Todd Zywicki is a law professor at George Mason who specializes in bankruptcy and similar consumer financial law. I learned to fear Zywicki when I pooh-poohed his prediction that the 2005 bankruptcy reform would permanently reduce the rate of filings; the latest data we have shows that despite the downturn, filings are still lower than they were in 2004.
He's got an interview up with Nick Gillespie of Reason on the proposed Consumer Financial Protection Agency.
He's probably more sanguine than I am about the wonders of credit cards. But his basic point is correct: a consumer financial protection agency is not going to do much to help consumers. It is true that people don't always understand all the terms in their credit card contracts or mortgages. The problem is, it is almost never the tricky hidden terms of those loans that get people into trouble. People get into trouble because hyperbolic discounting, or an insurmountable crisis, leads them to borrow more money than they can reasonably pay back. By the time a 5% increase in your credit card interest rate spells financial ruin, you've been in deep trouble for several years.
For some people this is an argument for laws that make it unprofitable to loan money to people who are likely to default, aka those living on marginal incomes. The problem is, there are two groups of people among the poor: those who will be made better off by credit, and those who will be made worse off. Judging from the bankruptcy statistics, the former group is larger. And there is no way to distinguish between them. The alternate forms of credit that poor people have traditionally used, like pawn shops and loan sharks, are worse than Bank of America.
So if the CFPA confines itself to ensuring full disclosure, this will not much help consumers, because the terms that matter are already disclosed, i.e that you are borrowing money and will have to pay it back with a high rate of interest. If it goes farther, this will probably not result in a net improvement in welfare, because poor people who really need credit will have to hock their belongings or go to loan sharks who will ding up much more than your credit rating if you default.
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In fairness, OTOH presumably some people rushed to file before the 2005 law was passed and took effect, so 2004's numbers are artificially inflated. Not as inflated as the run-up after the law was passed but before it took effect, though. And on the other hand, the fact that people could time their bankruptcies, and that even a deep recession doesn't have as many bankruptcies as 2004 still probably means something.
In 2004, no one knew the law was going to be passed. It didn't take effect until October 2005.
Love the Video's Subliminal Message. "Decline and Fall of the Roman Empire."
When Rome institutionalized a standing army on its frontiers, the farms of the citizen-soldiers fell into debt and were seized, along with public lands, by the plutocrats and senators who then transformed them into large plantations or latifundia, using imported slaves for labor. Outsourcing in reverse.
Returning soldiers often found themselves landless, the growing urban mobs of the "bread and circuses" regimes. (The ancient version of 3D TV!) The Grachus brothers attempted to reclaim the indebted properties under Roman law, but were both killed by the senate partisans. The soaring wealth disparities from the latifundia system moved the republic further and further towards instability.
In our own country, consumer debt and the Asian trade imbalances have been deferring the effects of real falling wages and rising wealth disparities for a long time. I agree that proposed protections will do little. But simplification might help. One of the mundane forms of class struggle we face in this country is the uneven battle over fine print. It gets harder and harder for the individual worker to keep up with massive financial operations devoted 24/7 to churning out fine print, new "choices," and new ways to extract that extra .03 percent from a million people.
I wonder if any economist has ever tracked how many millions of dollars in small insurance or phone overcharges are collected because people simply just don't have time to chase $3.00 through a two hour phone message tree or three pages of footnotes. "Decline and Fall" writ small. Sorry, mea culpa Rome analogies are so tired. Someone is sure to say that, so I'll just get it over with.
Megan, you're totally right. This agency is a waste of money. A clear, stiff usury law (say, 10 points above comparable Treasuries), credit card limits of, say, two months income, and mortgage debt at no more than 80% of home equity would do far more for both individuals and society as a whole, than this ridiculous new bureaucracy.
How do you compare T-bills to lending to people with awful credit histories? You're comparing an organization that has a perfect credit history over the last 233 years and several trillion dollars of assets to, say, someone who would be hard-pressed to find a 233-day period without default, and several hundred dollars of assets. Nobody in their right mind would lend to that person at 10% over T-bill, and trying to find a "comparable" T-bill is a fool's game. The debtors are not similar enough.
I think you're misunderstanding the topic and my proposal. The topic of this thread is, the CFPA is a bad means of accomplishing a goal of getting people's credit in line with their realistic ability to pay. While I agree that someone with "awful credit histories" would not get credit at T+10, that is the point - to stop lenders from lending to people with awful credit histories. That is the point of the "CFPA" and that is the point of my proposal. I submit that my proposal is more efficient way of getting to the same point and also more equitable to those who act in the socially desired way of repaying their debts, by preventing lenders from shifting the cost of defaulted loans to them via high interest rates. Finaly my proposal would reduce aggregate consumer credit, also a good thing when it gets way out of hand as it has.
Your proposal is authoritarian do-gooding which, if implemented, will hurt a lot of people. Just because a person does not have a good credit score does not mean that they will not benefit from a loan, especially in emergency situations where people take out payday loans, for example, when they are in danger of eviction or of losing their job because they need to get their car repaired quickly. Payday loans cannot be made at a low APR - even if no one defaults - because the lender is only collecting interest on a small amount of money for a short period of time. It is simply a myth - based on the ancient religious concept of usury which I understand originally meant the sin of one Jew charging another any interest whatsoever on a loan - that you can draw a line between a "reasonable" APR and one that is "excessive."
And if lenders should be "responsible" for ensuring that borrowers can afford their loans, then why shouldn't other merchants and service providers be similarly responsible? Before long you won't be able to buy any product or service anywhere without the seller being required to investigate your finances and decide whether or not you can afford the purchase.
No thanks, bro. Honest advertising and strong disclosure requirements, yes, but beyond that freedom works best.
I agree with Megan. I know at least a few of my friends would be better off if they'd stay away from consumer debt. They might have smaller TVs and cars, but they'd have more saved up for a rainy day. However, their habits have nothing to do with the small print.
And layaway, whereby you pay in installments but don't even get the item until the end because they really don't trust you. That nearly went away with the expansion of credit, and then came back after credit to those with bad credit was restricted.
In fairness to Zywicki, unlike you he doesn't make numbers up.
Start small: Standardized format for _all_ customer data
on the statement.
Then some private research agency offers to enter all
statements forwarded to them by customers into an
anonymous database, to be published on the web. :>
For a public university, George Mason seems to have a lot of libertarians on it's faculty...
Two things:
First, GMU is in Virginia, which is a bit more conservative than, say, California.
Second, GMU's Econ and Law schools (History as well, IIRC) are deliberately (by the choice of the Deans and faculty) more conservative than is the norm in most universities. This attracts the students who want a good education, but not a politically liberal one.
Megan,
You said:
"there are two groups of people among the poor: those who will be made better off by credit, and those who will be made worse off. Judging from the bankruptcy statistics, the former group is larger"
Can you elaborate on those bankruptcy statistics and how they tell us this? Or point to where you have previously done so?
Right now, about a million people a year declare bankruptcy--though we're obviously in a recession-driven upswing, so we're not sure where the numbers will settle; could be higher, could be lower. Most of them declare Chapter 7. Somewhere between a quarter and half are those who are just driven into it by circumstance--lawsuits, medical bills, too sick to work, an unexpected job loss. You could say that they should have saved, which is true, but I'm not sure it counts as "getting yourself into trouble with debt", and at any rate, if you're out of work for two years, that's going to exhaust most peoples' savings.
The number of people--even poor people--who get credit is obviously much larger than that. They may run up bills they don't like paying, but it's not catastrophic.
You can also look at FICO scores; more than 70% of Americans have credit scores which indicate that they're not having a significant problem with debt.
This is an interesting and controversial issue, one of the most cotroversial of all the administration's regulatory proposals. The US Chamber of Commerce is lobbying really hard against this.
I just read a great piece on the CFPA at the Pew Charitable Trust's website, you can see it here:
http://www.pewfr.org/task_force_reports_detail?id=0015
You're comparing an organization that has a perfect credit history over the last 233 years...
People keep saying this about the US having a perfect repayment history over 233 years.
I think you'll find that August 15, 1971 was NOT 233 years ago. It was the last time the USA defaulted on its loans, and many, many people are thinking about this event at the moment.
In case this was before your time: http://en.wikipedia.org/wiki/Gold_standard#Post-war_international_gold_standard_.281946.E2.80.931971.29
The State of Mississippi defaulted on its debt to the city of London in 1837. It barely had a capitol and it was already stiffing its creditors. In 1837 it at 26 banks. In 1851 it had 1 remaining bank. Deposits at Mississippi banks dropped from $ 8 mio to $ 100,000 in the same period. London's willingness to come to the financial assistance of the Confederacy turned on this experience. It was the inability to honor its own debts that brought down Dixie. The only public company of any substance ever to be headquartered in Mississippi....WORLDCOM. A fraud. Why we would entrust the creditworthiness of the US and the leadership of this country to these folks is the mystery. The bonds are still out there. Most are owned by the government of Monaco. They will sue Mississippi whenever the state agrees to be sued before the US Supreme Court.