Not so long ago, banks were routinely vilified for not lending to the less fortunate. Over the past 15 years, a revolution in credit has made it possible for millions of less wealthy Americans to borrow to buy a house or a car, or to go on vacation. The rise in subprime lending has made credit available to the many, not just the privileged few.
And so politicians now denounce the banking industry for lending to the less fortunate. Lenders that entrust their money to riskier borrowers are routinely called predators, as if velociraptors crowd creditors' cubicles. Presidential candidates promise to "combat" subprime lending, as if we need a war to ban loans to people without perfect credit scores. More worryingly, politicians have called for a moratorium on foreclosures, which would rewrite the rules of perfectly legal loans. This might help politicians look like they are doing something, but future borrowers will pay the price. Any response to the current crisis must recognize that to protect the rights of future borrowers, we must protect the rights of today's lenders….
As we respond to the current subprime mess, we need to follow the letter of the law, not the rhetoric of anti-banking populists. If lenders broke the law, then they should suffer the consequences. Foolish lenders that made foolish loans do not deserve a bailout. At the same time, we must not help distressed borrowers by expropriating law-abiding lenders.
Senator Obama's Stop Fraud Act threatens lenders with up to 35 years of prison and $5 million fines if they use any "false or fraudulent pretenses, representations, or promises." Given the vagueness of the term "fraudulent pretenses," I would expect to see millions of borrowers use the threat of prison or the threat of a lawsuit to get out of paying back their mortgage. I would also expect to see lenders shun loans that can lead to such lawsuits. Perhaps, the law should be called the "Stop Credit Act."
Unfortunately, Glaeser also makes some concessions to statism, for example: “…we can consider small public grants to ease the distress of people who move because of a foreclosure.” But it is heartening that a major economist recognizes at least on some level that there is something wrong with vilifying lenders for providing objectively valuable goods and services.
I encourage Glaeser and others of his economic persuasion to read Brook’s article, which identifies not only the economic facts in defense of free markets in the moneylending industry, but also the moral facts in support of such freedom. As Brook points out:
An understanding of … economic principles is necessary to defend the practice of usury. But such an understanding is not sufficient to defend the practice. From the brief history we have recounted, it is evident that all commentators on usury from the beginning of time have known that those who charge interest are self-interested, that the very nature of their activity is motivated by personal profit. Thus, in order to defend moneylenders, their institutions, and the kind of world they make possible, one must be armed with a moral code that recognizes rational self-interest and therefore the pursuit of profit as moral, and that consequently regards productivity as a virtue and upholds man’s right to his property and to his time.
Until the morality of moneylending is understood and embraced, economic arguments in defense of the practice will carry little weight.