George Mason Law Prof Confirms CFPA Would Be Worse Than Useless

Includes: KBE, XLF
by: Matt Stichnoth

In the Wall Street Journal, George Mason’s Todd Zywicki hits nail on head:

Policies based on a misdiagnosis of the true nature of the problem might actually lay the seeds for the next crisis. For example, [Elizabeth Warren, head of the Congressional Oversight Panel] rails in her op-ed about "tricks and traps" such as "universal default" provisions in credit-card contracts, where a failure to pay one credit-card bill can trigger a default on another one. Yet it is obvious that a consumer's failure to pay some of his bills provides valuable information about the likelihood of default on his credit-card bill (universal default provisions are common in commercial loans for this reason).

Thus a lender's elimination of universal default will have to be offset by higher interest rates or fees. To the extent that a CFPA makes access to credit cards less available, excluded borrowers will inevitably shift to more expensive alternatives such as payday lending or pawn shops. If the CFPA were to impose bans on efficient risk-based pricing by lenders in the name of vague claims about "fairness," the likely result will be to increase overall risk and make the next financial crisis more likely. [Emph. added]

Well put! A key mistake Elizabeth Warren makes framing the whole mess is her insistence on looking at it as essentially a problem of good vs. evil—of evil lenders exploiting naïve but good-hearted borrowers.

No. First, for as cunning as those lenders supposedly were, a whole lot of them blew up anyway, from Countrywide, to WaMu, to Citigroup, to Lehman, to . . . oh, you know the list. A sign of all-knowing fiendishness this is not. I thought that, if you’re a bloodsucking predatory capitalist swine, the guy on the other side of the table was supposed to be the one doing the crashing and burning.

Second, during this last bubble, the good-vs.-evil ran both ways. No small number of borrowers were the fraud artists, as was evidenced by the high number of first-payment defaults, especially toward the end of he cycle.

Third, as Zywicki points out, the real cause of the housing crisis wasn’t that people acted too rapaciously; it’s that they acted rationally. In the early part of the decade borrowers acted rationally when they chose ARMs over FRMs--and then acted rationally again when they walked away from their homes after the Fed hiked short-term rates. Later on, borrowers acted rationally when they purposely defaulted once their homes fell in value and were worth less than the amount owed.

This isn’t predation; it’s self-interest. It’s not that hard to understand. . . .

I continue to believe one of the best arguments against the CFPA is that it won’t be around to provide a perch from which Elizabeth Warren can irrationally browbeat bankers. . . .

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