Politicians seem to love economics, especially when it tells them that they don’t have to pass laws that would irritate the powerful corporate interests that make big campaign contributions. The argument is repeated like a mantra: Any effort to regulate protection for consumers will simply drive up costs and hurt consumers in the long run. In short, markets impose perfect discipline, the world is a cruel place, and there’s no way for government to make it better. (Notice how this fits with Grover Norquist’s goal to make government small enough to be drowned in the bathtub.)
The applications of the argument are everywhere. For example, any proposal to curb predatory lending practices is met with the claim that the ultimate result will be to drive the costs of mortgages even higher and to prevent lower-earning families from ever achieving the American dream of homeownership. But today research was released showing that maybe the mantra is wrong. A new study indicates that when states outlaw several predatory practices, costs don’t go up and families still have plenty of access to mortgage money. In fact, the main measurable effect just seems to be that homeowners are safer. Gasp! Does this mean that regulation could actually help someone?
Because the federal government won’t outlaw certain predatory practices but some states have outlawed them, we end up with a natural experiment—comparing costs and availability of credit across different legal regimes. The Center for Responsible Lending conducted the research, concluding that when states got rid of certain practices, that mortgage prices did NOT rise and that the availability of mortgage money did NOT shrink. In fact, this result is similar to a careful study nearly two decades earlier by Professor Michael Schill (now Dean of the UCLA Law School), who showed that different homeowner protection laws did not affect mortgage prices among the states.
What happened to the perfect market that would not admit any improvements through government regulation? It was always based on a fiction—two perfectly informed parties doing business without transactions costs. The CRL data are consistent with the notion that because consumers aren’t well informed about predatory practices, that lenders can bury those terms in the mortgages without driving consumers away—in effect, they lenders get the benefits of the predatory terms for free. If the terms are made illegal, the lenders lose something that was never part of the price anyway.
So now there’s a little more data that says to Congress or to state legislators: “You could help.” I don’t expect to be stampeded in the rush of legislators trying to run away from their contributors and help out the families who are their constituents, but I applaud the CRL for their efforts to take away one of the arguments for inaction.
Maybe there is a role for government after all. And maybe we should wait a bit before asking Grover to fill the bathtub.
