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Labor Market Upheaval, Default Regulations, and Consumer Debt

July 7, 2014 Comments off

Labor Market Upheaval, Default Regulations, and Consumer Debt
Source: Federal Reserve Bank of St. Louis

In 2005, bankruptcy laws were reformed significantly, making personal bankruptcy substantially more costly to file than before. Shortly after, the US began to experience its most severe recession in seventy years. While personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment, perhaps as a consequence of the reform. Moreover, in the subsequent recovery, households have been widely viewed as “develeraging” (Mian and Sufi (2011), Krugman and Eggertson (2012)), an interpretation consistent with the largest reduction in the volume of unsecured debt in the past three decades. In this paper, we aim to measure the role jointly played by recent bankruptcy reforms and labor market risks during the Great Recession in accounting for the use of consumer credit and debt default. We use a setting that features high-frequency life-cycle consumption-savings decisions, defaultable debt, search frictions, and aggregate risk. Our results suggest that the 2005 bankruptcy reform likely prevented a substantial increase in bankruptcy filings, but had only limited effect on the observed path of delinquencies. Thus, the reform appears to have “worked.” We also find that fluctuations in the job separation rate observed over the Great Recession did not significantly affect the dynamics of default; all of the work is done, instead, by the large decline in the job-finding rate.

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Housing Crash Continues to Overshadow Young Families’ Balance Sheets

March 14, 2014 Comments off

Housing Crash Continues to Overshadow Young Families’ Balance Sheets
Source: Federal Reserve Bank of St. Louis

The average young family—which we define as a single- or multi-person family unit headed by someone under 40—has recovered only about one-third of the wealth it lost during the financial crisis and recession. The average wealth of middle-aged families (ages 40 to 61) and older families (ages 62 or older) has recovered to about its precrisis level.

The main reason young families’ balance-sheet recovery lags is the recent housing crash and its lingering effects. The homeownership rate among younger families has plunged, reflecting both the loss of many homes through foreclosure or other distressed sales and delayed entry into homeownership among newly formed households. The house-price gains that have helped mainly older families to rebuild homeowners’ equity have been overshadowed among younger families by the ongoing retreat from homeownership.

The Rising Cost of College: Tuition, Financial Aid, and Price Discrimination

March 7, 2014 Comments off

The Rising Cost of College: Tuition, Financial Aid, and Price Discrimination (PDF)
Source: Federal Reserve Bank of St. Louis

The cost of college tuition has been in the headlines frequently in recent years. Conventional wisdom says the cost of a college education is rising—but is it really? The “sticker price” for a college education has risen three times faster than the inflation rate since 1978. However, when we adjust for inflation, expressing the cost in terms of constant dollars, and account for financial aid (which reduces the overall cost), average tuition and fees have remained effectively unchanged. For example, the College Board reports that average tuition and fees increased from $24,070 for the 2003-04 school year to $30,090 in 2013-14, but the average net tuition and fees (after financial aid) actually decreased from $13,600 per year to an estimated $12,460—a reduction of $1,140 over 10 years (in 2013 dollars). 2 Why the difference? The textbook explanation falls under the heading “price discrimination.”

St. Louis Fed Releases Key Findings of New Research Center on Household Financial Stability

May 31, 2013 Comments off

St. Louis Fed Releases Key Findings of New Research Center on Household Financial Stability

Source: Federal Reserve Bank of St. Louis

In an essay from the Federal Reserve Bank of St. Louis’ new Center for Household Financial Stability, the authors provide data on the damage to household wealth during the Great Recession, explore the circumstances that led to large declines in household wealth, make the case that such wealth has not fully recovered and show why all of that matters for U.S. economic recovery.

The essay was authored by the Center’s director, Ray Boshara, and chief economist, William Emmons, and it was published May 30, 2013, as part of the St. Louis Fed’s annual report. The analysis highlights the focus of the new Center—rebuilding the household balance sheets of struggling American families.

Boshara and Emmons featured several findings:

  • Average household wealth in real terms, contrary to recent headlines, has not fully recovered; indeed, it is only about halfway back to prerecession levels.
  • While many Americans lost wealth because of the recession, younger, less-educated and/or African-American and Hispanic families lost the most, in percentage terms.
  • Those subgroups had higher-than-average concentrations of their wealth in housing and higher debt-to-asset ratios than less economically vulnerable groups.
  • The very families most exposed to the economic fallout of a deep recession—fallout that came in the form of job loss or reduced income—possessed the weakest and riskiest balance sheets.
  • Balance sheet failures were important contributors to the downturn and weak recovery.

The Center will harness these insights and other research to inform policymakers, practitioners and financial institutions on ways to help families save and invest more wisely, thus contributing to households’ economic mobility and the nation’s economic growth.

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Unemployment Insurance: Payments, Overpayments and Unclaimed Benefits

January 15, 2013 Comments off

Unemployment Insurance: Payments, Overpayments and Unclaimed Benefits

Source: Federal Reserve Bank of St. Louis

Overpayments in the U.S. unemployment insurance system have received increasing attention of late. For example, CNN.com cited a recent study by the Department of Labor in reporting that 11 percent of all unemployment benefits were overpaid.1 Vice President Joe Biden, charged with leading the Campaign to Cut Waste, said: "Unemployment checks are going to people in prison. Unemployment checks are going to graveyards."

In this article, we examine the U.S. unemployment insurance system’s expenditures over a longer horizon. We begin by illustrating the benefits paid from 1989 to 2011. Next, we take a look at the overpayments. Finally, we discuss a fact that is less well-known: Not everyone who is eligible for unemployment benefits actually collects them. Over the longer horizon, these unclaimed benefits are much larger than the overpayments that have received recent attention.

Is a College Cap and Gown a Financial Ball and Chain?

September 1, 2011 Comments off

Is a College Cap and Gown a Financial Ball and Chain? (PDF)
Source: Federal Reserve Bank of St. Louis

The cost of a four-year college education has risen roughly 150 percent since 1980. 1 For this and other reasons, more and more students must take out student loans to finance their education. Upon graduation, many find they have accrued a sizable debt. Given the significant expense, some question the value of earning a college degree. However, along with the rising cost, the lifetime earnings difference between college and high school graduates has widened. The increased earnings potential of a bachelor’s degree allows a college graduate to recover the cost of college over time and eventually surpass the earnings of those with only a high school diploma.

Includes bibliography of related articles and data sources.

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