Americans aren't borrowing too much — rather they are investing in a better life — and almost everything Sen. Elizabeth Warren has told you about consumer credit is wrong.
Those are some of the takeaways from a new book called Consumer Credit and the American Economy, according to one of its authors, Todd Zywicki, a law professor at George Mason University.
Zywicki is a longtime vocal critic of the Consumer Financial Protection Bureau (CFPB) — the government agency that was the brainchild of Warren prior to her becoming senator and was mandated by the Dodd-Frank Act — which seeks to protect consumers from abusive financial products and practices.
But in an interview with ThinkAdvisor, the law professor and author worried that such products and practices are not clearly defined by statute and that the CFPB's entire approach is uneconomic.
While admitting his area of expertise is consumer credit, he says the debate over whether a fiduciary standard should be imposed on all financial advisors is analogous in that, from an economic perspective, any rule change will have a cost.
In the interview, the bankruptcy law professor eschewed discussion of securities regulation, but sticking to his area of expertise said that "when it comes to consumer credit, Washington's approach is to wish away unintended consequences."
He cites as an example new rules issued late last year by the Office of the Comptroller of the Currency that effectively persuaded banks to eliminate direct deposit loans that the OCC deemed as essentially high-cost payday loans.
But in so doing, the OCC essentially left poor consumers at the mercy of payday loan companies and bank overdraft fees by limiting market competition and consumer choice.
"You really have to think about the cost of doing things," Zywicki says, noting that consumers with impaired credit will have to pay higher interest so well-intended rules that limit their choices will effectively increase their costs.
The free-market oriented law professor says he is not opposed to regulation per se.
"I distinguish between what I think of as market-reinforcing and market-replacing regulation," a distinction he feels that Warren, a Massachusetts Democrat, and many in Washington with similar mindsets fail to grasp.
"Market-replacing regulation includes setting interest rate ceilings and banning certain products like payday loans. Market-reinforcing regulation includes sophisticated laws…that harness the forces of competition [to promote consumer choice]," he says.
Apart from regulation, Zywicki's new book seeks to clarify two other key points he thinks that Warren seems not to understand.
One of those issues concerns why people borrow. The professor says there is a prevalent belief that "people borrow to live beyond their means and sustain a level of expenditure that is not viable" — in other words that other people use consumer credit irresponsibly.
But Zywicki says that is not so. "Households and consumers use credit for the same reason businesses do: "to buy capital goods, and smooth income and expenses; that's overwhelmingly the reason people use credit cards."
By buying a washing machine, he says, "people don't need to schlep to the laundromat each evening; [that's] no different than a construction company buying a back hoe rather than hiring 10 guys to dig a hole with shovels.'
Another key myth, he says, is that people have too much debt because of credit cards — that they are goaded into buying things they don't want.
Zywicki says the burden of consumer indebtedness has not increased over time, but people's purchasing power has increased as credit choices have expanded.
