Modern Logic
July 28, 2010, 04:55 AM
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Libertarian economists Tyler Cowen and Adam Ozimek are worried that a potential nominee for head of the new Consumer Financial Protection Bureau, Harvard Law School bankruptcy expert Elizabeth Warren, might (or might not) favor legal restrictions on high interest loans. Ozimek writes:
My concern is that the agency will go for restrictions that liberals tend to like but that limit credit for those who need it most, like usury laws. This fear seems like a good reason to side with Tim Geithner in (supposedly) opposing Elizabeth Warren as head of the agency. I think a good test as to whether you should support Warren is how you feel about payday lending. If you’re the type of person who thinks that interest rates of 200% are crazy and shouldn’t be permitted, then you probably will like Warren as head of CFPB
Here`s Bill Maher interviewing Warren, where he raises the topic of "usury laws" and she points out that we had legal limits on interest rates until the Supreme Court tossed them out in 1979. I don`t see in the clip that she endorsed usury limits, just rules requiring effective interest rates to be transparently obvious to borrowers. (I reviewed here the 2003 book The Two-Income Trap that Warren wrote with her daughter : "I came away just plain liking these two ladies and their down-to-earth approach based on both formal data and the realities of daily life.")

Cowen writes:

I am curious about the modern liberal take on autonomy and credit. Let`s say that two gay men, of unknown health status, want to have informed, consensual, unprotected sex. Should the law prohibit this? ...

The unprotected sex is riskier and less prudent than borrowing money at an annualized rate of two hundred percent. Why prohibit one and not the other? Many of the borrowers are being fooled, but others have legitimate reasons to seek the money, such as wanting to buy a birthday present for a visit to one`s child, living with a separated spouse.

Is it that sex is sacred but borrowing money is not? What if you`re borrowing money to catch a plane to go have sex? Isn`t sex a big reason why people might borrow money at high annualized rates? Aren`t "sex decisions" some of the least rational we make and the most prone to error? ...

How many of you would support this same woman — with enthusiasm — if she wanted to ban risky but consensual sex?

One Marginal Revolution commenter actually has some useful information to contribute:
"No Authority To Impose Usury Limit- No provision of this title shall be construed as conferring authority on the Bureau to establish a usury limit applicable to an extension of credit offered or made by a covered person to a consumer, unless explicitly authorized by law."
That`s a quote from the consumer protection portion of the financial reform bill. Warren, if nominated and confirmed, will have zero authority to stop high interest rate loans, payday loans, etc. Indeed if you listen to her interviews her primary focus is on disclosure and on consumers understanding their contracts. So I think it is misleading to imply that she will just put a bunch of usury caps on when she has no power to do so.
So, don`t worry, the right to engage in usury remains sacrosanct.

But, I`m increasingly fascinated by how citing actual huge examples when arguing is now considered in poor taste.

For example, gay liberation in the late 1960s and 1970s in places like Greenwich Village, the Castro district and West Hollywood (e.g., the end of police raids on gay bars after the Stonewall Riot following Judy Garland`s funeral in 1969) led directly to the AIDS epidemic breaking out about a decade later in places like Greenwich Village, the Castro district and West Hollywood.

The Bush Administration`s war against traditional lending standards, such as down payments and limited interest rates, in the name of "Increasing Minority Homeownership" (the title of Bush`s 10/15/02 White House Conference) led directly to massive lending to people who previously wouldn`t have gotten mortgages in places like the Inland Empire, Las Vegas, and Phoenix, which led directly to massive foreclosures in places like the Inland Empire, Las Vegas, and Phoenix, which is what started the Great Recession.

Maybe we shouldn`t have any laws regulating bathhouses or subprime lending, but we at least ought to be able to talk about the costs associated with them.

It`s fascinating how the history of the biggest American public health story of the last half century, the AIDS epidemic, has been rewritten to conform to the demands of Who? Whom? thinking.

We`ve all been taught to reason according to the following logic:

A. Gays Are Good;

B. So, Anybody Who Mentions Anything Not Good About Gays Must Be:

C. Bad

Therefore, the AIDS epidemic couldn`t possibly have been self-inflicted. It had to be the fault of, say, Ronald Reagan, or of homophobic Mormons in Provo, or of something, anything, other than what actually happened.

QED

Of course, exactly the same process is happening to recollections of the mortgage meltdown.

Similarly, the historical connection between money-lending and Jews has come to subtly influence much of the economics profession to view anyone not utterly allergic to prudential limits on lending, even lending of the most "Heads we win, tails the taxpayers bail us out" variety, as probably a raging anti-Semite and thus illegitimate.

This essentially childish Who? Whom? thinking is becoming ever more prestigious at the highest levels of the modern world.