Conflicted

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.