Professor Adam Levitin is not impressed by our prediction of the effect on consumer credit of the CFPA.  Readers might recall that, using estimates from the literature on the effect of regulatory shocks on interest rates and of the long-term debt elasticity, we offered a (in our words) “rough calculation” of the “lower bound” of the effect of the CFPA Act on consumer credit at 2.1%.  Professor Levitin says that we just “make up the numbers” and that they do not pass the “straight-faced test.”  In his paper (and second blog post) Professor Levitin offers more of the same formula: a combination of assertions unsupported by evidence, ad hominem attacks, and insistence to his prior assumption that the CFPA will reduce the cost of credit without imposing serious regulatory costs (again, without substantiation).  He writes that his real problem with our analysis is that “The key point here, however, is the impact of the legislation is speculative and certainly not susceptible to precise statistical predictions.”

Read the full piece here. 

Abstract

The U.S. Department of the Treasury has submitted the Consumer Financial Protection Agency Act of 2009 to Congress for the purpose of overhauling consumer financial regulation. This study has examined the likely effect of the Act on the availability of credit to American consumers. To do so we have examined the legislation in detail to assess how it would alter current consumer protection regulation, reviewed the rationales provided for the new legislation by those who designed its key features, considered why consumers borrow money and benefit from doing so, and reviewed the factors behind the expansion of credit availability over the last thirty years. Based on our analysis we have concluded that the CFPA Act of 2009 would make it harder and more expensive for consumers to borrow. Under plausible yet conservative assumptions the CFPA would:

• increase the interest rates consumers pay by at least 160 basis points;
• reduce consumer borrowing by at least 2.1 percent; and,
• reduce the net new jobs created in the economy by 4.3 percent.

By reducing borrowing the Act would also reduce consumer spending that further drives job creation and economic growth. In addition to restricting the availability of credit over the long term, the CFPA Act of 2009 would also slow the recovery from the deep recession the economy is now in by reducing borrowing, spending, and business formation.

The financial crisis has surfaced a number of serious consumer financial protection problems that were not dealt with adequately by federal regulators. Rather than proposing expeditious and practical reforms that can deal with those problems, the Treasury Department has put forward a proposal that would disrupt current regulatory agency efforts to deal with these issues.

This paper focuses on the CFPA Act that the Administration introduced in July 2009. House Finance Committee Chairman Frank has proposed changes to this Act which the Treasury Secretary Geithner appears to be willing to accept. However, given that these changes could be reversed or other changes could be made as the legislation works its way through Congress, we focus on the Administration’s original bill rather than a moving target. Chairman Frank’s proposed changes do not significantly alter any of our conclusions.

I’d like to propose a contest for the greatest intellectual embarrassment of antitrust. Let me name the first contestant—tying, which some of you know has been one of my favorite for years. Here’s why. First, there is no persuasive theoretical or empirical evidence that tying is a business practice that is likely to harm consumers.  (This is not the blog to deal with Professor Elhauge’s provocative paper except to say that it does not alter this view.)  There is work that says it could be, under stringent conditions, and one can point to cases where maybe the practice has been used in a harmful way.  Yet the courts have put tying in the same antitrust category as price fixing when done by a firm with some market power.   Second, the courts, lacking any analytical framework for detecting bad behavior, have developed a mechanical test for tying that doesn’t have any connection whatsoever to any of the plausible theories of when and why tying might be bad.  The test leads to false positives almost by design.  Third, tying has led to one of the most ridiculous antitrust remedies of all time—namely the  European Commission’s insistence that Microsoft expend effort creating and offering a product–a version of Windows that didn’t include Microsoft’s media player technology—that no one wants. Now, I understand that others will have their own candidates. But to beat mine your challenge is you must show a complete lack of theoretical or empirical support; a really bad legal test; and a remedy that better demonstrates the bankruptcy of the law.   The challenge is on.

Read the full piece here.

The treatment of unilateral conduct remains an intellectual and policy mess as we finish out the first decade of the 21^st century. There were signs of hope a few years ago. The European Commission embarked on an effort to adopt an effects-based approach to unilateral conduct and to move away from the analytically-empty, object-based approach developed by the European Courts.  Meanwhile the Federal Trade Commission and the U.S. Department of Justice embarked on a series of hearings on unilateral conduct that brought the best thinkers together and hoped to achieve some consensus.  Hopes were dashed in 2008.  The Justice Department and the FTC splintered. The DOJ issued a lengthy report that for all intents and purposes argued for significantly limiting the circumstances under which a business practice could be found to constitute anticompetitive unilateral conduct. Three of the four sitting Federal Trade Commissioners quickly asserted their fundamental disagreement. Towards the end of the year the European Commission finally issued a document that adopted an effects-based approach, sort of, but only for guidance for its prosecutorial discretion over which cases it would focus its resources on.  I say “sort of” because although much of the framework it adopts is quite sensible, the Commission places virtually insurmountable obstacles to considering efficiencies. (For a comparative review of the EC and DOJ reports see my article here.)

Read the full piece here.