophisticated marketing tactics [and] gathering personal financial data to tailor their pitches to the consumer . . . .]]” The lenders knew who to target and how because they had consumers’ financial data. “[[http://www.nytimes.com/2008/10/22/business/22target.html][[B]usinesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans. They then sell that information as marketing leads to banks, credit card issuers, and mortgage brokers, who fiercely compete to find untapped customers. . . .]]”[16] | >
> | The debt trap was created by extracting consumer surplus via “(l)enders (who) found new ways to squeeze more profit from borrowers. The extraction was facilitated by sophisticated marketing tactics (and) gathering personal financial data to tailor their pitches to the consumer . . . .” The lenders knew who to target and how because they had consumers’ financial data. “(B)usinesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans. They then sell that information as marketing leads to banks, credit card issuers, and mortgage brokers, who fiercely compete to find untapped customers. . . .” | | | Unsurprisingly, a consumer getting back from the hospital would find mail to this effect: “Can’t afford your hospital bill? Take a loan to pay it off.” The elderly, too, were targeted by sophisticated direct mail programs telling them to “Live Richly” and get a home equity loan. Ironically, the lenders even targeted people who just exited bankruptcy by offering special credit lines for people with “less-than-perfect credit.” | |
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< | Furthermore, the lenders spent “[[http://www.nytimes.com/2008/10/22/business/22target.html][hundreds of millions of dollars on advertising campaigns that [made] debt sound desirable and risk-free.]]” For instance, Mastercard’s “Priceless” campaign was meant to “eliminate negative feelings about indebtedness.” Other commentators point to the recent attractiveness of second mortgages (which were renamed as “home equity loans” to sound more pleasant). Previously, the second mortgage was a desperate tool but now has become universally accepted due to “ubiquitious ad campaigns from banks.” | >
> | Furthermore, the lenders spent “hundreds of millions of dollars on advertising campaigns that (made) debt sound desirable and risk-free.” For instance, Mastercard’s “Priceless” campaign was meant to “eliminate negative feelings about indebtedness.” Other commentators point to the recent attractiveness of second mortgages (which were renamed as “home equity loans” to sound more pleasant). Previously, the second mortgage was a desperate tool but now has become universally accepted due to “ubiquitious ad campaigns from banks.” | | | In sum, the absence of privacy – the consumer’s inability to keep a lid on his transactions –enabled the credit bureaus and marketers to collect hordes of data about consumers. The data was parsed so that statistical inferences could be made about the consumers’ creditworthiness. This ability to predict the default risk resulted in MBSs and the tremendous expansion of sub-prime mortgage market. Simultaneously, the data was sold as marketing leads to financial institutions, which aggressively pushed more credit products on consumers. Maxed out, the consumers defaulted on their loans. The mortgage industry finally failed in 2007, triggering the recession of 2008. |
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