The Consumer Financial Protection Agency idea really upsets banksters, but their howler monkey lobbyists need academic cover. Fortunately they can turn to old reliable, Todd Zywicki, to provide a g-string of academic cover from his perch at George Mason University. When he last made news, it was to provide “academic” “justification” for the Bankruptcy Amendments of 2005.
Now he has emerged in full John Galt regalia to complain about the paternalistic restrictions that the CFPA will put on all their libertarian glory.
Treating all consumers as hapless victims rather than recognizing that many consumers rationally respond to incentives is a recipe for unintended consequences. It can lead to counterproductive regulation that makes loans more expensive and harder to get.
Zywicki and his fellow Randians think that the FCPA wouldn’t have made the slightest difference in the conditions that led to the great crash of 2008. He says all of these borrowers understood the exact nature of the loan terms in those option ARMs, and fully grasped the way the credit card companies would interpret the 63 pages of terms and conditions. They took out loans they couldn’t pay on the theory that the value of the house would go up so they could refinance the loans and borrow money to make the payments. Or something. Anyway, they were acting rationally.
Each one of those lenders was acting rationally too, since their incentive, making commissions, was to sell the worst possible loan to anyone, regardless of their ability to pay, because the worse the loan terms, the higher their commissions would be.
Zywicki explains that “Virtually every credit product is valuable to some consumers.” The logical implication is that banksters should be allowed to try to make loans on any foolish terms they can think up, whether or not it makes sense for the borrower. It’s up to us to figure out whether they are cheating us. I really like the idea that Zywicki will have to read the kinds of loan agreements I slave over for hours, and see if he can figure out what the bankster lawyers are doing with the English language.
By Zywicki’s theory, it was perfectly rational for buyers to take out house loans leaving them only tiny amounts of money for food and transportation. So many people did this that it is fair to ask what their motivation was. Edmund Andrews, a financial reporter for the New York Times, is a perfect example, and most people aren’t as articulate as he is. He explains that he and his wife both “succumbed to magical thinking.” He felt it was kind of cool to be able to borrow enough to get the house of his fiance’s dreams on a mortgage payment of $2,500 when he only had take-home pay of $2,777. It’s amazing anyone would lend him the money, and indeed, his lender went broke before he did. This guy is smart and knowledgeable but he did something truly stupid, and so did the lender. Zywicki thinks this is rational.
I’d say that Zywicki might have a point if Andrews and his lender were the only people doing this. Andrews would be forced into bankruptcy, and the lender would fire the guy who made the loan. That isn’t what was happening. Instead, banks and mortgage brokers were lending to anybody who could sign a name on the forms, responding to the incentives they themselves set up. They used derivatives to protect themselves from risk, dumping the losses onto AIG and pension plans and eventually onto taxpayers.
The lesson here is that consumer protection cuts in two directions. Consumers need to be protected from lenders, and they need to be protected from themselves. Banks are protected to some extent by collateral, and by their ability to dump losses onto others. Banks need to be protected from their own greed, and taxpayers are entitled to be protected from that greed. Moving the consumer protection powers of the Fed to a separate agency insures that both consumers and taxpayers are going to get some minimal level of protection, whether banks like it or not.
The odd thing is that in connection with the Bankruptcy Amendments, Zywicki was outraged that consumers were taking advantage of the system to borrow money and then file. They were responding to the incentives they faced, so the solution was to change the bankruptcy system. It would have been really wrong to insist that the banksters manage their approach to credit better, although I can’t remember exactly why. The actual causes of bankruptcy were irrelevant. The mere possibility that a few people might cheat the system was enough to justify radical change.
At least Zywicki is consistent: banks should be allowed to mishandle lending, and taxpayers and consumers and other leeches should suffer the losses in every case. John Galt would be proud
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Regent U must be jealous of that George Mason “economics” department. So much magical thinking disguising business-friendly claptrap as academic work product.
I really wish all these okole pukas would stop whining about sh*t and just go ahead and do their Galt imitations already, rather than just talking about it.
Then we might actually get people in charge of businesses and such that actually have brains rather thn a bunch of WATBs.
So consumers are supposed to be experts in finance and law, but banks are okay not having a clue?
No wonder things are f*cked up. The system is upside down.
Well, by his logic, banks should be free to offer credit cards with an interest rate of, oh, say, 100% per annum. Why should the Mafia be the only lender in the “vigorish” market? Aren’t there some consumers that would be “served” by this “product?”
Remember the consumers were also to blame for the sub-prime fiasco.When in this countries existence did banks ever overlook your ability to pay or your employment status?That was a collaborated scam if I ever saw one.
It must be wonderful to live in that alternative universe.
Of course they couldn’t overlook your ability to pay if they were holding the note and mortgage themselves. Once they had the ability to sell them into a secondary market, they no longer had the same incentive structure. It only got worse from there.
People like this pigfucker serve no constructive purpose to society. They’re parasites, like ticks.
Actually, that pretty much fits most of the modern day repuke party.
Shorter Todd Zywicki: [Unfettered and unregulated] Greed is good.
I think we’ve had quite enough of these propagandistes who represent institutionalized corporate-based crime.
Geo Mason was founded by wingers to balance all the liberal colleges in the D.C. area, had the likes of the Grahams and Buchanans on the board back when they weren’t under indictment yet. Leading funder; Charles G. Koch.
Today we have a shadow market where the Fed gives trillions of dollars disguised as a plan to shore up the financial structure.When in fact it is allowing the likes of Goldmann Sachs to continue playing their games with taxpayer backed funds.Does anyone wonder why the Dow continues to rise with a continuing flow of horrible economic news?This market has been taken over by Trillion Dollar Hedge Funds and Bernankes trillion dollar injections.Those who still play by the rules need not apply.
Ah, George Mason, land of the free, home of the brave millionaires. The patrician original George Mason, whose house remains beautifully preserved in Northern Virginia, probably doesn’t take kindly to the university abusing his name or politics.
The Bankruptcy “Reform” Act of 2005 was an abomination, a blatant attack on consumers and families in favor of credit card companies. The Dems ought to have repealed it by now, if not so many of them had become “centrists” and “moderates” in thrall to Wall Street, the status quo and the next lobbyist to walk through the door.
The tired refrain of “rational response” seems to apply only to consumers in debt to large corporations, never to the corporations or to governments. Cutting taxes to pay for necessary government services, for example, is a rational response only in the world of John Galt.
Zywicki is a professor in bankruptcy and contracts in George Mason’s Law School. He was kicked off Dartmouth’s Board of Trustees for “inappropriate” remarks. These apparently concerned the defense of a student who had inserted a line of Mein Kampf into the masthead of the Dartmouth Review, the day before Yom Kippur. He thought and still thinks that the charges of anti-semitism which this elicited were unfair. He’s just another dope who lives off of winger welfare.
http://thedartmouth.com/2008/01/07/news/board/
I should correct myself. The stuff about the Dartmouth Review incident is true but I believe he was ousted because he called the university’s president a “truly evil man”. He also railed against political correctness at Dartmouth. This was all in remarks made in Raleigh, NC.
http://alumni.dartmouth.edu/default.aspx?id=736
Political correctness at Dartmouth? You have to look really close to find that. Really really close.
The irony is that these clowns curse FDR’s name when he was the only thing that stood between their grandfathers and flaming tire necklaces. (Then again, their grandfathers were probably backing the DuPont-financed coup attempt of 1934.)
Unless it’s slavishly hewing to right-wing dogma. But of course for him “political correctness” = decency, especially when advocated by a non-fascist.
As always you people try to turn something very complex into a black or white situation. No, the lenders are not always the problem. There are many others. Barney Frank and Alan Greenspan for starters.
Very true.
Yeah, Barney Frank was so powerful he single-handedly twisted the arms of Newt Gingrich, Dick Armey, Tom Delay and all the Republican House majority in the ’90s forcing them to his nefarious ways.
Of more concern to me at this point, after a fair amount of reading and listening, is the quite likely scenario that the Mob is riding behind many of these so-called ‘legit’ outifts. See this from yesterday’s Financial Times for just a thin crust of the top of an iceberg. (Emptywheel readers will recognize the name ‘Victor Bout’.)
I make this comment for several reasons:
1. My background in environmental studies involved looking at patterns of populations over time; when they alter their behavior, something’s deeply amiss. In other words, the populations are merely ‘indicators’ of what’s going on at a deeper level, and I’d say this is true with finance in today’s ‘global economy’.
2. A ‘normal’ bank would not be getting into the kinds of activities that charge 33% interest, would not rely on tax havens, would not get involved with dark money, and would steer clear of fraud; all of those are ‘criminal’ activities.
3. It appears that Todd Zywicki is so blinded by economic ideology of the Randian (and Chicago school) ilk that he cannot see his financial nose in front of his economic face — if he saw more clearly, he would recognize that banks in the US did **not** charge usurious fees and interest in the 1960s, 1970s, or even the 1980s (although in the 1980s, the Silverado and S&L meltdown must surely have had some mob activity behind it).
4. By failing to address the near-certainty of criminal activity underlying a lot of these mortgage loans, and also by failing to address the fact that ‘banks’ are no longer the same kinds of legal, local, community-based entities that they were in the 1960s and 1970s, Zywicki is not describing the actual reality of our current finance and banking structure.
Mr. Zywicki is clearly not a man to be given a shred of respectability, if he can’t see our current situation more realistically than you describe, masaccio.
Does he even ‘get’ the fact that Goldman Sachs is currently a Bank Holding Company, now bellying up to the Fed Discount Window? It does not appear that he troubles himself to admit that significant wrench in the financial system.
We’ve had so many ignorant shills given so much false respectability that it’s tough to tell the wheat from the chaff. Thanks for pointing out the distinction in this case.
Zywicki is clearly ‘chaff’.
Duly noted.
‘High five’ for that comment ;-))
The NYT article about the housebuilding industry probably fits in here; being able to carry losses back to more years to get a tax kick back not to build makes senses to GMU economists, I suspect. It makes the builder companies takeover targets – huge cash balances just sitting there and built-in tax losses. BIG PAYDAY FOR MANAGEMENT when stock price gets bid up.
http://www.nytimes.com/2009/11/15/business/economy/15gret.html?_r=1
Also Elizabeth Warren – not happy with the lobbying on the PBS NOW show over the weekend – if you saw it.
Please explain a) who “you people” are and b) what is black and white in my post.
Well, obviously “you people” are those who disagree with him, and asserting your argument was “black and white” reflects his inability to come up with a cogent argument of his own.