Dropping the Ball on Financial Regulation — Simon Johnson

 

MIT Sloan Prof. Simon Johnson

From the New York Times

With regard to financial reform, the outcome of the November election seems straightforward. At the presidential level, the too-big-to-fail banks bet heavily on Mitt Romney and lost; President Obama received relatively few contributions from the financial sector, in contrast to 2008. In Senate races, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio demonstrated that it was possible to win not just without Wall Street money but against Wall Street money. Read More »

Juanjuan Zhang on microlending websites: a poor credit rating can mean a successful loan

MIT Sloan Asst. Prof. Juanjuan Zhang

When a bank considers a loan, it looks at the borrower’s income, assets, credit history, and plans for the money. On microloan websites, lenders have one other way to evaluate a borrower’s creditworthiness. They can observe the behavior of other lenders.

With a colleague, Peng Liu of Cornell University, I have been studying Prosper.com, the largest of the microlending sites. On Prosper, lending is transparent. Borrowers make requests in public postings and typically rely on multiple lenders. Prosper assigns credit ratings to borrowers, and friends of borrowers can post endorsements. Once the process is under way, lenders can see how other lenders respond to the listing.

We analyzed over 2 ½ years of Prosper data to determine the dynamics of lender behavior. We thought we might see what is known as  “irrational herding,” or mimicking. If irrational herding is at work, then a listing that received a strong initial response would attract more and more lenders. As we sifted through the data, we found no evidence this was  happening.

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Trying to solve Canada’s household credit crunch

The numbers are staggering: The average family debt in Canada has increased 78 percent over the last two decades, recently hitting $100,000 per family. In the third quarter of 2010, Canadians’ debt-to-disposable income ratio surpassed the US for the first time since the late 1990s. In my home country – I grew up just outside of Ottawa, Ontario – this is getting a lot of publicity (comparing ourselves to our American cousins is always a popular pastime).

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