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. 

Well, he warned us.  But now that it’s here it sounds so incredible.

Read the full piece here. 

My co-author on this paper on The Effect of the CFPA Act of 2009 on Consumer Credit, David Evans, has a great post over at Catalyst Code on the importance of access to consumer credit during tough financial times.  Here’s the key paragraph…

Read the full piece here.

Speaking of Josh’s co-author, David Evans,  David just testified the other day before the House Financial Services Committee on a bill, the Welch Bill, HR 2382, that would regulate the fees banks charge to each other to process credit card payments.  The Welch Bill is actually only one of three pending bills that would regulate interchange fees (the other two offer antitrust exemptions for merchants to negotiate these fees. Because we all know how good antitrust exemptions are).

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.

Between the various power grabs and dubious regulatory proposals (each more dubious than the last!) from the likes of Geithner, Bernanke, Frank (.pdf), Dodd, etc., etc. you’d be excused for thinking the financial news from Washington (remember when financial news used to come from New York?) was all bad and growing only worse.

Read the full piece here.

Abstract

The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.

I have said it before and I’ll say it again: All of this hand wringing over executive compensation seems to exist in a parallel world where corporate executives have no risk aversion, where there is no real competition for managerial talent, and where firms can only take on too much–never too little–risk.  And this in a day and age (the age of never-ending financial reform regulation, Lehman/Bear, enormous public scrutiny of financial and banking industries, etc.) when the downside from excessive risk-taking is now either a) extremely large or b) non-existent (but only because of guaranteed government bail-outs).  In either case, fiddling with compensation schemes will not help matters.

Read the full piece here. 

There has been a lot of talk recently about the possibility that lax antitrust gave rise to the financial crisis or that antitrust could be used as a proactive weapon to prevent mergers and acquisitions that would create entities “too big to fail.” George Priest recently took AAG Varney to task for suggesting that there was a consensus amongst economists that lax antitrust contributed to the current financial situation.  Simon Johnson has been pushing the idea that antitrust is an appropriate tool for dealing with the type of financial risk imposed by businesses that become so large that their failure would cause substantial damage throughout the economy.  The idea might be catching on.  Frank Pasquale recently cited to Johnson’s work favorably.  The idea has also been favorably cited by Commissioner Rosch.

Read the full piece here.