Credit Snobs

Ted Frank of the American Enterprise Institute has a guest editorial in the WSJ today in which he makes some great points about the desire to over regulate sub-prime lending,

Bangladeshi banker Muhammad Yunus won a Nobel Peace Prize for bringing credit to people too poor to qualify for traditional bank loans. The availability of nontraditional credit has helped millions of Third Worlders out of poverty.

Similarly, in the U.S., homeownership rates are near an all-time high because of recent financial innovations that made lending to people without pristine credit feasible. But trial lawyers and legislators are seeking to reverse this progress. If they succeed, measures purportedly aimed at helping borrowers will end up hurting them.

An even better point is how these "men and women of the people" are ready to shut them out of the capital market.

This is not good enough for some activists, the ones that George Mason University Professor Alex Tabarrok calls "credit snobs" because they take the position that the hoi polloi cannot be trusted with the risks and benefits of credit. (This snobbery is hardly limited to mortgages: Witness the December SEC regulations further limiting who may invest in hedge funds, thus depriving the middle class of financial opportunities available to the rich.) In the eyes of a credit snob, if a homeowner defaulted, it must be because of "predatory lending." And where there are paternalistic uprisings against faceless banks to be had, a lawsuit is sure to follow.

Removing poor people's access to capital is cruel. I suggest that this would be a good, explainable political issue for the GOP: prosecute any actual fraud aggressively, but show the advantages to reduced regulation.

Economics and Markets Posted by jk at April 25, 2007 12:15 PM