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August 24, 2006


Rebecca Tushnet

Very interesting post. What interests me about the rhetoric of these discussions is that pro-regulators have become adept at using the language of economics, specifically behavioral economics, to explain why such offers are deceptive in ways that mere disclosures can't correct. If you deregulate for economic efficiency, you have to be open to the possibility of regulating for economic efficiency -- or you're really not after efficiency at all.


You call the regulatory side "pro-consumer," but if the libertarians are right that these policies will drive marginal borrowers into the arms of organized crime, it's not really pro-consumer at all. You argue that "borrowers who have nowhere else to turn, [sic] should not be subject to predatory terms." But they are subject to such terms whether they are borrowing from legal or illegal businesses. Is there any more to your argument than "libertarians are meanies"? Do you have a real solution?

Emma Coleman Jordan

Thanks for the comments, this site is coming to life.

A quick response:

1. The key question is whether the claim that the only alternatives are completely unregulated consumer loans or extensive price and term regulation.

The evidence suggests that conventional lenders are able to operate successfully in a price regulated environment. The introduction of new financial instruments that permit calibrated risk-based pricing makes it possible to refine pricing structures within the interest rate limits set by government.

Experience suggests that some forms of the most extreme arguments for completely unregulated consumer lending markets are based on hyperbole and a determined preference for markets over government.

2. You miss a large component of what the argument is about. The non-price terms have been as important as the price (interest rate) issues. Libertarians oppose regulation in both categories.

3. Protecting borrowers with limited bargaining power from economic predation on both price and non price terms is a normative good, if your belief system permits consideration of norms other than efficiency. Reducing economic unfairness by restricting waivers and the use of inappropriate collateral advances the norm of fair participation in markets.

4. As I said in the post, I agree with the DOD proposals. This is a reasonable use of government intervention in a market that suggests that niche players are not truly competing on price and other terms.
5. No, Sophia, libertarians are not "meanies" and progressives are not stupid. Newsflash: the Lochner era is over.

Emma Coleman Jordan

Rebecca makes a great comment about the inconsistency of those who have elevated efficiency to the uberprinciple for evaluating human commercial exchange.

If efficiency justifies non-intervention in markets, then the efficiency adherents ought to be just as pleased,
(but they rarely are) with strong regulation to improve efficiency.

This proposal does indeed provide a test of fidelity to the efficiency principle. The DOD proposals can, in fact, be strongly justified on efficiency grounds.

For example, within the Navy, predatory lending contributed to an increase in the number of security revocations and denials for financial reasons.

These security revocations or denials increased from 212 in 2002, to 1,999 in 2005 (representing 80 percent of all revocations and denials for that year).

The report details the role that debt accumulated from predatory lending practices played in impairing soldiers' personal readiness, and in tarnishing their careers.

Our armed forces have encountered difficulty in recruiting (ironically, there are allegations that some recruiters have engaged in predatory recruiting tactics to meet quotas) and in maintaining troop levels. Thus, the regulations proposed can be justified as improving efficient administration of our military preparedness.

Nice point Rebecca.

David Nieporent

5. No, Sophia, libertarians are not "meanies" and progressives are not stupid.

You seem to take umbrage at the latter accusation (although Sofia did not make such an argument), but the underlying premise of your position is that poor people are stupid.

You dress it up in language about "lack of bargaining power," but of course that's not the case; they have the same bargaining power as everyone else: the ability to take their business to another service provider (in this case, lender). If they're nonetheless choosing these "predatory" terms over better ones, then the only conclusion we can come to is that they're stupid.

You might respond by arguing that they don't have bargaining power because they can't shop around, because there simply aren't any lenders out there willing to offer better terms. But in that case, outlawing the so-called "predatory" terms doesn't help them at all; all it does is remove their ability to borrow. Unless, that is, your assertion is that it's better to have no loan at all than a 37% loan (using the DOD's proposed cutoff, for the sake of discussion). But apparently, the people actually taking out the 37% loans disagree. So we're again back to the implication that they're stupid.

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