How much handholding do you want?

[andrewducker]

There was a discussion recently on my journal that started with my usual divisive poll (Who is to blame - banks or borrowers?) and ended up with two definite camps - one that held that people were responsible for the contracts they had made the choice to sign, and one that held that most people were incapable of understanding these contracts and therefore there had to be strict regulation and a duty of care.

The problem is that _some_ people are incapable of making an informed choice about anything involving a percentage sign*, and other people are perfectly capable of making an informed choice about hedged derivatives. Offering the same range of choices to both of these groups of people is either going to lead the former group to unwittingly walk off a financial cliff or punitively restrict the options of the latter group.

Most of my friends are social liberals and economic authoritarians - assuming that people are capable of making social choices but not financial ones.** Most people would agree that _some_ protection was needed to prevent people from signing up to things they don't understand - but there would clearly be large areas of disagreement over where that line should be drawn. One could argue that we'd be safer if everyone on the planet was wrapped in cotton wool, but that would make it awfully hard for mountain-climbers. And studies have consistently shown that the people most likely to overestimate their competence are those who lack it.

One thought I had was that you could mandate fixed-rate mortgages as the standard for everyone - that way people can't sign up for discount rates that land them in trouble two years later, or be left in trouble when rates rise. People would then become eligible for variable-rate mortgages only if they could show a rudimentary grasp of percentages and interest rates, and then further products being unlocked to people that could prove they understood statistics, economics, etc.. Eventually you end up at the level where people people with PhDs in maths have fully self-invest pensions and properties leveraged against derivatives on the international debt markets. It's not likely to happen, but frankly that kind of shading is the only thing that can both protect the ignorant and allow freedom for the educated.

Someone want to offer me a better suggestion?

[Poll #1286669]

*I can't find the data now, but some startling proportion of the population don't actually understand percentages.

**Of course, one can argue that most people are capable of making their own social choices. But even that assumes all sorts of things about people's ability to weigh up short and long-term costs, and most people's lack of understanding of the way that society reacts to their actions. A quick survey of my friends regarding some of _my_ social choices would show that they hadn't always been as well-reasoned as I might like.

Comments

[andrewducker]

Obviously, in an ideal world we'd be able to experiment and then be picked up when we fell over. Which is what we do have in some ways - if you fall off the mountain you're climbing then the hospital will stick you back together, if you completely fuck up your finances then you can declare bankruptcy and start over. The question is whether there should be police standing around the bottom of Mount Everest to stop ramblers from attempting to scale it, or whether regulators should stop banks lending people money they (probably) won't be able to pay back.

[miss-s-b.livejournal.com]

Perhaps everything should be licensed - you shouldn't be allowed to make a free choice in anything until you can prove that you have the capacity to make an informed choice.

But then who sets the tests?

[andrewducker]

People who have proved they're capable of setting tests? Quid testes ips testeres and all that :->

[red-phil.livejournal.com]

Hmm.
I voted it was the banks fault in that poll.
But I meant the current situation of banks becoming insolvent and collapsing was the banks fault.
If someone takes out a loan that they can't repay it is either their fault, or a cunning plan.
I have heard a resonable case for borrowing all the money you can, enjoying the hell out of life, then declaring bankruptsy (sp?) when everything falls apart.
It works as long as you have no real prospects to begin with

[lizzie-and-ari.livejournal.com]

Yes that was going to be my point - the general problem of people over borrowing lies (generally) with the lenders, but the problems each individual borrower gets are his own.

Having said that, it seems unfair that the banks are the ones that get the massive payouts. Why not help the people who are in trouble rather than paying off banks to be able to continue as they were?

This is not a rhetorical question, I'm reall asking. Ari says it's because i have no grasp of world economy. I genuinely don't understand why if the government has £50billion, why doesn't it use it for economic regrowth in developing countries thereby giving a more level world economy and also fewer people starving to death. Is that because I'm a great big communist and the world just Doesn't Work That Way Darling? Or am I genuinely missing something?

Lxx

[endless-psych.livejournal.com]

People should be free to get themselves into trouble - however it should be made clear the ways in which this could happen. How probable it is (using real fequencies as people understand those - most people do understand percentages its probabilities that are the unnatural bugbear maths forces upon us ;)) that something bad could happen should be made more then clear by the lender.

That is to say in an ideal world the focus would be less on selling mortgages and more on ensuring that the person taking the loan is able to meet/understands the risks involved.

As I understand the current situation this was not the case.

Also social responsibility and financial responisibility are not in the slightest comparable. We have had social responsibility since we evolved these lovely big brains and have to life with the consequences and results of our actions day in and day out. Financial responsibility requires an understanding of concepts and maths alien to our everyday life, or at least our everyday intuitive understanding of life.

[robhu.livejournal.com]

I blame the people who ask us questions like this!

Can't I have it whichever which way is easier at the time?

Gah, stop making me think!

[pizza.maircrosoft.com (from livejournal.com)]

Knowing when you need help is a good start. Personally I'd expect to be able to pay someone for advice and get good advice.

[andrewducker]

Problem is that, as bohemiancoast pointed out in the last discussion, when many people go to see their bank manager they expect to only be leant money they can afford to pay back. They expect the person lending them money to know more about mortgages than they do, and treat them fairly.

I don't expect this - but then I'm not most people, and laws should take that into account :->

[pizza.maircrosoft.com (from livejournal.com)]

Also that many people think that they can work things out for themselves rather than pay for help in understanding them. And also that the people they might pay don't always get it right either.

[palmer1984.livejournal.com]

Not answering that poll. It's set up to make you look like some sort of paternalistic "nanny state" type if you choose the first one.

The question is not a moral one, it's a practical one. Empirically if people are offered loans that they can't pay back they will take them. This will mess up the economy a few years down the line as people default. Therefore you have to stop people from borrowing too much. Similarly, if banks have liquidity to lend they'll lend it, therefore you need to stop them from lending too much.

[palmer1984.livejournal.com]

Also, if people's real wages had increased more they would have been less likely to get themselves into so much debt.

[andrewducker]

I find that a tad unlikely. People seem to get into debt as a proportion of their earnings - the more you earn the more debt you think you can afford.

[chuma.livejournal.com]

In a parallel universe, if the house market hadn't collasped along with this inability for some people to pay for their mortgages, we wouldn't be having this conversation; the banks would have just sold the homes at profit and recouped their losses and go on.

In a different parallel universe, if the mortgages that banks bought up that were dodgy and knew that the buyer wouldn't be able to keep up repayments were still with those banks when the house market collasped then only those banks who made bad decisions would have been affected.

In reality, the banks made bad decisions, the house market started to decline and they had been screwing one another over with CDOs (Bad mortgages wrapped up to look like AAA investments) so everyone got a piece of it in the ass when confidence hit the financial markets and they collasped, banks stopped lending to one another *deep breath*... and we find ourselves in this unfortunate situation with a worldwide recession.

Just as long as people don't ask me to feel sorry for those who gambled on the Buy-To-Let market during a housing shortage and live off the rent generated. They took a chance and are paying the price... boo fucking hoo. Maybe if they weren't paying 86% above the asking price in Edinburgh for instance then they wouldn't be in negative equity now.

[chuma.livejournal.com]

NB: Much as I hate the word "product" in a financial sense, I can't think of a better word to encapsulate all mortgages, bonds, PEPs, credit cards, pensions etc)


Protection is out there. The reason is to avoid companies misrepresenting themselves or their products or not making their clients fully aware of the risks. Beyond these protections the company only needs to make a decision based on whether it is profitable and within their company policy to offer their product to that person.

The person buying the product (mortgage, pension, car finance agreement etc) should go into the dicussions with an idea of how much money they have, how much they can spare for payments and a basic idea of what they are after. The company should make them aware of the financial implications of the product, any penalties for forfeiture, the cost per month, overall cost and benefits of this product over another. Beyond this, the buyer has FULL responsibility. If the company has been negligent of any above protections then they should cover any losses but not just because the person cannot afford to keep up repayments or hasn't researched the market better.

If someone doesn't understand something about the financial markets even beyond the company's guidelines and their own research, there is a bloody good reason for the job title "Financial Advisor". If they can't be bothered to source one and get their expert advice and absorb it, tough shit.

[andrewducker]

What do we do about the proportion of the public that doesn't understand maths well enough to know what they're really agreeing to?

[chuma.livejournal.com]

See the part where I said get financial advice from a Financial Advisor. No excuse not to and if you are buying a house in Edinburgh for instance you can nip to ESPC and get free advice. Before you even go through houses they go over your risks, expectations, money worries, deposits, coverage incase of illness or injury etc. It was all basic but sound advice that cost nothing more than a bus journey to George Street. I doubt there aren't similar people giving out such advice elsewhere, and if not, pay for it. Buying a house is the single biggest debt you are ever going to encounter and there is no excuse for taking it with a pinch of salt.

[andrewducker]

I tend to agree with you that there is advice out there. And it does baffle me to know that there are people who aren't taking advantage of it. I'd love someone to do a study of what actually happened with the people that took on ridiculous debts.

[chuma.livejournal.com]

The only people I have sympathy for are those who have been made redundant as a result of the recession or other such eventualities; there are some circumstances that you don't see coming.

[ninebelow.livejournal.com]

I know this is against the point of your polls but I would like to vote for both simulatneously and, in this case, there is even a proper phrase.

[andrewducker]

Oooh, yes - I remember reading about this in an article in the Economist a few months back.

I think it's a great idea - changing defaults, for instance, has been shown to work very well.

[martling.livejournal.com]

Well designed software has had a good solution to this for years.

By default, it protects the user from their incompetence/ignorance. When they really want to get round that, they click the "expert mode" button, get warned of what might happen, and agree to take the risk.

It shouldn't be too hard to replicate this for finance regulation.

[andrewducker]

The problem being when (for instance) mortgages that start at one fixed discounted rate, and then move to another rate after a certain time period, along with differing money-down costs are what are pushed towards the consumer.

I think I'm of the opinion that completely-fixed mortgages should be the default, with people having to go looking if they want more complex things.

[grapefruitzzz.livejournal.com]

I'm generally a big liberal but I think people should take responsibility for their own idiocy. I have about £4000 of debt that I'm paying off very slowly (I worked out that a 'good credit rating' was like a Victorian maiden's reputation and once gone, not worth fighting for :D ). I have met advisors trying to blame the bank for lending me the money and 'the debt-happy economic climate' but if anything I feel sorry for them and vaguely guilty for abusing their trust. I owe most of it to the Cooperative, who really are the defenceless wee bunnies of the banking world.

OTOH, I don't think this sort of mentality should spread to health and schools etc. I don't want some Tory MP tutting over my gutter-prone diseased body and saying that it was my fault I didn't get health insurance.