How Inequality Drove the Subprime Mess

A few months ago I worried that many subprime borrowers were concerned parents terrified of losing a bidding war for places in good school districts. Today Robert H. Frank, with his usual perspicuity, explains that dynamic in a concise and convincing op-ed:

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the [decades leading up to the subprime meltdown]. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families' ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

Todd Zywicki faults Frank for failing to acknowledge that rising tax burdens have caused middle income families to lose as much (or perhaps more) financial ground as a home finance arms race. I hope that Prof. Zywicki will take a look at the proposed progressive consumption tax at the end of Frank's book Falling Behind, which would likely address many of his concerns. We might also query why recent administrations have done so much to alleviate the tax burden of the top 1% and 0.01% of taxpayers, while doing relatively little to reduce the tax burden of the vast middle class. Frank's work has consistently faulted those policies.

Of course, if school district quality were not so disparate, the desperation that fueled the subprime spree may not have been so intense. But given the stranglehold big donors have over the legislative process currently, I don't expect the US to move in a Finnish direction any time soon.

Posted by Frank Pasquale at 08:06 PM | Comments (3) | TrackBack

Financial Products Safety Commission

As we deal with the consequences of housing and consumption arms races, Elizabeth Warren's article on "Making Financial Products Safer" is a must-read. Warren notes:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?

Warren proposes that a new federal agency start regulating credit from a consumer safety perspective:

[W]hy not create a Financial Product Safety Commission (FPSC), charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new products for safety, and require modification of dangerous products before they can be marketed to the public? The agency could review mortgages, credit cards, car loans, and so on. It could also exercise jurisdiction over life insurance and annuity contracts. In effect, the FPSC would evaluate these products to eliminate the hidden tricks that make some of them far more dangerous than others, and ensure that none pose unacceptable risks to consumers.

An FPSC would promote the benefits of free markets by assuring that consumers can enter credit markets confident that the products they purchase meet minimum safety standards. A commission could collect data about which financial products are least understood, what kinds of disclosures are most effective, and which products are most likely to result in consumer default. It could develop nuanced regulatory responses; some credit terms might be banned altogether, while others might be permitted only with clearer disclosure. A commission could promote uniform disclosures that make it easier to compare products, and to discern conflicts of interest on the part of a mortgage broker or seller of what are now loosely regulated products. For example, an FPSC might review the following terms that appear in some—but not all—credit-card agreements: universal default clauses; unlimited and unexplained fees; interest-rate increases that exceed 10 percentage points; and an issuer’s claim that it can change the terms after money has been borrowed. It would also promote such market-enhancing practices as a simple, easy-to-read paragraph that explains all interest charges; clear explanations of when fees will be imposed; a requirement that the terms of a credit card remain the same until the card expires; no marketing targeted at college students or minors; and a statement showing how long it will take to pay off the balance, as well as how much interest will be paid if the customer makes the minimum monthly payments on the outstanding loan balance.

As I've noted here and here, the federal CPSC may not exactly be a model here. It could easily turn into one more preemption machine. But given the "race to the bottom" dynamics common generally, federal regulation may be the only solution.

Posted by Frank Pasquale at 02:42 PM | Comments (3) | TrackBack

Does the Roomates.com Case Affect CDA § 230 Immunity for JuicyCampus?

The U.S. Court of Appeals for the Ninth Circuit (en banc) has just issued a very interesting opinion interpreting a federal law providing immunity from liability for online speech -- the Communications Decency Act (CDA), 47 U.S.C. § 230. The case is Fair Housing Council v. Roommates.com, LLC, 2008 WL 879293 (9th Cir. April 3, 2008) (en banc).

The CDA § 230 states: "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." Most courts have interpreted § 230 to immunize the operators of websites or blogs against distributor liability for comments posted by others.

I have been critical about the way that this statute has been interpreted:

Unfortunately, courts are interpreting Section 230 so broadly as to provide too much immunity, eliminating the incentive to foster a balance between speech and privacy. The way courts are using Section 230 exalts free speech to the detriment of privacy and reputation. As a result, a host of websites have arisen that encourage others to post gossip and rumors as well as to engage in online shaming. These websites thrive under Section 230’s broad immunity.

Websites such as JuicyCampus, which encourage and facilitate gossip and rumors about college students, exploit § 230 immunity.

The Roommates.com case suggests a limit to § 230 immunity that some might believe creates a way to hold sites like JuicyCamus.com responsible for the gossip and rumors they solicit. In the end, I don't believe that Roommates.com will save the day and penetrate § 230's armor for sites like JuicyCampus.

Roommates.com allows users to post listings for roommates. When a user creates a listing, Roomates.com requests particular information from users, requesting preferences for gender, sexual orientation, and kids. Much of this information is solicited via drop down menus which list the various choices. Users can also put additional comments in a section that allows for an open-ended narrative. Two Fair Housing Councils in California sued Roommates contending that the site violated the Fair Housing Act (FHA), 42 U.S.C. § 3601 and state housing discrimination statutes. The FHA prohibits any "statement . . . with respect to the sale or rental of a dwelling that indicates . . . an intention to make [a] preferenc,e limitation, or discrimination" based on certain categories (such as gender or sexual orientation). California law has a related restriction.

Roommates.com contended that it was immune under the CDA § 230. It claimed that it just provided options for its users and is not the "information content provider." But the Ninth Circuit concluded that § 230 immunity didn't apply. According to the statute, an "information content provider" is one who is "responsible, in whole or in part, for the creation or development of" the content. Writing for the court, Chief Judge Kozinski noted:

The FHA makes it unlawful to ask certain discriminatory questions for a very good reason: Unlawful questions solicit (a.k.a. "develop") unlawful answers. Not only does Roommate ask these questions, Roommate makes answering the discriminatory questions a condition of doing business. This is no different from a real estate broker in real life saying, "Tell me whether you're Jewish or you can find yourself another broker." When a business enterprise extracts such information from potential customers as a condition of accepting them as clients, it is no stretch to say that the enterprise is responsible, at least in part, for developing that information.

The court also held that Roommates.com was not immune for its search system, which allowed users to search according to discriminatory criteria:

For example, a subscriber who self-identifies as a "Gay male" will not receive email notifications of new housing opportunities supplied by owners who limit the universe of acceptable tenants to "Straight male(s)," "Straight female(s)" and "Lesbian(s)." Similarly, subscribers with children will not be notified of new listings where the owner specifies "no children." Councils charge that limiting the information a subscriber can access based on that subscriber's protected status violates the Fair Housing Act and state housing discrimination laws. It is, Councils allege, no different from a real estate broker saying to a client: "Sorry, sir, but I can't show you any listings on this block because you are [gay/female/black/a parent]." If such screening is prohibited when practiced in person or by telephone, we see no reason why Congress would have wanted to make it lawful to profit from it online.

Roommate's search function is similarly designed to steer users based on discriminatory criteria. Roommate's search engine thus differs materially from generic search engines such as Google, Yahoo! and MSN Live Search, in that Roommate designed its system to use allegedly unlawful criteria so as to limit the results of each search, and to force users to participate in its discriminatory process.

What are the implications of the court's holding? What about sites like JuicyCampus.com that encourage gossip and rumor? Are they immune under the court's reasoning?

While I believe that sites like JuicyCampus.com shouldn't have as broad an immunity under the CDA § 230 as they do, I don't believe that they'd lose § 230 immunity even under the holding of Roommates.com. The Ninth Circuit notes:

Roommate does not merely provide a framework that could be utilized for proper or improper purposes; rather, Roommate's work in developing the discriminatory questions, discriminatory answers and discriminatory search mechanism is directly related to the alleged illegality of the site. . . . Roommate is directly involved with developing and enforcing a system that subjects subscribers to allegedly discriminatory housing practices.

However, the site would be immune for what people wrote in the "additional comments" section:

The fact that Roommate encourages subscribers to provide something in response to the prompt is not enough to make it a "develop[er]" of the information under the common-sense interpretation of the term we adopt today. It is entirely consistent with Roommate's business model to have subscribers disclose as much about themselves and their preferences as they are willing to provide. But Roommate does not tell subscribers what kind of information they should or must include as "Additional Comments," and certainly does not encourage or enhance any discriminatory content created by users. Its simple, generic prompt does not make it a developer of the information posted.

Although JuicyCampus.com wants students to spread gossip and rumor, not all gossip and rumor are defamatory or invasive of privacy. Only some of the comments on JuicyCampus are tortious. I believe that the gossip and rumor solicited by JuicyCampus is too open-ended to lose immunity under the Roommates.com decision. As much as I'd like to see JuicyCampus be held responsible for the content it facilitates, I don't think that the Roommates.com decision is knight coming to the rescue.

One final word on Roommates.com. The case involves a major difficulty with applying § 230 to some Web 2.0 applications -- it is often hard to figure out exactly who is responsible for providing content. I blogged about this problem a while ago. Often, sites solicit content in standardized formats; they have fields for entering information; they structure the way people input data to the site. They thus play a role in shaping the content users supply. Who, exactly, then is the content provider? The answer is very tricky, but a lot hinges upon it. Roommates.com doesn't provide a clear rule that addresses this issue -- a lot remains to be wrangled out in cases to come.

For a thoughtful analysis and critique of the case, see Eric Goldman's post at Technology & Marketing Law Blog.

Posted by Daniel J. Solove at 10:55 AM | Comments (9) | TrackBack

The Neuroimaging of Persuasion: Selling Babies

I've argued (here, here, & here) that there is a gap between how jurists generally imagine that consumers behave (and should be protected) and the technological tools available to clever marketers. The slogan I've come up with is total persuasion: "a society in which most speech that you hear is designed to persuade you to consume."

Today's W$J offers an interesting article along this line. According to researchers at Oxford, we're hard-wired to respond to baby faces in positive ways:

Using a technique called magneto-encephalography that measures brain signals, the Oxford researchers found that a baby's face can seize our attention in milliseconds, activating an unusual mental organ called the fusiform gyrus that responds to human faces. Moreover, these distinctive infant features, unlike the mature features of an adult, trigger a sense of reward and good feeling in a seventh of a second. Picture Bambi's saucer-size eyes or those of Mickey Mouse.

And from later in the article:

Through brain-scanning experiments, researchers have located the neurochemical essence of our face expertise in a strip of temporal-lobe tissue about two inches long and three-quarters of an inch wide. Studying this face recognition area in macaque monkeys, neurobiologist Doris Tsao at the University of Bremen, Germany, reported in Science that the tissue consisted almost entirely of neurons that responded just to faces.

To understand how the tissue develops, Yoichi Sugita at Japan's Neuroscience Research Institute raised infant monkeys for two years without ever showing them a face. Lab workers wore hoods. When faces were finally revealed to them, the monkeys could readily tell them apart, Dr. Sugita reported in January in the Proceedings of the National Academy of Sciences.

"It is mind-blowing," Dr. Kanwisher said. "If you had to bet, you would bet it is innate."

What can/should the law do about these findings, which, after all, confirm common intuitions. See Steven Jay Gould's A Biological Homage to Mickey Mouse, in The Panda's Thumb.

Posted by Dave Hoffman at 02:11 PM | Comments (1) | TrackBack

Lipson on The BS That Didn't Bark: Why Didn't (Doesn't) Bear Stearns Go Into Bankruptcy

My colleague, Jonathan Lipson, is an incredibly astute observer of bankruptcy law and practice. I was talking with him the other day about Bear's bailout, and he offered some characteristically interesting thoughts. I invited him to share them in written form with our audience, and will be posting his comments in two parts today and tomorrow.

What’s so bad about bankruptcy?

Today’s New York Times reports that both shareholders and lock-up acquiror JP Morgan-Chase have threatened to put the financial firm into bankruptcy if the other doesn’t blink.

But, if bankruptcy is the only thing both sides agree on, why doesn’t the board authorize a chapter 11 filing?

Two classes of arguments have been made against a BS bankruptcy, one about market disruption, the other about value maximization. The cost, delay and uncertainty of bankruptcy could bring the whole system down, the theory goes. In any case, it would wipe out shareholders’ entire interest.

These are, of course, possible outcomes. But they’re not as likely as people think. In any case, the important question is not whether bankruptcy would do this, but whether ex ante we think bankruptcy would be worse than the current deal.

There is some reason to think bankruptcy might actually be better. If so, then something else may explain why BS, JPM and the Fed would rather spend the next couple of years in Delaware Chancery Court than the U.S. Bankruptcy Court for the Southern District of New York.

Market Disruption

Consider first the claim that a BS bankruptcy would irreparably disrupt fragile capital markets. A domino effect is possible, of course: First BS, then Lehman, then JPM, then Citigroup, until only Goldman remains to drool over the carcasses. Bear Stearns is, the thinking goes, simply “too big to fail.”

But this position loses force if we actually think about a how bankruptcy would likely play out.

First, bankruptcy would simply not touch at least some BS entities and many of their larger, system-sustaining transactions. Entities that are banks or insurance companies generally cannot be debtors under the Bankruptcy Code. While this would not keep the public parent company out of the tank, it would appear that at least some subsidiaries would be outside the reach of bankruptcy.

So, too for the major swap, derivative or repo transactions to which the company was party if it went into bankruptcy. These were the sorts of deals that were thought “too big to fail.” A BS bankruptcy would surely disrupt these trillion-dollar deals, the claim goes, thereby annihilating the economy and all of civilization.

But the reality is that’s not how it would work. In 2005, large financial institutions succeeded in having complex “netting” provisions added to the Bankruptcy Code (or expanding ones that already existed) precisely so that the bankruptcy of a major financial institution—e.g., Bear Stearns—would not otherwise disrupt the larger capital markets. These provisions do this by permitting non-debtor parties to close (“net”) out their positions without risk of the cost or delay of a bankruptcy. It would be as though bankruptcy never happened so far as those deals, and those counterparties, were concerned.

In any case, while the too-big-to-fail mantra may have resonance when applied to major commercial banks, it didn’t (at least in the past) send the Fed to rescue non-bank financial firms. Drexel Burnham was too big to fail, too, remember? But we seem to have gotten through their bankruptcy.

Second, to the extent that BS subsidiaries were statutory broker-dealers, bankruptcy would have to be a comparatively quick liquidation under special provisions of chapter 7, not the longer, more drawn out “reorganizations” we typically think of when we think of business bankruptcy.

True, a BS bankruptcy would probably halt future deal flow. But didn’t events leading up to (and including) the announcement of the JPM deal kill that activity? Bankruptcy can’t kill a dead dog twice.

Value Maximization
If bankruptcy law exempts truly system-critical transactions, and those were much of what BS did, what would a BS bankruptcy add? The answer is value maximization—or at least competitive valuation of some sort for those portions of the business that would go through bankruptcy, including the parent company.

This goes to the second argument usually advanced against a BS bankruptcy--it would kill shareholder value. Often, that’s true. But given the appallingly low price offered—even $10/share is a small fraction of its recent close—it is not surprising that many shareholders would prefer a gamble in bankruptcy.

Why? Because in bankruptcy, any major deal to sell or reorganize the company would likely result in some sort of competitive process that would drive the price closer to market. Committees of creditors (and probably) equity holders would vet any deal and object to a process that seemed to dampen value. For example, they might challenge the so-called “Bear Put”, which appears to permit JPM to keep the deal in play until shareholders finally give up. It might also put BS’s valuable real estate on the auction block, rather than give it to JPM no matter what, even as a breakup fee.

Because bankruptcy is increasingly a venue for the sale of assets—rather than traditional reorganizations—a court may well approve a controlled liquidation of the company. But it would almost certainly require a meaningful market test, to assure that the assets received the highest and best price. Today, even with JPM sweetening its offer, we have no idea what the real market value of the company is. The JPM process appears designed to make sure we never find out.

A related argument is that bankruptcy is a costly and time-consuming process. But here, too, there is less than meets the eye.

Those who would make this claim cite Enron, which took several years and hundreds of millions of dollars in professional fees. But the important question is not whether bankruptcy is costly—it is. Rather, the important question is whether, ex ante, it appears to cost more than the current deal.

Given the litigation that the JPM deal is likely to spawn, it is not clear why a well-managed (a big caveat, that) bankruptcy would be any worse. Is one or more roundtrips through Delaware Supreme Court likely to be quicker and cheaper than time on Bowling Green? Perhaps. But more than a half-dozen years of Disney litigation does not bode well.

A final (somewhat incongruous) argument is that bankruptcy would scare off JPM and/or the Fed, who have thrown a lifeline to BS. That may be, but given the deal's reception, it looks more like an anchor than a float was at the receiving end of the line.

More important, there is simply no reason JPM and the Fed could not have walked into bankruptcy court, arm in arm with BS, proposing the exact same deal that was inked March 16. The only difference would be that it would be subject to court approval. The fact that JPM head Dimon now “threatens” bankruptcy suggests he may understand this.

Indeed, the fact that this didn’t happen is especially baffling when you think about how much bankruptcy might actually benefit JPM. If they really were offering the best deal around—one that a competitive auction in bankruptcy would confirm—then they would also get the benefit of a discharge of most pre-bankruptcy BS liabilities. This means they would not have to worry about unanticipated liabilities—like lawsuits--haunting them after the fact. True, JPM agreed to guarantee a variety of BS obligations in connection with the acquisition. But that could all have been part of the deal run through—and approved by—the bankruptcy court. If it was the best deal going.

Posted by Dave Hoffman at 05:17 PM | Comments (5) | TrackBack

Facebook Banishment and Due Process

Recently, I was talking with David Lat, author of the blog Above the Law, and he was complaining about being banished from Facebook. David was an active user of Facebook, and he suddenly and inexplicably found himself banned from the site. Facebook didn't supply him with any reason.

I found the issue quite intriguing, and David said I could blog about it. In particular, what makes this issue of interest to me is how it applies more generally to Web 2.0 applications. With Web 2.0, people invest a lot of time creating profiles, uploading information, and so on. And they start to depend upon these applications in their lives.

David also said he has a lot of important information on his Facebook profile. He uses it as a way to communicate with people, and he uses it to help him gather information for use in his blogging. So being kicked off Facebook is a big deal to David. It can impact his job. It can also impact his friendships and professional relationships. For example, David told me he received emails from several friends who wondered where he had gone. They thought David might be ignoring them or might no longer be their "friend" on Facebook.

As more of our lives become dependent on Web 2.0 technologies, should we have some sort of rights or consumer protection? Is Facebook the digital equivalent to the company town?

David checked Facebook's website, which has a FAQ about disabled accounts. Facebook states:

Your account was disabled because you violated Facebook’s Terms of Use, to which you agreed when you first registered for an account on the site. Accounts can either be disabled for repeat offenses or for one, particularly egregious violation.

Facebook does not allow users to register with fake names, to impersonate any person or entity, or to falsely state or otherwise misrepresent themselves or their affiliations.

We do not allow users to send unsolicited or harassing messages to people they don’t know, and we remove posts that advertise a product, service, website, or opportunity.

Our Code of Conduct outlines the types of content we do not allow on the site. This includes any obscene, pornographic, or sexually explicit photos, as well as any photos that depict graphic violence. We also remove content, photo or written, that threatens, intimidates, harasses, or brings unwanted attention or embarrassment to an individual or group of people.

David insisted that he didn't do any of the things above. Can he see the allegedly offending content that got him banned? Facebook's answer in the FAQ comes from the pen of Franz Kafka:

Unfortunately, for technical and security reasons, Facebook cannot provide you with a description or copy of the removed content.

One blogger writes :

Facebook is shutting down accounts of users who are exhibiting any behavior it finds remotely suspicious. As paradoxical as it sounds, "suspicious" often means just using the site too much! Sometimes they warn people and give them the chance to change their behavior, and sometimes the account termination is sudden and permanent. Most of the time the disabled accounts will be turned back on, whether automatically after a cool-down period, or after prostrating yourself to the FB authorities. But sometimes they'll lock it up and throw away the key.

Facebook remains intentionally vague about what "bad behavior" looks like, and so it's no wonder that people get confused, angry or despondent when they get the ACCOUNT DISABLED message.

Apparently, you can email Facebook to "appeal" being kicked off, but there are no guarantees that you'll be given any sort of reason, or hearing, or fair adjudication process. For some banned users, Facebook will inform them of their crime. David said he emailed Facebook and that he only received an email confirming receipt of his query. Since then, he hasn't heard anything more from Facebook.

But Facebook doesn't have any obligation to tell David anything. Facebook's Terms of Use provide:

The Company may terminate your membership, delete your profile and any content or information that you have posted on the Site or through any Platform Application and/or prohibit you from using or accessing the Service or the Site or any Platform Application (or any portion, aspect or feature of the Service or the Site or any Platform Application) for any reason, or no reason, at any time in its sole discretion, with or without notice, including if it believes that you are under 13, or under 18 and not in high school or college.

In other words, you exist on Facebook at the whim of Facebook. The Facebook dieties can zap your existence for reasons even more frivolous than those of the Greek gods. Facebook can banish you because you're wearing a blue T-shirt in your photo, or because it selected you at random, or because you named your blog Above the Law rather than Below the Law.

On the one hand, this rule seems uncontroversial. After all, it is Facebook's website. They own their site, and they have the right to say who gets to use it and who doesn't.

But on the other hand, people put a lot of labor and work into their profiles on the site. It takes time and effort to build a network of friends, to upload data, to write and create one's profile. Locking people out of this seizes all their work from them. It's like your employer locking you out of your office and not letting you take your things. Perhaps at the very least banished people should be able to reclaim the content of their profiles. But what about all their "friends" on the network? People spend a lot of time building connections, and they can't readily transplant their entire network of friends elsewhere.

Suppose Facebook didn't have any kind of system for appeal when a person got banished. Should the law force it to have some kind of appeal system? One might argue that perhaps the market will work it out -- if people want an appeal system, then they'll choose the social network website or Web 2.0 application that has one. But in many contexts (though not all contexts) people rarely think about the procedures companies have for when things go wrong. This is often not a consideration in making a choice, so it might not generate enough competition in this regard.

As more people use Web 2.0 applications, they are increasingly encouraged to invest an incredible amount of time and effort in them. Facebook wants and encourages people to put up information, to build one's network, and so on. Given people's investment in these applications, should they be granted any kind of rights or protections in using them?

UPDATE: David Lat finally heard back from Facebook. He was banished because he "posted parts of a user's profile to another website, which is a violation of Facebook's Terms of Use." Facebook reactivated David's account, so the story has a happy ending. All's well with the world.

Posted by Daniel J. Solove at 12:55 AM | Comments (15) | TrackBack

Persuasion in the Virtual Shopping Mall

I just came across an interesting paper, Empirical analysis of consumer reaction to the virtual reality shopping mall , 24 Comp. Hum. Beh. 88, by Kun Chang Lee and Namho Chung. Here's the abstract:

The Internet shopping mall has received wide attention from researchers and practitioners due to the fact that it is one of the most killing applications customers can find on the Internet. Though numerous studies have been performed on various issues of the Internet shopping mall, some research issues relating to the user interface of VR (virtual reality) shopping malls still await further empirical investigation. The objective of this study is to investigate whether the user interface of the VR shopping mall positively affects customer satisfaction in comparison with the ordinary shopping mall. For this purpose, we developed a prototype of the VR shopping mall for which the user interface consists of both 3D graphics and an avatar, using it as an experimental medium. 102 valid questionnaires were gathered from active student users of the ordinary shopping mall, and two research hypotheses were then tested to prove whether the three explanatory variables such as convenience, enjoyment, quality assurance improve in the VR shopping mall, and whether customer satisfaction is also significantly enhanced in the VR shopping mall in comparison with the ordinary shopping mall. Additionally, we conducted the PLS (partial least square) analysis to test whether the customer satisfaction is explained significantly by the three explanatory variables or not.

Not surprisingly, products in the VR malls were seen as better, and customers enjoyed shopping more. As the authors point out later in the paper, "VR is a medium capable of yielding immersion," which should increase customers' ability to evaluate brand quality, and thus increase sales. Indeed, the effect becomes more robust the more time you spend at the VR mall! Lee and Chung claim that their approach has "immediate managerial applications": to me, it gives a sense of why and how we'd move toward an omni-persuasive consumer experience.

Posted by Dave Hoffman at 01:52 PM | Comments (1) | TrackBack

The Home Finance Arms Race

A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The "stimulus package," the Fed's interest rate cuts, and new moves to increase the limit on "jumbo loans" all seem based on this assumption. Given that the U.S. is already racked with debt, I can't quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there's a much simpler explanation for the current housing woes:

The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, "forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income." And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.

Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.

If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America:

[I]t’s not just real estate. It’s everything, or near everything, and it’s ratcheted up even more in the last few years. As the value of homes and stocks and salaries has spiked, there’s been a kind of arms race of acquisition that has touched every little facet of our lives. You don’t just go to the store and buy groceries, like a regular person; now you fetishize [them] . . . [at] Union Market, where among other preciously presented items there’s a loaf of raisin-walnut bread that isn’t quite as fresh and delicious as the raisin-walnut bread the Lopezes used to bake. But it is three times as expensive.

Wine. Jacques Torres chocolates. Kiehl’s skin creams. Kids’ clothes! . . . Why do we dress our kids like Johnny Depp and Kate Moss? We’ve all gotten pulled into this slipstream of wealth. We have some friends who have a friend who chartered a jet to fly 50 or so of his closest friends to a Mexican resort to celebrate his birthday last year. There’s no way they can repay that in kind, obviously, but the pressure’s on a little at the next dinner party he comes to, you know what I mean?

This is all tricky to talk about without seeming laughably self-absorbed, and I want you to know that I know how loaded we are, comparatively speaking, and not just loaded in that abstract compared-with-the-developing-world way; we’re loaded compared with most of the people in this city. But that too is part of the problem. You don’t feel connected to anyone, in a way, not to the people who have so much more than you and not to the people who have so much less. Money has stretched us all apart from one another.

Real estate's "two americas" may be proliferating into many more tiered options, but the bottom line is that inequality is eroding social ties (and economic hopes) in many ways. The "cheap money" solution to the housing crisis may be less panacea than poison, leading more people to take on more risk in the hopes that ever-rising housing prices may cushion them financially--and thereby risk major losses if those hopes fail to materialize. The next bubble to pop may be far more painful.

Posted by Frank Pasquale at 08:45 AM | Comments (5) | TrackBack

Are Debtors' Prisons Next?

Ah, the perils of unintended consequences. The federal government in the 1990s made direct deposit a default method of paying Social Security and some other benefits. Now "Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans." And the "payday loan" industry has found a lucrative new niche--"volume has climbed to about $48 billion a year from about $13.8 billion in 1999."

Responding to the manifest failures of under-regulated consumer finance markets, many are now claiming that predatory borrowing was a bigger problem than predatory lending. I wonder if they'd find predatory "Ms. [Jennifer] Rumph, whose medical problems include severe asthma and two hip replacements," and who appears to support herself and her children with disability benefits:

After Ms. Rumph fell behind on her payments, Miracle Finance sued her in small-claims court in Abbeville, Ala. Although federal law says creditors can't seize Social Security, disability and veteran's benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments, and threaten them with criminal prosecution, senior advocates say.

Debtors must go to court to prove their case. Ms. Rumph says she didn't know any of this and was afraid to go to court. Miracle Finance won a $1,500 default judgment in July, and four days later sought a court order requiring Ms. Rumph to appear in person to detail her income and assets.

I suppose some analogue to the "fugitive disentitlement" doctrine might leave hard-liners unmoved by Ms. Rumph's plight. Nevertheless, the payday borrowing boom in general should lead to reconsideration of exactly what the purportedly narrowing "consumption gap" between rich and poor is actually based on.

Posted by Frank Pasquale at 07:53 AM | Comments (3) | TrackBack

Kosher Food, Social Justice, and Shaming (Blumenthal Guest)

The last year or so has seen a fascinating movement in the kosher food world-the development of the "hekhsher tzedek" -variously translated as a "righteous seal" or "Justice certification." Initiated largely by the Conservative Jewish movement, the certification is seen as a complement to the traditional kosher certification, which attests that the food in question has been prepared according to Jewish ritual law. According to the United Synagogue of Conservative Judaism, the seal would certify that "food and meat processors have met a set of standards that determine the social responsibility of kosher food producers, particularly in the area of workers' rights." Thus, kosher food could receive two certifications-one showing that it is ritually kosher, one showing that the workers in a particular plant were treated ethically, fairly, and legally. The USCJ was to consider a resolution establishing the certification at its December conference last week. It was expected to pass easily, though I have not seen follow-up reports.

The idea is controversial, for a number of reasons legal and otherwise. One is motive-some see the move as motivated by antipathy toward one of the larger kosher facilities, AgriProcessors, in Iowa, where worker mistreatment and unsafe conditions were alleged in the spring of 2006.

Another set of issues concerns the proper purviews of government, religious, and lay groups: objections have been raised that responding to such worker treatment is the role of government agencies and the justice system. There are interesting echoes here of the kosher fraud statute cases of the last several years, in which constitutional challenges to state definitions of "kosher" were upheld. These cases essentially led to more informal, social regulation of kosher food sellers, reflecting the sort of "shaming" and social norms issued often discussed here at CO. See Shayna M. Sigman, Kosher Without Law: The Role of Nonlegal Sanctions in Overcoming Fraud Within the Kosher Food Industry, 31 FLA. ST. U. L. REV. 509 (2004). (My own opinion is that those cases may be wrong, and the statutes not unconstitutional, but that's another discussion.)

But other questions have been raised, too-for instance, what effect, if any, would such certification have on the value of the ritual certification (i.e., would the religious aspect of it be devalued)? Is there potential liability for a certifying group if there is an accident or mistreatment at a plant that has been certified? What standards would the certifying group use?

All of these notions, I think, raise good issues for legal scholars (and students looking for note topics!).

Posted by Jeremy Blumenthal at 10:49 PM | Comments (2) | TrackBack

Predatory Lending: Meet Jonathan Swift

At the new website of the Predatory Lending Association, aspiring lenders can find concentrations of "working poor" customers in their neighborhood, calculate effectively usurious loans, not blacklist crusaders against payday lending, including Liz Warren, and learn all the arguments that goo-goos will make against high-interest borrowing. One Q&A in particular should be familiar to contracts professors (or maybe just those, like me, who use Randy Barnett's Perspectives book):

Myth: Payday lending is comparable to selling yourself into slavery.

Reality: Although there is a market need for slavery, people do not choose to sell themselves into slavery. Free choice is the difference between payday lending and slavery.

(There is even a neat chart to make the connection more clear.) On the discussion boards, you can share your thoughts with other predatory lenders. Sure, it all seems a little too cute, but it's worth checking out anyway.

Posted by Dave Hoffman at 04:32 PM | Comments (2) | TrackBack

Food Fraud & the First Amendment

The Pennsylvania Dep't of Agriculture has decided to keep consumers from knowing whether the milk they buy is free of certain hormones:

Dennis Wolff, Pennsylvania’s agriculture secretary [has] announced a crackdown on “absence labeling” on milk, meaning labels that tell consumers what isn’t in a product rather than what is. He argues that “hormone free” labels are misleading because cows produce hormones naturally. Even labels that are more carefully worded, such as “contains no artificial hormones” will soon be verboten in Pennsylvania because Mr. Wolff said that there were no scientific tests to prove the truth of such a claim.

On first glance, this might seem like a classic case for First Amendment intervention. A reporter asks " as long as the claim is accurate, isn’t the point of labels to differentiate one product from another?" He warns that "using Mr. Wolff’s reasoning, you could argue that organic labels on milk are unfair because they suggest that non-organic food is inferior. The same goes for labels for “natural,” “from grass-fed cows” and “locally produced.”"

However, Rebecca Tushnet counsels caution, especially given consumers' limited opportunities to process information. Commenting on controversy over "genetically modified organism" labeling, she writes:

Establishing that some consumers wish to avoid GMO foods on non-safety grounds does nothing to refute either of the FDA’s major premises: GMO foods are safe, and labeling will mislead some significant number of consumers about safety.

Tushnet's position makes sense to me, but I am afraid that captured regulators may provoke courts to impose sweeping First Amendment limits on advertising regulation. Instead of picking on consumers with preferences for less chemical cow enhancement, why aren't they taking on real "food frauds?" For example, here's the CSPI on Smucker's:

All varieties of Smucker’s Simply Fruit contain more fruit syrup than actual fruit. And the syrup doesn’t even come from the fruit in the products’ names, but from (cheaper) apple, pineapple, or pear juice concentrate.

This strikes me as much worse for consumers than the "absence labeling" in the milk context. But perhaps we should be willing to accept some questionable priorities now in exchange for First Amendment flexibility that permits future action on real food fraud.

Posted by Frank Pasquale at 02:14 PM | Comments (1) | TrackBack

The Fear Economy

Many commentators worried that the 2005 bankruptcy law would discourage entrepreneurs from taking risks. Now it appears to be accelerating the housing downturn:

A new bankruptcy law, approved by Congress in 2005 after years of debate, makes it much harder for households to get out from under their consumer debt. The result: More people being forced to walk away from their homes, leaving lenders holding the bag. Perversely, a law intended to help the financial industry may be damaging the housing sector, creditors and borrowers alike.

Another recent BusinessWeek article shows just how weak bankruptcy protections may be becoming in the wake of a voracious debt-collection business and slow-footed credit bureaus.

In the 1990s, businesses adept at tracking and trading consumer debt expanded their reach to dabble in accounts enmeshed in bankruptcy. That dabbling has grown into a robust market. Some of the trade in so-called bankruptcy paper involves debts that remain collectible. What's troubling is that the market now also includes billions in discharged debts, which ought to have no dollar value. Owners of canceled liabilities can revive their value in two main ways: by directly pressuring consumers to cough up cash or by gaming the credit system. . . .

After Chapter 7 cases, "debtors expect their credit is going to become pristine," [one commentator] notes. "But now you have people who buy the debts, even bankruptcy debts, and all of a sudden, new people are supplying information to the credit bureaus." She adds: "The way the system is working now, it doesn't give [debtors] that fresh start."

The new collectors are adept at resurrecting debt:

Pfister, 63, a retired AT&T technical supervisor in Denton, Tex., received a Chapter 7 discharge in 2001. Then, last January, while applying for a mortgage, he learned that two discharged credit-card debts, a Discover Card balance of $6,306 and a former Chase account for $2,683, were showing up on his credit reports. Lenders turned him away because of what appeared to be unpaid obligations, he says.

The Chase loan has been sold twice and is now owned by a debt buyer called Pinnacle Credit Services, according to Pfister's reports from credit bureaus TransUnion and Experian. Pinnacle reported to those credit bureaus as recently as May—six years after the bankruptcy discharge—that the debt is still subject to collection. In addition, Pinnacle has given the former Chase debt a new account number. Pfister's lawyer, James J. Manchee, says that creating a new account number is a strategy some debt buyers use to make it more difficult to tie accounts back to discharged debts, and therefore make the debts appear collectible. Pinnacle declined to comment. In June, Quicken Loans became the 12th mortgage lender to reject Pfister.

Since FICO score-setting mechanisms are a trade secret, I predict more and more consumers like Pfister are going to end up hounded for unenforceable debt and effectively unable to enjoy the protections bankruptcy is supposed to afford. I fear we are heading toward an economy of fear--where one bad break leads to a cycle of mutually reinforcing stigmas that law is incapable of addressing. As we reconsider our policies on debt and credit bureaus, we should keep in mind how new "reputation economies" can render old bankruptcy protections obsolete. As we make the key players in these economies more accountable, we should also consider the sound advice of sociologists Katherine Newman and Victor Tan Chen in their new book, The Missing Class:

Many banks shun poorer neighborhoods, depriving families of opportunities for savings, alternatives to check-cashing companies and their exorbitant fees, and loans at reasonable interest rates for buying a car or paying for a college education. The policies we've suggested are not handouts but investments in the potential of our country's people. They will put in place the kinds of incentives that inspire individuals at the bottom to rise to the top. They will pay off for the whole country by making workers more productive and less at risk of sinking into poverty and illness — personal crises that nonetheless create burdens for the rest of society.

If the new "fear economy" advances unchecked, you might end up being a "music serf" for life for downloading a few dozen songs. Or you might end up with a credit report tarnished for years by a health emergency that happened while you were uninsured. And forget about ever fully understanding how the all-important FICO score (that translates these debts into a number indicating creditworthiness) is tabulated--trade secret protections make it a black box.

Posted by Frank Pasquale at 01:30 PM | Comments (3) | TrackBack

Why There's No First Amendment Right to Sell Personal Data

There are a number of really interesting cases pending in the First Circuit and its lower federal courts that raise questions of confidentiality and free speech in the context of the commercial trade in prescription drug information. In New Hampshire, Maine, and Vermont, data mining companies have raised First Amendment challenges to state laws that restrict the ability of pharmacists to sell information about which doctors prescribed which drugs. More information about these cases from the AP can be found here. I've written about this phenomenon here, arguing that there are sound doctrinal, jurisprudential, and policy reasons to reject any idea that regulation of the commercial data trade raises any serious First Amendment problems.

These cases all involve laws passed by states concerned about the sale of prescription information to data mining companies, who buy information about which doctors prescribe which drugs from pharmacies and then massage the data for use in marketing and other industry purposes. The laws vary in their particulars, but basically forbid or regulate the ability of pharmacies to sell the information. In April, a federal district court in the New Hampshire case struck down New Hampshire's law under the Central Hudson test as violating the companies' free speech rights. The First Amendment argument can be boiled down as follows: because the laws stop pharmacies from telling other people about their customers, they violate the pharmacy companies' free speech rights and are therefore unconstitutional.

I think this is a silly argument, as I explain after the jump.

This is an unconvincing argument for a number of reasons. At the level of doctrine, the commercial trade in personal information isn't the kind of free speech claim that the First Amendment is (or should be) concerned about. Lots of things that are done with words aren't protected by the First Amendment - words are used to form contracts, to engage in insider trading, and to hire hitmen - but laws regulating such activities aren't thought to implicate the First Amendment. Nor do we think of the attorney-client privilege as constituting a speech restriction on the ability of lawyers to inform the public with newsworthy disclosures about their clients. The boundaries of the First Amendment are fuzzy, but they tend to exclude purely commercial activity and they tend to exclude professional duties of confidentiality.

There are good reasons for this exclusion that involve why we do (and don't) protect constitutional rights in the political and commercial areas. The data mining companies in this case essentially argue that the Constitution prohibits the government from interfering with their liberty of speech. As such, there are some striking parallels between these arguments and old "liberty of contract" claims from the Lochner era. But modern constitutionalism rests upon the premise that commercial activity can be freely regulated by the government, while only political and civil liberties justify heightened scrutiny of legislative rules. This can be a hard line to draw, but not in these cases, as there are no fundamental constitutional liberties threatened by the prescriber confidentiality statutes. The pharmacies want to sell information. The drug companies want to buy the information so that they market drugs to physicians more effectively. And that's about it. The regulations don't even cover advertising (which is protected First Amendment speech). So there is no reason to invoke the Central Hudson apparatus to assess these schemes.

What's at stake in these cases is something really important, but it's not the spurious free speech claims of the drug companies. It's the ability of democratic legislatures and ultimately the people they represent to set the defining parameters for commercial uses of information. What's at stake is the ability, in a world where information transfers are becoming ever more important and more lucrative, to set a sensible information policy. Treating these issues as involving the First Amendment turns the First Amendment into little more than a right to make money in the data trade. The First Amendment is of course very important - it safeguards our political, philosophical, and artistic expression, and protects our ability to debate matters of public concern. But it should not be interpreted to include a Lochner-style right to transfer databases free of government regulation. Hopefully, the First Circuit will realize this on appeal in the New Hampshire case, putting the power to set information policy in the legislatures rather than in the Courts, and preserving judicial review for First Amendment claims that involve more substantial issues.

Posted by Neil Richards at 05:16 PM | Comments (0) | TrackBack

Should You Buy Divorce Insurance?

Divorce is catastrophic: it increases the rates of suicide and heart disease; can decrease overall well-being for both parents and children; and it significantly hurts the financial position of the parties, especially women.

But unlike almost all other catastrophic risks that we face, the costs of divorce can not be fully insured. Because of statutory requirements that limit insurance coverage to "fortuitous events", and the perception that divorce is elected (at least by one of the parties to the marriage), you can't buy a policy that will pay you for breach of the marriage contract. Such is the law.

I'm interested in this topic, and so I was quite intrigued to read about a new product being developed by an entrepreneur named John Logan, of the SafeGuard Guaranty Corporation: divorce insurance.

There has been significant enthusiasm for the concept. As some noted, you could imagine such insurance having a collateral-benefit: "risk matching" your perspective spouse (or even a first date) based on their premiums. But when you think about the concept a little bit, obvious objections present themselves:

• Fraud and Adverse Selection: Since divorce can be elected, how could an insurance company prevent gaming? Fake marriages seeking divorce payouts might soon abound: would the insurance company have to order Green Card from NetFlix to train its agents? For lack of a cheap way to assess the risk of divorce, and fraudulent marriage, premium rates overall would increase, leading "good" candidates (i.e., those who would never divorce) to opt out of the pool. This divorce insurance externality would be extremely difficult to manage. Indeed, this is why marriage insurance excludes reasons like "change of heart." I don't know that it is a soluble problem.
• Public Policy:
Imagine that we could solve the problem of intentional fraud, so the only payouts would go to innocent victims of adulterous spouses. We might still imagine that the common law, which generally prohibits insurance that encourages socially wrongful conduct, would strike such contracts on public policy grounds. The argument would go that the insurance regime, by decreasing the cost of divorce on the victim spouse, in effect increases the incentives for adultery, by reducing the ultimate financial and emotional obligations. In my view, this is a foolish argument, but courts seem to persist in treating insurance as a step-child of the freedom to contract movement.

The externality problem seemed so severe that I decided to go to the source, and emailed John Logan about his product. He was nice enough to chat with me for a few minutes, and I can now share the fruits of that conversation with you.

I started the conversation believing that Logan was offering a true insurance product. A business methods patent the company may have filed stated that divorce insurance is:

1. An insurance policy covering at least some financial consequences of the untimely ending of a contractual relationship between two or more natural persons, which contractual relationship governs the natural persons way of living together.

12. A method of doing business comprising: determining a periodic amount to be charged a prospective participant for divorce insurance; charging that periodic amount to a participant in an insurance program over a period of time; and administering the insurance program.

But when I talked to Logan, he preferred to call the product to be offered a "hybrid insurance/investment product." The idea is that individuals would buy the right to a payout, in 25 years, of a fixed sum, and in turn promise to pay premiums priced based solely on the total face value of the instrument. The instrument – let's call it an annuity for ease of reference – has a contingency: if its owner gets divorced, the annuity pays out immediately, at a rate to be calculated based on the time since purchase and the premium rate. That is, the longer you stay in the marriage, and the closer you are to the end of the 25-year annuity, the more money you will get paid on divorce. The product does not seem to intend to graduate premiums at all based on the risks of divorce, or the "why". It is a fairly simple investment vehicle. The only other bell I learned about was their plan to permit individuals to recapture premiums at any time, so long as they purchase an initial premium rider, which is a bit of departure from ordinary insurance practice.

Because this isn't an insurance product, Logan plans to market and run his business largely online, with little or no need for the ordinary back-end costs of an insurance business (actuaries, etc.) That said, he still needs an initial capital investment, and is still looking for additional investors before the product launches. He hopes to roll out "divorce insurance" this fall, if the financing lines up. He estimates a premium market approaching $200 billion annually, based on a base premium of something like $1,200 annually per policy.

So what to think? Well, first, this is simply not divorce insurance. That doesn't mean it is a bad investment – I have no idea whether it is or not – but it does not intend to permit individuals to pay an actuarially measured share of the risks of divorce. I imagine that the legal and economic issues I've already discussed play a large role in the shaping of this product, but it still left me with some questions. There is obviously a degree of "yuck" factor when thinking about purchasing insurance for divorce – the kind of distaste than long discouraged pre-nups, and which makes proposals like these dead-letters. But this kind of financial vehicle would appeal to me more were I not "forced" to subsidize others' divorces, and instead were measured at my own risk level. What's the chance that courts will relax their public policy limitations on insurance anytime soon? Second, another way to approach the legal-fees aspect of this problem is through a prepaid legal service. I don’t know enough about these kinds of contracts, so this is a really ignorant question: how can such services possible get around conflict problems if they don't counsel the entire couple about the ethical issues at the beginning of the lawyer-client relationship?

Posted by Dave Hoffman at 11:44 AM | Comments (4) | TrackBack

Pomegranate Juice and the War on Terror

The blogs are abuzz this morning talking about the Times' profile of Stephen Abraham, an Army reserve officer who filed a crucial affidavit in the latest Guantanamo litigation. The article explains Abraham's unique role:

As an intelligence officer responsible for running the central computer depository of evidence for the hearings, he said, he saw many of the documents in hundreds of the 558 cases. He also worked as a liaison with intelligence agencies and served on one three-member hearing panel.

All of which has left Colonel Abraham, 46, a civilian business lawyer who has lately been busy with a lawsuit between makers of pomegranate juice, with a central role in the public debate over Guantánamo. His account has been widely discussed in Congress, the administration and the press. On Friday, a federal appeals court judge took note of it in describing what she said were problems with the Pentagon’s hearing process.

I thought I'd do some digging into that aspect of this story that will interest our non-constitutional readers: why are pomegranate juice sellers suing each other?

PACER searches disposed of the mystery quickly. POM Wonderful LLC v. Purely Juice, Inc. et al., CV 07-2633 (C.D. Ca.) was filed on April 20, 2007. POM lawsuit against Purely Juice alleges that Purely Juice violated the federal Lanham Act (and its state analogue) by falsely marketing its product as "all natural, consist[ing] of 100% pomegranate juice" with "NO added sugar or sweeteners."

Abraham represents Purely Juice. Just a few days ago, his client won an important victory in the case. On July 11, 2007, Judge Christina Snyder denied POM's TRO. The order itself (download the PDF here) is notable for its length and careful attention to the law. POM had independently tested Purely Juice's product, and allegedly found that "it is clear that consumers of 'Purely Juice . . .' are not receiving the nutrients and antioxidant polyphenol health benefits that one would expect from 100% authentic pomegranate juice." [Editorial comment: anytime you are asking a judge to make a claim about “antioxidant polyphenol health benefits” on a TRO, you seem likely to be in for a tough fight.] But, Abraham argued that, basically, the FDA hasn't yet made clear what constitutes 100% pomegranate juice, and it was otherwise compliant with 21 CFR 101.30, regulating percent juice claims. The Court agreed with Abraham. As for the plaintiff’s claim that the “NO added sugar” was misleading, the Court found that there was insufficient evidence to find that defendant had added sugar, accepting Abraham’s defense that "the laboratory results could have been caused by the natural variation in the pomegranate fruit, growing conditions, harvesting, storage conditions or processing conditions." (Notably, this seems like a non-denial denial to me.)

Abraham's good lawyering saved his client a significant chunk of change. According to a declaration filed in the case, Purely Juice has 800,000 bottles in its inventory, each of which retails for $3.79. ($3.79! For juice!)

So what’s the moral here? You can be a busy commercial lawyer and a participant in the great issues of constitutional moment at the same time? Or, perhaps, as various players seek to control the last lucrative, non-commodity, juice market, the great Pomegranate Wars have begun.

Posted by Dave Hoffman at 01:41 PM | Comments (1) | TrackBack

Consumer Time Travel

(This is another in my series of dispatches from Rome. If you are getting tired of the concept, don't worry: I'm coming home in a week.)

Two aspects of life here offer a nice comparative story about the way life in the United States used to be, and might become.

The first is the specialization of food shopping in Rome. Small shops for seemingly every type of food - cheese, meat, fruit, wine, cereals – line the streets in Rome’s old city center. In each shop, one (or two) employees dispenses food from behind a counter – it is not a self-service experience. It seems like these tiny shops, rather than the occasional small supermarket - are the primary way that citizens get their food. In a way, shopping here is like stepping back in time in the states to around 1940 or so. And there is something charming about the experience: the interactions (me in pantomime) are personal; the food is fresh and delicious; and you are less likely to slip and fall on a banana peel left on the ground. But the food is expensive, especially fruit, and if I were a busy citizen instead of a less-busy tourist, I'd find going to five different stores to complete my shopping to be a daily irritant.

Why does this specialization persist? I know less than I should about the risk of supermarkets in the United States, but I've a few preliminary thoughts. The first explanation denies that Italians shop at small stores outside of the cramped confines of City Centers. That is, just in the States, it is difficult for supermarkets to obtain purchase and economies of size in expensive urban cores. So, maybe, most Italian citizens do go to supermarkets, just not in places that tourists spend their time.

But this doesn't explain why in the States some supermarkets have entered cities, or why butchers, cheese-mongers, fruit-stands, and bakeries are generally dead or gourmet institutions.. So then I was tempted to think that Italy’s rejection of supermarket organization reflects the comparative strength of Italian labor unions, and the comparative inability of Italian businesses to easily franchise. Or maybe there is a tort or agency law explanation?

On the other side of the spectrum, I've been struck by the security measures at Italian internet cafes. As Solove noted here, a recent Italian security act requires owners to collect personal information from users, usually in the form of a passport. From my experience, owners will not accept a paper copy of a passport but instead will take and hold the real thing for the duration of your time online.

On the whole, this is a chilling experience, and reminder that every link you follow can be, and maybe will be, later seen by the authorities. In the current political climate it is difficult to imagine such a law passed in the United States, although given the relative lack of internet cafes, the better analogy probably would be to require wifi hotspots to collect personal information about users. I imagine that in that hypothetical world, I’d get used to the loss of privacy, just as the Italians have to the loss of theirs, but it would surely rankle at first.

[Photo Credit: Campo de' Fiori Market, courtesy of A Young American in Rome]

Posted by Dave Hoffman at 03:59 AM | Comments (7) | TrackBack

Black Boxes Bite Back

As interest rates jump, piggybacking has become all the rage in "credit repair" circles. For a fee, groups like Instant Credit Builders will let you "borrow" (part of) another person's credit score by becoming an "authorized borrower" on his cards. Here is ICB's overheated defense of the practice:

ICB has developed a system to counter the harmful societal impacts of an emerging market called "subprime lending". Mob-like blood suckers under the umbrella of legitimate lending institutions are targeting those who have poor credit scores but fall short of being beyond credit risk acceptance.

To explain why subprime lenders are in such an opportunistic industry, take this example: The commission payable to a financial adviser or mortgage broker from an actual prime lender on a $100,000 deal yields a broker about $250. Yet the same $100,000 deal using a subprime lender yields them $2,000 to $2,500. This niche market banking industry is getting paid well to enslave most minorities, low-income borrowers, even victims of identity theft with interest rates that can be up to 3.5% higher than average.

Needless to say, mortgage lenders are hoppin' mad. The godfather of credit scores, FICO, has claimed that "piggy-backing will soon come to an end on its watch." One irony here is that, as lenders crack down, "they may actually increase demand for some of the services that these Web sites offer."

A lot of the commentary on these sites has been harsh, but let me offer something like an "unclean hands" defense. Credit scores have long come under attack for having a "a disparate impact on poor and minority populations." Moreover, the scoring is opaque; scorers claim that transparency would undermine their "trade secrets." So consumers are navigating a world where they can have only a vague idea of the rules. Lenders shouldn't be surprised when entrepreneurs reverse-engineer the ratings system and the technology bites back.

Moreover, these rules themselves may be self-fulfilling prophecies: if you decree that one missed $10 payment for a family of 4 earning $30,000 per year lowers their credit score by 200 points, they probably are going to end up being more likely to default because they are going to be paying much more in interest for any financing they get. Again, because the scores are black boxes, we have no assurance that the companies that offer them try to eliminate such endogenicity or whether they actually try to profit from such self-fulfilling prophecies.

As long as c