A portfolio manager, spouting a piece of conventional wisdom that gets spouted way too often, writes the following:
I’ve written many times about how disgusted I am that nearly every element of the U.S. financial system has engaged in predatory behavior toward their own customers, usually victimizing the most vulnerable people in our society. Just think about it: can you name even one area of consumer finance – mortgages, credit and debit cards, auto loans, student loans, insurance, debt collection, check cashing, pawn shops – that hasn’t been tainted by horrific, widespread scandals? So add this latest disgrace to the mix: a front-page story in the NY Times last week on how “Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.” . . .
It just makes me sick – and more determined than ever to champion a very powerful and independent Consumer Financial Protection Bureau, which is desperately needed. [Emph. added]
This is bogus. First off, the notion that the credit crunch was entirely (or even somewhat) due to predatory lending by the banks is a myth that will not die, mainly because liberals love it so. But it’s still a myth. Subprime mortgage lenders weren’t “predatory.” They were merely doing what the government wanted them to do: ease their lending standards to subprime borrowers to boost homeownership among the “disadvantaged.” So the banks and non-banks lowered downpayment requirements, eased terms generally, and made loans to people with low credit scores. Dumb, in retrospect--but fully in line with federal policy. Come to think of it the FHA still does a lot of those things. Is it a predator too?
But more broadly, so what if lenders engaged in predatory behavior? The customers they were dealing with were grownups, and presumably mature and rational enough to, for example, vote, drive a car, and support themselves. As I say, fully functioning adults. They should be relied upon to be able to recognize a bad deal when they see one. And if they don’t, well, that’s why we call it “real life.”
People aren’t “protected” from predatory behavior when they pay $3.75 for a peppermint mocha from Starbucks or put $1,000 on red in Las Vegas. Why? Because the vendors aren’t being predatory! Nor are state lotteries being predatory when they sell tickets that on average don’t pay out much more than 60 cents on the dollar1. The consumer knows what he’s getting into, or should know. You might think that in each case he was making a bad decision. You might even be right. But the decision should be left up to the individual. If he later comes to regret it, then, well, tough.
This ought to be common sense, but when it’s financial services transactions being scrutinized, suddenly common sense goes out the window and the consumer is somehow assumed to be semi-sensient, blubbering idiot—so that it’s soon decided that the industry has to be regulated nearly to death. That’s bad. Overregulation restricts consumer choice, drives up the cost of credit, and reduces economic growth generally. It doesn’t help anyone. Then again, this sort of paternalism provides plenty of opportunity for sanctimony and moral preening from the self-appointed watchdogs. What a bunch of blarney. The best markets—on both sides—are the most unfettered markets.
1. I never cease to be amazed, given the steady drumbeat of accusations from the do-good set regarding predatory this or that on the part of the banks, that these same people never seem to have a single bad word to say about the lotteries run by the states, even though state lotteries are incredibly bad deals for consumers and tend to extract the most money from the people who can least afford it. Yet try to price those same people’s credit cards to reflect their risk, and, literally, a federal law gets passed to make it harder. The world truly is crazy.
What do you think? Let me know!