The Two-Income Trap - Elizabeth Warren [75]
But this argument rests on one very important supposition—a well-functioning market for credit. Any honest economist will explain that markets work efficiently only when there is a level playing field, when consumers have full information about the costs and risks associated with whatever they are purchasing. The evidence is strong that the lending playing field is anything but level. After all, if the market were working properly, how could Citibank sell 40 percent of its high-priced subprime mortgages to families with good credit who would have qualified for low-cost mortgages? How could the company’s loan officers get away with charging extra fees to anyone who “appeared uneducated”? And why would low-income whites get better terms on their mortgages than high-income African Americans? A perfect market free to operate without government interference certainly sounds good, but it is little more than a fantasy held up to distract policymakers while lenders rake in profits from those who never quite figure out the terms in fine print.
The argument for reregulation of consumer lending is a lot like the argument for regulating any other useful but potentially dangerous product. Consider the toaster. People buy toasters for home use. No one makes them buy toasters, and they could live without toasters. If they understood electrical engineering, they could evaluate the safety of each toaster under every possible scenario. But toasters are regulated. No toaster manufacturer may peddle toasters that have even a 1 percent chance of catching fire. Toaster makers (and conservative economists) could point out that riskier toasters could be made more cheaply, and that permitting their sale would expand the number of toaster owners in the country. Companies might put special disclaimers and instructions on their toasters, telling customers how to extinguish the fires themselves. But as a nation, we have collectively decided that the risks posed by an unregulated toaster industry are not acceptable.
The government regulates the sale of millions of products—everything from children’s pajamas to aspirin to automobiles—to protect consumers from the risks of substantial injury. For most of America’s history, loans to consumers fell squarely within that definition. Interest rates and other terms were carefully limited by state legislatures and patrolled, when necessary, by state attorneys general. Predatory loans may not set houses on fire the way a faulty toaster might, but they steal people’s homes all the same. America has had more than twenty years to observe the effects of a deregulated lending industry, and the evidence is overwhelming. It is time to call the experiment a failure.
Reregulation would help solve a litany of evils. The most important is worth its own headline: Limiting interest rates would halt the rapid rise in home foreclosures. With a lower ceiling on interest rates, lenders would lead the charge to reestablish an appropriate match between family income and mortgage size, which would have the effect of reducing the mass of families that are sucked into mortgages they have no hope of paying. Minority communities would no longer find themselves stripped of wealth by predatory subprime lenders. And homeowners would no longer be suckered into second and third mortgages that promise to lower their monthly bills but that actually rob them of the family home.
Interest rate regulation would also take the ammunition out of the middle-class bidding war, helping to save families from the Two-Income Trap. Competition for the best neighborhoods would continue, but if no one could get a mortgage that ate up 40 or 50 percent of the family’s entire income, then home prices would begin to settle down to Earth. To many economists, this is a scandalous notion, involving a reduction in Americans’ “net worth.” But that net worth isn’t worth anything