Since Tim Geithner won’t, I want to try and provide a case against Elizabeth Warren as head of the Consumer Financial Protection Bureau. By no means am I an expert on her record, nor have I followed her every word, so don’t take this as the final word on her… not like you would though. And of course, depending on your positions on these issues, this may well serve as a case for Elizabeth Warren.
I should start by saying that in theory, and maybe in reality, I think the Consumer Financial Protection Bureau is a good idea. Obama’s high-level description is certainly something I can sign off on:
He said the new agency would promote “clear and concise information” for consumers to make financial decisions, crack down on abusive and deceptive practices and rein in unscrupulous credit card issuers and student loan companies.
My concern is that the agency will go for restrictions that liberals tend to like but that limit credit for those who need it most, like usury laws. This fear seems like a good reason to side with Tim Geithner in (supposedly) opposing Elizabeth Warren as head of the agency. I think a good test as to whether you should support Warren is how you feel about payday lending. If you’re the type of person who thinks that interest rates of 200% are crazy and shouldn’t be permitted, then you probably will like Warren as head of CFPB. However, if you’re the type of person who thinks that payday lending makes people better off, then you probably don’t want Warren as head of CFPB.
A good place to look to see what kind of agenda she would have as head of the agency is articles and papers in where she argued for the existence of such a regulator. In both places I found her praise of usury laws troubling. These laws, which limit the maximum interest rate a bank can charge, were on the books in 36 states in the late 70s. Some were high enough to be effectively non-binding for 90% of lending, like Georgia whose rate was 60%. Others, like Arkansas whose rate was capped at 5% above the Fed discount rate, were low enough to limit the usage of credit cards and other consumer loans. Warren praises these laws and laments the 1979 supreme court decision that effectively nullified them.
One place these types of interest rate caps could be particularly harmful is payday lending. Warren praises legislators for banning rates above 36% for military families. But if you believe the empirical evidence which shows that access to 200% APR payday loans actually make borrowers better off, then a cap at 36% is a bad idea.
Another bad indicator is how she broadly paints the “problem” that this new regulator is addressing:
Americans are choking on debt. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders missed at least one payment last year,2 and an additional 2.1 million families missed one or more mortgage payments. In 2006, 1.2 million families lost their homes in foreclosure,4 and an estimated 2 million more families were headed into mortgage foreclosure by 2009. The net effect of subprime mortgage lending is that one million fewer families now own homes than did a decade ago.
There’s nothing wrong with setting the stage for her report by arguing that America has a debt problem, but if she sees CFPB as something that could address these issues then that is problematic. Informational problems and tricky lenders are not the lead cause of these problems, and to try and fix them via those levers would require draconian restrictions.
A final problem with Warren is shown by Megan McArdle’s criticism of her misleading bankruptcy paper. Can Warren be trusted with statistics? I found myself reading her more skeptically than I normally would, and I think that’s justified. She may have lot’s of credibility with the left, but this paper surely hurts her credibility with everyone else.
Overall, I think Warren’s case for clearer disclosure in financial instruments is a good one. For instance, I can sign off on most of these things she calls for the consumer protection agency to do:
It would also promote such market-enhancing practices as a simple, easy-to-read paragraph that explains all interest charges; clear explanations of when fees will be imposed; a requirement that the terms of a credit card remain the same until the card expires; no marketing targeted at college students or people under age 21; and a statement showing how long it will take to pay off the balance, as well as how much interest will be paid if the customer makes the minimum monthly payments on the outstanding balance on a credit card.
But I do worry that Warren and an agency staffed with like-minded individuals would be overzealous and over-restrictive in regulating credit. Unlike other commentators, I see no problem with an agency staffed by grey-beards and stuffy academics.

20 comments
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Wednesday ~ July 21st, 2010 at 9:55 pm
Peter
I was at an event recently in DC, and if I remember correctly, one of the speakers said that the CFPB did not have the authority to put caps on interest rates. I could be wrong but I remember one of the speakers making that claim.
Also, the empirical evidence you cited on payday lending, was a program that looks nothing like payday lending in the US. US payday loans have large fees, but the program had none, and US payday loans are generally due in two weeks, but repayment in the program was over 4 months.
Are there any other good studies about the payday lending market in the US? I suspect these loans are welfare increasing for people borrowing for emergencies, but welfare destroying for chronic borrowers that have had to rollover their debts multiple times.
Thursday ~ July 22nd, 2010 at 7:00 am
Adam Ozimek
Here’s one from Oregon:
http://www.philadelphiafed.org/research-and-data/publications/working-papers/2008/wp08-32.pdf
Thursday ~ July 22nd, 2010 at 1:15 pm
Wonks Anonymous
Megan McArdle sums up her take on Warren. This is only part 1 (of 2):
http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/
Friday ~ July 23rd, 2010 at 1:15 pm
Why Obama will nominate Warren « Read NEWS
[…] doesn’t like the methodology in her research papers; again, this is not a big deal. And Adam Ozimek, in a blog post entitled “The case against Elizabeth Warren”, sums it up like this: If […]
Friday ~ July 23rd, 2010 at 4:37 pm
scathew
I am really want to understand what good you can see out of 200% loans. It seems pretty intuitively obvious that these payday loans are likely to beget more payday loans which in turn beget more and so on. It strikes me as a viscous cycle toward further poverty, much like the sharecropper stores of days old.
It is also on any objective level immoral and remarked as such in just about every religion as such. Why under American capitalism it suddenly becomes all squeaky clean is beyond me.
Friday ~ July 23rd, 2010 at 9:08 pm
Adam Levitin
Adam:
Let me shut down your uninformed Warren=usury restriction rant: section 1027(o) of the Dodd-Frank Act specifically prohibits the Bureau of Consumer Financial Protection from enacting a usury regulation.
I don’t think anyone can point to any occasion when Elizabeth Warren has endorsed usury laws. (Indeed, can anyone point to a smoking gun in her extensive work?) She knows as well as anyone that usury laws are blunt policy tools and can have unintended consequences. What Warren laments in the articles you linked was the shift away from a regulatory world that was pretty effective at preventing predatory lending. That’s a far cry from saying let’s go back to 1977.
Also, note that there has never been a real policy debate in the US on usury laws. They ceased to be generally effective because of a 1978 (not 1979) Supreme Court decision that hinged on the interpretation of the statutory language of the 1863 (!) National Bank Act, not a consideration of policy.
Additionally, the empirical literature on payday lending is deeply, deeply divided; you’ve only cited one side of the story. Finally, note that scholarship from some rather conservative scholars, like Eric Posner, suggests that usury restrictions are much more complicated than you’ve painted.
Friday ~ July 23rd, 2010 at 11:07 pm
Adam Ozimek
From the article of Warren’s:
“The Department of Defense identified payday lending as such a serious problem for those in the military that it determined the industry “undermines military readiness.” In fact, the practices were so outrageous that Congress banned all companies from charging military people more than 36 percent interest. This change in the law will protect military families from payday lenders, but it will leave all other families subject to the same predatory practices.”
That sounds like Warren endorsing a particular usury law.
Friday ~ July 23rd, 2010 at 10:39 pm
Adam Ozimek
That’s good to know, thanks for that info. But I consider her saying the repeal usury laws was regrettable, which is what she said, to be indicative of the kind of agenda she would have. The point is exactly that usury laws are blunt instruments; if she will praise blunt instruments, and she absolutely did, it is a bad sign.
As to usury laws not being a policy debat, I specifically cited an example of recent usury laws: the restriction on payday lending to military families. She praised this law. In addition many states regulate maximum payday interest rates. So I disagree with you here.
I am aware of literature that indicates otherwise, but my read of the overall evidence is that payday lending makes people better off. The study from Karlin which is cite is particularly well done. If you can point to a credible summary of the literature that makes a convincing case that the balance of the literature shows that payday lending makes people worse off I’m genuinely open to persuasion. It’s an empirical question, and I won’t claim to be an expert.
Saturday ~ July 24th, 2010 at 1:30 am
Peter
From what I am seeing in my attempts to research this question is that there has not been a lot of good research done on the welfare affects of payday loans in the US, mostly due to data availability limitations. The only thing close to a detailed literature review I have been able to find comes from this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1066761
It’s the last paragraph in section two entitled “2. Payday Lending” The entire section is pretty informative actually.
I would also note that the experience in North Carolina detailed in the paper is subject to conflicting interpretations, see this work: http://www.ccc.unc.edu/abstracts/1107_NorthCarolina.php
The evidence really does seem to be mixed, and I don’t think at this point anyone knows the correct answer-more research is necessary. I still think that the affect of payday loans will vary greatly for different people. Focusing on the average impact on borrowers will miss the possibly large variance of impacts on the borrowing population (Does that make sense? I know what I’m trying to say, but I’m not sure if I’m communicating it well).
Saturday ~ July 24th, 2010 at 9:45 pm
paulyts50
Let’s compare the poor in Africa to… whom ? Americans? Different kettle of fish.
There are many types of poor in Africa and their social structure is so different from one country to the next, you can’t make any comparison, let alone call it empirical evidence that having that loan made a significant impact. it may by their standards but a loan to increase a standard of living in the USA is another thing entirely.
In such dire poverty, having a meal might be more important then paying off the loan so they may risk having their hand chopped off if they can’t pay. Do you have any idea how ridiculous this is? or are you going to argue they are better off to have lived to have their hand chopped off then dead?
What people who cannot get credit in the standard way need is counseling and debt reduction, not more loans and more debt at all costs. Loan sharks are called sharks for a reason. the fact that they are made legal is what is killing your economy. Greed only begets greed. No numbers needed for that.
While you are crunching numbers the debt is rising and you are in front of the computer for too long. Go feed and help out a homeless person so you can place a little more humanity and empathy into the data.
Sunday ~ July 25th, 2010 at 10:50 am
Peter
Here is a paper using a lab setting to analyze payday loans:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083796
Their findings are basically what I expected; payday loans make the majority of people better off, but for a relatively large percentage of people who take out many of these loans, payday loans make them worse off.
The main policy question is how do you continue access to payday credit for responsible borrowers, and limit the negative effect of these loans on chronic borrowers. Maybe the easiest way to do this is just to limit the number of loans a borrower can take out per year to ten or so.
Wednesday ~ July 28th, 2010 at 11:55 am
James
Actually, what’s misleading is Megan McArdle’s article. McArdle misquotes and misrepresents Warren’s Bankruptcy Paper, which actually does a very good job of putting all of the objective evidence out on the table in a fair and honest way. McArdle’s criticism has widely been debunked as fallacious:
RJ Escow deconstructs Megan McArdle – http://www.huffingtonpost.com/rj-eskow/elizabeth-warren-and-her_b_659797.html
Mike Konczal deconstructs Megan McArdle – http://rortybomb.wordpress.com/2010/07/27/megan-mcardles-hack-post-on-elizabeth-warrens-scholarship/
Thursday ~ July 29th, 2010 at 7:19 pm
The Confirmation Bias of E. Warren. « Modeled Behavior
[…] on family income and bankruptcy, as well as her position on bank nationalization. Here, Adam, has been critical of her position on high interest lending as […]
Saturday ~ July 31st, 2010 at 10:16 am
Considering Megan McArdle, The Blogger « Around The Sphere
[…] read someone, somewhere arguing that Elizabeth Warren was the nominee to shut them down. I am curious about the modern […]
Tuesday ~ August 3rd, 2010 at 6:53 pm
Payday Lending: Thoughts | Observations of a Naive Undergraduate
[…] Posted on August 3, 2010 by anundergrad My new semi-fascination with payday lending began with this post by Adam Ozimek at modeled […]
Saturday ~ September 18th, 2010 at 10:26 pm
susan velletri
USURY IS not JUST ABOUT PAYDAY LENDING!
Who would fight this type of consumer protection?
Its good for the Country as A WHOLE.
There should be a Federal blanket of laws: that the States can work from. The power was given to the States and some have allowed their usury laws to lapse or be repealed, leaving me and you: the consumer – in the dust, and in the DARK. Transparancy. I equate transparancy : to honesty and integrity.
Everyone deserves to make a buck, ABSOLUTELY: This is America and I believe in Capitalism. True: I have moral integrity issues. I will throw myself on a sword 7 days a week when it comes down to it. I can look myself in the mirror every day and be PROUD of the person I am and that I strive to be. When fellow Americans —- are willing to take advantage… to capitalize EXCESSIVELY at my expense:::??? There SHOULD be limits – it is detrimental for society as a WHOLE to allow this type of abuse and behavior. To condone it? To pray on people most likely to not understand…
Lets get this all cleared up/transparent – so that we can ALL have a fair playing field. If I were on the other end: I would not want to win even by a hair: if I knew that ::: I had an UNFAIR ADVANTAGE; in any which way.
God Bless America. I love my Country.
BRAVO! Elizabeth Warren, Bravo!!!
…Republican-Democrate-You like Tea?
…Purple, green, brown, white, yellow orange and neon.
It is our differences, diversity and tolerance that makes us great.
We ALL deserve truth, transparancy and protection….
Saturday ~ July 30th, 2011 at 8:40 pm
Payday Lending: Thoughts « Exogenous Variation
[…] new semi-fascination with payday lending began with this post by Adam Ozimek at modeled […]
Wednesday ~ October 31st, 2012 at 9:16 am
Gertie
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Any suggestions?
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Danny
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Friday ~ May 31st, 2013 at 8:25 pm
Payday loans & Predatory Lending
Hi there just wanted to give you a quick heads up. The text
in your post seem to be running off the screen in Firefox.
I’m not sure if this is a format issue or something to do with web browser compatibility but I figured I’d post to let you know.
The layout look great though! Hope you get the problem solved soon.
Cheers