I am not crazy about the way Elizabeth Warren, Chair of the TARP Congressional Oversight Panel, looks at the world. I have heard her speak at conferences, from which it is clear to me that (1) she thinks consumer credit is generally a bad thing and (2) has no understanding of present value. I inferred the second of these points because she claimed that total interest paid over the life of a loan is the relevant measure of cost. In particular, she thought households should pay off their mortgages as quickly as possible.
Yet some of the reforms she is suggesting now make some sense to me. I find myself surprised at myself in now thinking that some sort of usury ceiling might make sense--one where, say, credit card rates may be no higher than LIBOR + 20 percent, or some such thing. The reason: there is a point at which it is not possible to map risk to prices, and therefore it is socially optimal not to have credit available. In particular, there is a point at which higher rate creates more risk which should lead to higher prices, etc. I am not sure that it is analytically possible to determine the threshold, so a government limitation would be a second best policy. But usury ceilings might have prevented the current crisis.
I've been surprised at thinking the same thing lately. Do you have a specific link to Warren, or is this proposal more in general?
ReplyDeleteI think there's a more compelling argument for a usury ceiling. High interest rate loans are like high explosives - sure, they have their uses, but the typical consumer is unequipped to understand their inherent risks. The same is true for the more exotic mortgage products.
ReplyDeleteBeing a bankruptcy attorney, I should disagree as high interest rates help drive my client base, but it is really hard to disagree. I am willing to bet that as a start setting the limit at 100% would be a good start as it would probably put the pay day loan stores and the title loan companies out of business which i have to think is a net social positive. As I understand, even the mob doesn't charge as much as the pay day companies. Although the points are a real bitch.
ReplyDelete"...she thought households should pay off their mortgages as quickly as possible."
ReplyDeleteHere interests seemed to be aligned with those of the owners of the loans currently. If you know the borrower will be out of a job shortly, wouldn't you want them to pay you as much money back as possible, as quickly as possible?
She seemed heaven-sent in the beginning, but when she began to talk about how to regulate exotic garbage rather than get rid of it -- respect lost.
Angriest,
ReplyDeleteMost bankers actually view prepayment as a worse deal than defaults when it comes to housing mortgages. Prepayments expose banks/bond holders to nasty negative convexity on the loan. Warren recommending faster prepayments, wisdom aside, is not towing the banking line.