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06/15/2008

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Jake

Prof. Becker is absolutely correct.

Brian Davis

In the '20's or '30's of the last century, a brilliant man named Guy B. Fisher, from deep East Texas, penned a marvelous little book entitled "Facts About Money." I commend it to anyone with an interest in the Coinage Clause of our U.S. Constitution's Article I (Congress's powers), the Banks of the United States, the economic trauma wrought by the Civil War, the 1864 National Banking Act, the Federal Reserve Act, gold and gold clauses (and their New Deal demise), the Basel Accords, etc. Fisher's advice was to save and invest one's currency of the realm in tangible assets, like real estate, timber, and minerals - take title directly and accept the responsibility of stewardship. Likewise, he advised to never give a banker your financial statement (the Bankruptcy Code itself (in sec. 523) contains reason enough for why that advice was sound. Instead, if you need credit, put up some precious metals or growing timber or a oil royalty interest. But NEVER pledge your personal residence for anything except a first-lien purchase money mortgage loan, fully-amortizing. Loan sharks and sleazy lending schemes of all stripes exist because most people in contemporary lack the self-discipline to observe a self-made man's considered dicta. Reclaiming one's economic dignity can be tough love but remember what one of the Framers said, Franklin maybe, "It's a Republic, if you can keep it." The same goes for one's economic dignity. Condemn squander and those who seek reward by enabling it.

Jim

What is it that I am missing here? Haven't prices risen inexorably since Keynesianism was adopted after WWII? Isn't Keynesianism inexorably inflationary? Aren't the government and the private sector equally responsible for continuing to deficit spend (borrow, credit, whatever you wish to call it)? The politicians are constantly pandering to "You deserve everything". The commercial sector is constantly doing the same, "You deserve not to have pimples". Is it possible that early Americans were relying on phiosophical and religious proscriptions against extravagance based on historical experience? And now we have a government which doesn't have the political will do stabilize the cost-price-value curve and a population which is totally materialistic. Now we have influential thinkers saying that is just fine. Great! Personally, I lean toward Ravi Batra's view in his "Great American Deception" and that of Marvin Harris in "Why nothing works".

By the by, I wonder what the asset ratio is between 60 to 80 year olds to 40 to 60 year olds now compared to some previous years, say 1920 and 1960 and how much asset transfer is going on before death between those age groups.

Best regards to all.

David R. Henderson

Dear Gary,

Good point. I remember being turned down by VISA for a credit card I applied for in 1974. The limit I applied for? $250. I was a Ph.D. student at UCLA who got through college on my own with zero student debt, which meant that I didn't have a credit record. That was before the federal court decision that said credit card companies issuing credit cards across state lines could be under the usury laws in their states of issue. That's why so many credit cards come from South Dakota and Nevada. When that happened, it was much easier for me to get a credit card. My life in graduate school would have been substantially better had I had a credit card. You should have seen the suit I wore to the AEA meetings in San Francisco for my job interviews.

Best,

David

Floccina

I am a big saver by nature but I remember my grandmother advising spend your money when you are young and can really enjoy it. I may be over saving but I am very lazy and so hope to quit work so much in a few years (BTW I am 51 years old).

Matt

Re: Jim - "Population which is totally materialistic".

What are we here for, if not to consume?

Jim

Matt,

I hope your tongue is in your cheek!

Even if you have no essential philosophical motives, WASTEFUL consumtion based on DEFICIT spending cannot serve a society well in the long run. I believe that deficit spending has become so ingrained in the United States that it has perverted the government's purpose, debased the currency and given politicians their sole operating princple, "vote for me and I will make sure you can feed at the public trough".

profscam

As usual, Becker is long on theory and short on facts. He says, Urban workers also faced severe risks due to the threat of unemployment and other difficulties in labor markets. Families had little opportunity to get commercial credit to help tide them over the bad times.

If we are talking about the late 19th and early 20th centuries, the claim in the second sentence is false. Commercial credit, in the form of salary and chattel mortgage loans, was widely available in big cities like Chicago. These were the businesses for which the term "loan shark" was invented. They charged high rates for small sums and trapped many borrowers in debt. The products were constructed in such a way as to operate as interest-only cash advances.

At the end Becker says, Every new form of credit brings with it abuse from some borrowers and lenders. This has clearly been the case with the expansion in consumer credit instruments, but the benefits from this expansion seem to have far outweighed the costs.

About loansharking (a.k.a. payday lending) in its original incarnation one ought to be more cautious. It is doubtful that the benefits of salary lending far outweighed the costs. That result was only achieved through regulations like the Uniform Small Loan Law, which brought into existence the licensed personal finance industry (HFC, for example). The licensed lenders had their rates capped at 42% a year, were required to assess ability to repay, and amortized their product to make repayment more feasible for people with modest incomes.

Though the regulations produced losers as well as winners, winners vastly outnumbered losers. Millions of working people were able to borrow small sums at rates well below the typical loan shark price of 240% a year.

One could tell the same story about unregulated payday lending today. The number of customers who use the product once or twice is small. The number who roll over their loans again and again, and who borrow from one lender to pay another, is large.

Unlike Brooks, I wouldn't ban payday lending. But I also wouldn't trust the free market to maximize well-being for this type of product. The problem with the Becker/Posner position is that it makes sweeping claims without much attention to facts. What works in the prime mortgage market won't work in the small loan market that caters to cash-strapped consumers.

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