Zywicki & Durkin: Why Everything Elizabeth Warren Told You About Consumer Credit Is Wrong

by Jeff Sovern

The op-ed is here, at Forbes.com.  Except that if you want to find out why everything Warren said is wrong, maybe the op-ed wouldn't be the place to look.  Here's the lead:

Why do people borrow? To hear law professor turned Senator Elizabeth Warren, it is because they are seduced by rapacious lenders and a consumerist culture into living beyond their means, buying big-screen televisions, new cars, and expensive vacations. And before you know it, you are under the thumb of the big banks—or, even worse, of the street corner payday lender.

And here's how Zywicki & Durkin respond to that claim:

* * * Although there are exceptions to any rule, for most [consumers, the reason they borrow] bears little resemblance to Senator Warren’s picture of hapless victims goaded into debt by rapacious credit card issuers. Instead, consumers borrow for essentially the same reasons that businesses borrow: for capital investments and to smooth disruptions in income and expenses. * * *

So "everything" Warren said is wrong, but as for Zywicki's & Durkin's explanation, there are "exceptions" and the explanation applies only to most consumers anyway.  I don't know but I suspect that Warren would agree that most consumers borrow for the reasons Zywicki & Durkin state, but she would also say that some are lured into unwise borrowing (remember the Great Recession, which was triggered by unwise lending?) and that Zywicki & Durkin would agree, judging by their "exceptions," that sometimes that happens.

Here's another paragraph commenting on Warren:

But aren’t people today different—more prone to living beyond their means? As then-Professor Warren herself put it in a 2004 interview with PBS, “The [credit card] industry has no evidence that people were being turned down for loans in the early 1980s. What they have is evidence that people more often in the early 1980s preferred to pay cash than to pay on credit.” Yet hand-wringing about how other people use consumer debt is as old as debt itself. For example, the New York Times warned in the 70s that American consumers were “borrowing trouble”—the 1870s, that is.

I don't see that that particular quote demonstrates either hand-wringing about how people use consumer credit or that people are living beyond their means.  Nor do I see anything wrong with saying that a problem that existed in the 1870s is still with us, even assuming that Warren said that.  But on top of that, given the role of unwise consumer lending in creating the Great Recession, which we are still recovering from, isn't a little hand-wringing about that appropriate?

Durkin, Zywicki, Gregory Elliehausen, and Michael Staten have written a new book, Consumer Credit and the American Economy, and are trying to sell it. That's perfectly appropriate.  I hope to find time to read the book soon myself.  I want to see if it's going to change my thinking on consumer credit issues, for one thing. But if this op-ed is any example, it won't.  Here's more. After mentioning proposals to outlaw payday lending, they write:

And if you take away legal, high-cost options? Well, history shows the unintended consequences of that policy too: When New York’s legendary Genovese crime boss Anthony “Fat Tony” Salerno was indicted in 1973 on 11 counts of loan-sharking (and one count of criminal solicitation to have a victim’s leg broken) it was estimated that his operation had some $80 million a day outstanding—that’s $429 million in today’s dollars, in just his territory alone. Nor was Fat Tony alone: according to a 1968 U.S. Senate Report, loan-sharking was the second-largest revenue source of the mafia at the time.

I worry about what consumers who use payday lending appropriately–and apparently there are some, though they are out-numbered by consumers for whom payday lending turns out to be more of a problem than a solution–would do if payday lending was barred.  But if the best evidence that barring payday lending is a bad idea is that more than forty years ago there were loan-sharks, I'm going to be less worried.  Plenty of states bar payday lending already. If prohibitions on payday lending lead to loan-sharking, wouldn't we be seeing  a lot more loan sharking in those states?  I hope there's more about this in the book, because the op-ed doesn't convince me.


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