Credit crunch

I went to a Liberty Fund conference on consumer credit this weekend, where a good time was had by all. This brought a number of thoughts to the fore, which I scribble down in no particular order:

1) There is an enormous amount of moral panic about debt in western society. (I presume in other societies too, but I don't know.) Over and over, the fact that people can and will make bad decisions about debt is presented as a legal reason for restricting their choices. Yet when I think about the bad decisions my friends have made, and the consequences on their lives, getting in over their head with credit cards or a house is probably the last thing on the list. Unless you are in a position that requires some sort of security clearance, the worst thing that happens to you if you borrow too much money is . . . you will find it harder to borrow more money. Much worse consequences have come from marrying the wrong people, procreating at the wrong time, majoring in the wrong subject, taking the wrong job, or choosing the wrong hobby. Yet almost everyone, including liberals, would be repulsed by the notion of trying to "fix" this problem by curtailing liberties--should we require poor people to get counseling before they change jobs?

2) The moral panic results in a huge amount of paternalism about debt. Credit alarmists frequently focus on college students, with the implication that they are still children who needed to be walled off from bad credit decisions. This is bad enough, but at least they're arguably still growing up. It becomes truly offensive when that attitude often spills over to other groups--minorities, the poor--who are also spoken of the way we talk about children: as people who presumptively cannot make good decisions. Better to restrict their options than let them make a bad decision.

Poor people are more likely to make bad decisions about credit than the more affluent, because people with bad decision-making skills are more likely to become poor, and also because the affluent have more knowledge about credit that they tend to transmit to their friends and offspring. The question is not whether some people will deeply regret their decision to borrow; it is whether you or they are more likely to correctly assess their situation. My money's on them.

3) The moral panic also extends to people who meet those needs: we view paycheck lenders as in broadly the same class as pimps, casino owners, and drug dealers. Particularly disturbing seems to be the notion that people make profits providing money to the poor. Yet there's little evidence that payday lenders make especially high profits; even non-profits who try to get into the business have found themselves charging interest rates they previously regarded as usurious. Poor people are, in fact, poor lending risks; the high interest rate compensates for the high default rate.

4) Many of the provisions supposed to "help" the poor with their credit end up helping the middle class. For example, capping interest rates means that people who cannot be profitably lent to at lower rates will be denied credit altogether. Some of them will benefit, because they will not borrow money that would have made them worse off. More of them will be pushed into worse alternatives: pawn shops, loan sharks. Meanwhile, the capital will towards the better credit risks, lowering interest rates for them.

5) A huge problem with reporting on credit markets, as with so many other issues, is that current harms are highly visible, but current helps are largely invisible. Because of our deep shame about debt, people who are in financial trouble rarely say so unless it is made public against their will--i.e., their house or car is repossessed. So the person who has been pushed into bankruptcy by high credit card debt tells her story to the New York Times; the person who managed to finesse a personal crisis with Mastercard keeps quiet and thanks their lucky stars.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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