By Karl Smith
By Adam Ozimek
I want to try and provide a case against Elizabeth Warren. By no means am I an expert on her record, nor have I followed her every word, so don’t take this as the final word on her… not like you would though.
In theory, and maybe in reality, I think the Consumer Financial Protection Bureau is a good idea. Obama’s high-level description is certainly something I can sign off on:
He said the new agency would promote “clear and concise information” for consumers to make financial decisions, crack down on abusive and deceptive practices and rein in unscrupulous credit card issuers and student loan companies.
My concern is that the agency will go for restrictions that liberals tend to like but that restrict credit from those who need it most, like usury laws. This fear seems like a good reason to side with Tim Geithner in (supposdely) opposing Elizabeth Warren as head of the agency. I think a good test as to whether you should support Warren is how you feel about payday lending. If you’re the type of person who thinks that interest rates of 200% are crazy and shouldn’t be permitted, then you probably will like Warren as head of CFPB. However, if you’re the type of person who thinks that payday lending makes people better off, then you probably don’t want Warren as head of CFPB.
A good place to look to see what kind of agenda she would have as head of the agency is articles and papers in which she argued for the existence of such a regulator. In both places I found her praise of usury laws troubling. These laws limit the maximum interest rate a bank can charge, and in the late 70s, 36 states had them on the books. Some were high enough to be effectively non-binding for 90% of lending, like Georgia whose rate was 60%. Others, like Arkansas whose rate was capped at 5% above the Fed discount rate, were low enough to limit the usage of credit cards and other consumer loans. Warren praises these laws and laments the supreme court decision that effectively nullified them.
One place these types of interest rate caps could be particularly harmful is payday lending. Warren praises legislators for banning rates above 36% for military families. But if you believe the empirical evidence which shows that access to 200% APR payday loans actually make borrowers better off, then a cap at 36% is a bad idea.
Another bad indicator is how she broadly paints the “problem” that this new regulator is addressing:
Americans are choking on debt. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders missed at least one payment last year,2 and an additional 2.1 million families missed one or more mortgage payments. In 2006, 1.2 million families lost their homes in foreclosure,4 and an estimated 2 million more families were headed into mortgage foreclosure by 2009. The net effect of subprime mortgage lending is that one million fewer families now own homes than did a decade ago.
There’s nothing wrong with setting the stage for her report by arguing that America has a debt problem, but if she sees CFPB as something that could address these issues then that is problematic. Informational problems and tricky lenders are not the lead cause of these problems, and to try and fix them via those levers would require draconian restrictions.
A final problem with Warren is shown by Megan McArdle’s criticism of her misleading bankruptcy paper. Can Warren be trusted with statistics? I found myself reading her more skeptically than I normally would, and I think that’s justified. She may have lots of credibility with the left, but this paper surely hurts her credibility with everyone else.
Overall, I think Warren’s case for clearer disclosure in financial instruments is a good one. For instance, I can sign off on most of these things she calls for the consumer protection agency to do:
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 people under age 21; 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 balance on a credit card.
But I do worry that Warren and an agency staffed with like-minded individuals would be overzealous and over-restrictive in regulating credit. Unlike other commentators, I see no problem with an agency staffed by grey-beards and stuffy academics.