osewalrus (osewalrus) wrote,

Paternalism or Enlightened Self-Interest? The Case of Predatory Lending.

Tip of the hat to goldsquare for this piece from Barry Rhitholtz reporting on a study of the impact of anti-predatory lending laws(APLs)and the impact of their premption by the Bush Administration. Approximately half the states have APLs. APLs generally require verification of the ability of the borrower to pay and limit interest rates and charges. In other words, they prevent lenders from making higher risk loans, and therefore prohibit practices justified by borrowers as compensation for the higher risk.

In 2004, the Bush Administration preempted all state anti-predatory lending laws (federalism was apparently a fad for the GOP when it didn't control Congress and the Presidency but not an actual governing principle).

The study finds two things. First, the rate of of foreclosures in comparable neighborhoods prior to 2004 were significantly lower than in those in states without APLs. Second, following federal preemption, the rate of "high cost" (aka subprime) loans in states with APLs rose dramatically (from accounting for 16% of loans to 46% of loans). These loans (as a class and in the states) subsequently defaulted at much higher than usual rates, creating the "subprime meltdown" and contributing to the subsequent financial crisis.

This brings me to one of the favorite arguing points of Libertarians against APLs and other consumer protection laws. They argue that these laws are paternalistic. Why prevent a grown up capable of assessing risk from engaging in a transaction with another grown up who can also assess risk? How awful of society to protect people from themselves for their own good.

Except, of course, that I am not protecting them for their own good. I am acting to protect my own good, as the subprime financial meltdown and subsequent economic disaster demonstrate. I like living in a functioning economy which, alas, is far more complex and messy than the idealized universe invariably described by Libertarians consisting of two rational willing buyers with perfect information and no transactional costs.

There are, of course, good Libertarian arguments against my enlightened self-interest regulation. They start with non-economic ones about individual autonomy, then move on to the fact that it is impossible to eliminate or even predict all negative externalities and that the effort to prevent the predicted tragedy may -- like the man who sees Death in the market and flees to Padua -- actually create negative externalities or prevent the development of positive externalities, and that the regulatory process can be usurped by existing incumbents looking to protect their own interests rather than the public interest.

The difficulty, as I've often said, is that most folks claiming to espouse Libertarian philosophy are usually not that interested in intellectual arguments but in assuming a moral high ground and preserving a rather stark and idealistic worldview. Justice Roberts' smugness in questioning Solicitor General Kagan in the recent Citizens United case makes an excellent example. Kagan argued that it is effectively impossible for the average shareholder -- the actual owners of the company and for whom the company is theoretically "speaking" -- to have any influence on the supposed speech of the corporate "person." Roberts could have pressed any of a number of counter-questions, such as the extent to which the First Amendment should consider this or if the First Amendment is sufficiently absolute that it cannot yield to such practical considerations (the lead case on such an argument is Tornillo, although this approach was rejected for corporate speech in this context in McConnel v. FEC).

Instead, Roberts sat back and asked, in a tone suggesting all the smugness of one with authority finally putting a villain in her place, "isn't that rather paternalistic? The idea that Big Daddy Government has to protect the helpless shareholders?"

Well no, not if one understands that the world is complex. Complexity does not foreclose moral arguments. But the intellectually honest man chooses to accept the real costs -- economic or otherwise -- of a moral choice, especially when others will bear that cost.

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