The market for consumer credit has been subjected to an ever increasing amount of federal regulation since the 2008 crisis. The Dodd-Frank Act created the Consumer Financial Protection Bureau to intervene in consumer credit markets and protect us from the rapacious lenders who devour household income and place consumers in unmanageable levels of debt through stealth and manipulative business practices. The predictable results have been a marginal increase in the cost of credit and its decreasing availability to lower income consumers as the CFPB’s rules price them out of this market. Todd Zywicki, co-author of Consumer Credit and the American…
The story is a familiar one: Irresponsible consumers and rapacious borrowers collide in a frenzy of consumption that takes down the American economy and banking system. Only heavy-handed government regulation can rein in the excesses, providing comprehensive regulation of the consumer-credit economy and protecting vulnerable groups of Americans from exploitation by lenders who goad consumers to take on more debt than they can handle to sustain a consumerist lifestyle they can’t afford.
This year would have been Bruno Leoni’s 101st birthday but for his tragically early death in 1967. Leoni was an Italian lawyer cum academic who was one of Europe’s leading classical liberal thinkers in the post-War era. Friend to the leading classical liberals of the age—counting Hayek, Buchanan, and Alchian as friends—Leoni was not only a pioneer of law and economics thinking but also an early adopter of public choice theory.
On January 14, the Supreme Court heard oral arguments on an issue that may seem somewhat dry and technical to the average person, whether parties to a bankruptcy case can consent to have a Bankruptcy Judge enter a final order resolving their claims in a bankruptcy case. Contrary to the seemingly narrow and special nature of the issue, however, the outcome of the case could have profound implications for individual rights and the administration of justice in the federal courts.
Events of the past month have brought to a close the unique experience of the U.S. government’s auto bailouts. In early December the government sold its last remaining stake in General Motors. And at the dawn of the New Year the United Auto Workers health care trust sold its stock in Chrysler to Fiat for $4.35 billion, giving the Italian automaker 100% ownership of the company.
The Treasury Department estimates that in the end it will lose approximately $10 billion on its $49.5 billion investment in General Motors. Despite this extraordinary negative return on taxpayer dollars, President Obama took to the airwaves to tout the deal as a successful “bet [that] paid off,” and that the bailout saved the American auto industry from “collapse” and, implicitly, that the loss of billions of taxpayer dollars was worth it to save the industry.
Thank you to my friend Adam Levitin for engaging me on my critique of the CFPB’s recently-issued—but potentially invalid—“Ability to Pay” and “Qualified Mortgage” rules. One thing I particularly enjoy in engaging with Adam is that I can follow the logic of his argument and the data to which he is relying, which makes such dialogues useful because it makes it possible to clarify the relevant issues rather than obscuring them. That’s not always the case and I appreciate Adam’s clarity of exposition.
Allow me to summarize my original post. My goal was to assess the CFPB’s claim that its extraordinary independence from standard oversight and accountability procedures is justified in light of its claim to be an “evidence-based policy-making” body, constrained by the “data” and thus it needn’t be constrained by other typical accountability measures such as a bipartisan agency structure, Presidential removal power, or effective congressional oversight through the appropriations process.
New mortgage rules released by the CFPB show why heightened oversight is necessary.
The Consumer Financial Protection Bureau is one of the most powerful and least accountable regulatory agencies in American history. Immune from budgetary oversight by Congress and headed by a single director who cannot be removed by the President, the agency wields unconstrained, vaguely-defined powers to regulate virtually every consumer and small business credit product in America. The Bureau has defended its extraordinary independence by claiming that its regulations will be “evidence-based” on unbiased, unimpeachable economic evidence, and thus is above the usual political concerns that justify bipartisan commissions and engaged congressional oversight.
Last week’s issuance of its new rules on residential mortgages (summarized here), however, shows why the new regulator can’t be trusted to regulate itself. The rules impose new burdens on lenders to ensure borrowers’ “ability to pay” their loans and create a safe harbor for so-called “qualified mortgages” that are perceived as especially safe by regulators, such as fixed rate mortgages and—don’t laugh—loans issued according to Fannie Mae and Freddie Mac’s underwriting criteria.
Last month marked the one-year anniversary of the Consumer Financial Protection Bureau (CFPB). At the time the Bureau was created I predicted that it would be a bureaucratic train wreck: an institution that is almost perfectly designed to manifest all of the worst pathologies that scholars of regulation have identified over the past several decades. Unfortunately, its operations to date have confirmed those fears.
The institutional structure of the CFPB is novel in American history—not merely an independent agency, it is an independent agency tucked inside another independent agency (the Federal Reserve). Its decision-making is not only independent of any review by the President or Congress, but also from the Federal Reserve itself.
This episode of Liberty Law Talk is a conversation with George Mason School of Law Professor Todd Zywicki about the blatant violations of the federal bankruptcy code and the breach of the rule of law by the Chrysler bailout. Professor Zywicki stresses that the Chrysler bailout abandoned the bankruptcy code's clear and known rules regarding creditor interests that derive from the code's 19th century origins. This allowed for the sinister use of the public trough by special interests that benefited from the bailouts. Moreover, Professor Zywicki highlights the fallout in corporate bond markets from the subversion of the legitimated process…
Comparing Friedman and Hayek’s Defenses of Liberty
The early 1960s were bleak for champions of the free society. True, we had yet to experience the onslaughts of Johnson’s Great Society, the Nixon Administration, and the Vietnam War. But the Cold War raged and following the Eisenhower administration the welfare state was entrenched and growing.
But from the rubble emerged within just two years of each other two remarkable books—first F. A. Hayek’s The Constitution of Liberty in 1960 and just two years later Milton Friedman’s Capitalism and Freedom. In these two books rest the roots of an intellectual counter-revolution that would transform not only the United States but the world over coming decades. Both books are simultaneously remarkable feats of scholarly and intellectual force on one hand but also inspiring in their vision for the blessings of a free society on the other. Although authored by two titans of the economics profession—in fact, Friedman received his Nobel Prize in economics two years after Hayek received his—both books were written to reach an audience beyond the ivied walls of the academy.
Yet while the books share many remarkable coincidences beyond their timing and the distinction of their respective authors, they differ in several subtle but important ways in the agenda that they establish for how to conceive of the project of building the free society. In this brief essay I will focus my attention on what I perceive to be an important methodological difference at the heart of the distinction between Capitalism and Freedom (CaF) and The Constitution of Liberty (CoL) and the systems that the two authors establish for preservation of the free society. Following that I will rashly venture to offer my opinion on the bottom line question concerning these two 50 year old books: if forced to choose, which of the two books should one read and use as a guide to understanding the intellectual and institutional foundations of a free society.